TAX NEWS - June 2010

Canada tax: Plan Ahead To Spend Your Savings

Canada's oldest baby-boomers hit 65 this year and most of those who are still working will retire. And over the next 20 years, the remaining members of that demographic bulge will do the same.

Yet a survey by Bank of Montreal (BMO) found that less than half of boomers over 55 have created a spending plan for their retirement, leaving the majority vulnerable to out-living their savings or unable to meet an unexpected expense.

"During the spending years, every dollar that you pull out of your savings and spend has an impact on how long the rest of your money is going to last and how much you have available" for any emergency, says Tina Di Vito, head of BMO's Retirement Institute.

It's one thing, she says, for working Canadians to set aside a portion of their income every month for their retirement, but quite another to then use those savings appropriately when they stop working.

The closer a person gets to retiring, the more their focus should shift from how to save to how to spend, Di Vito says. A proper spending plan would determine how the savings should be drawn down in the most tax-efficient manner and with the least impact on remaining capital.

For example, she believes many Canadians will be surprised to see the tax bite on a withdrawal from their Registered Retirement Income Fund. Others may discover they won't receive as large a monthly cheque from the Canada Pension Plan as they may have expected. And many may find their plans change considerably if they haven't considered how to deal with a major health issue or the possibility of having to help an elderly parent financially.

"Living off your retirement savings and knowing how to open up those piggy banks, in what order, and how much to pull out, is going to make a big difference between a retirement you're happy with and and one in which you are struggling," Di Vito says.

However, the BMO study showed that only 48% of Canadians on the verge of retirement have planned or discussed their post-retirement income strategies with a financial adviser. Of those who have, Di Vito notes, 81% of them have considered the tax implications of that strategy.

Meanwhile, less than half of Canadians over 55 have planned financially for the unexpected expense of a health crisis or caregiving for an elderly relative, even though, Di Vito notes, the odds are high that a retiree will either become disabled or need long-term care.

And only one-third of Canadians over 55 have considered the possibility of out-living their savings, even as life expectancy has extended significantly in recent years. According to Statistics Canada, life expectancy is now 80.7 years, up from 78.4 years a decade ago.

"When you're 55 or 60 or 65, you have pretty much accumulated what you're going to accumulate," Di Vito says. At that point she says, working Canadians should "get a strategy in place" and make any necessary changes while they still have time.