The five years before you stop working are the most consequential planning window of your financial life. The decisions made during this period, including when to take CPP, how to draw down registered accounts, whether to pay off the mortgage, and how to structure income in year one of retirement, can add or cost you hundreds of thousands of dollars over a 25-to-30-year retirement.
Most people spend more time planning a two-week vacation than they do planning the financial transition into retirement. This checklist is a starting point for getting serious about the five years that matter most.
Know Your Retirement Income Before You Retire
This sounds obvious but most people do not actually do it. Before your last day of work, you should have a clear projection of your year-one retirement income: the exact amount from CPP at your chosen start age, your OAS amount if applicable, any pension income, projected RRSP or RRIF withdrawals, and any other sources. You should also know your estimated tax on that income.
If that projected income does not cover your planned lifestyle, you need to know before you retire, not after. You still have time to adjust your retirement date, your savings rate, or your planned spending.
The Pre-Retirement Checklist
- Get your CPP Statement of Contributions from My Service Canada Account. Review your projected benefit at 60, 65, and 70. Decide which age makes sense given your health, other income, and retirement date.
- Decide on OAS timing. You can take OAS at 65 or defer to 70 for a 36% increase. If your income in early retirement will be high enough to trigger the clawback, deferral may make sense.
- Model your RRSP drawdown window. If you retire before 65 and defer CPP and OAS, you have a low-income window to draw from your RRSP at reduced tax rates. Know how much you can withdraw each year without pushing into higher brackets.
- Project your RRIF mandatory withdrawals at 72. Convert your expected RRSP balance at retirement forward to 72 and calculate what the minimum withdrawals will look like. If they will push your income into the OAS clawback zone, consider drawing the RRSP down further before then.
- Pay off high-interest debt before you retire. A mortgage is manageable. Credit card debt or variable-rate loans in retirement erode cash flow and reduce your options. Aim to enter retirement with the mortgage either paid or on a clear schedule, and consumer debt at zero.
- Review your insurance coverage. Group benefits through your employer end when you do. Review what you will lose access to: drug coverage, dental, extended health. Price individual coverage or understand what provincial programs cover before your last day.
- Build a one-year cash buffer. Having 12 months of living expenses in a TFSA or high-interest account at retirement means you never have to sell investments at a bad time in year one. It also reduces the psychological pressure of watching a portfolio fluctuate when you are depending on it.
- Review your will and powers of attorney. If these are more than five years old, review them. If your retirement changes your asset mix significantly, your will may need updating. Powers of attorney become more important, not less, as you age.
- Test your retirement budget. Six months before you retire, live on your projected retirement income. Bank the difference between your current income and your retirement income. You will discover whether your budget is realistic while you still have time to adjust.
- Get a retirement income plan done. Not a generic financial plan. A specific, year-by-year projection of your retirement income, taxes, CPP and OAS timing, RRSP drawdown strategy, and TFSA management from your retirement date to age 95. This is the document that makes every other decision on this list easier.
The five-year window closes faster than you expect. People who build a retirement income plan three to five years before stopping work consistently have more options than those who plan in the final six months. Deferring CPP requires income to bridge on. RRSP drawdown strategies need time to execute. The earlier you plan, the more levers you have to pull.
Retiring in the Next Five Years?
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Get in TouchFreehold Financial Planning is an advice-only, fee-for-service financial planning practice based in Windsor, Ontario, serving clients across Canada. This article is for educational purposes and does not constitute personalized financial advice.