There’s a reason that financial planners call the five to 10 years before a planned retirement the “retirement risk zone”— that’s because your plans and finances are vulnerable to unexpected changes such as job loss, a decline in your health or that of a loved one, or market downturns.
If you’re unexpectedly taken out of the workforce sooner than you expected, all is not lost: there are still opportunities to create a successful retirement even when life strikes without warning. Here are three steps you can take to help regain control of your future, and create a plan that takes your adjusted situation into account.
1. Take stock of potential sources of retirement income
Before retirement, you’ve likely been relying on your employment income to cover living costs (and to set aside funds for the future). Although retirement has many different dimensions, such as social, emotional, lifestyle and other aspects, the financial part of retirement can be the most significant. Once you leave the work force, you’ll need a new strategy to cover those expenses.
The good news is that if you’ve lived and worked in Canada before retirement, it’s very likely you have multiple sources of guaranteed retirement income that will kick in once you reach the eligible start age. These can include the Canada or Quebec Pension Plan (CPP or QPP), both of which can start as early as age 60 (and the amounts will go up if you delay taking them past age 60). The income you’ll receive is based on the contributions you’ve made during your working life. To learn more, consult the Government of Canada’s web site (or for the Quebec Pension Plan, the Government of Quebec website).
In addition, you may be eligible for monthly payments from the Old Age Security (OAS) or Guaranteed Income Supplement (GIS) programs once you hit age 65, both of which can boost your finances significantly in retirement. How much you’ll get is based on how long you’ve lived in Canada, your other income, and whether you’re married or single. To calculate how much OAS and GIS you could receive in retirement, use the Government of Canada’s web resources, which will help you understand your eligibility and estimate the amounts.
When you’re reviewing these government sources of income (CPP, QPP, OAS and GIS), make sure to take note that the amounts are guaranteed — will last as long as you do — and are reviewed and adjusted for inflation each year.
In addition to this base of guaranteed income, you might also have an employer-sponsored pension plan that will either provide a monthly cheque in retirement (if yours is a defined benefit pension plan), or a tax-deferred account that you can withdraw from to meet your needs (if yours is a defined contribution pension plan).
A defined-benefit pension plan can sometimes also be converted to a lump sum if you leave your employer before reaching age 60 or 65, or before meeting the conditions for a full retirement pension. The age at which you can start to receive payments or access the funds, and whether the income you are paid from a plan is adjusted for inflation over time or not will depend on the rules for your plans, so a call to your pension provider would be in order to learn more.
Finally, you might have private savings that can help meet your financial needs in retirement. These could include a Registered Retirement Savings Plan (RRSP), a Tax-Free Savings Account (TFSA), or unregistered savings or investment accounts. You could also have other assets on your personal balance sheet, such as a principal or secondary residence (a summer home or cottage) that could, if necessary, be used to provide financial resources for retirement.
All in all, your potential sources of income to support your retirement, even if retirement comes earlier than you expected, could be more than you had initially expected. And because some of these potential income streams can be “turned on” at varying ages, you may be able to draw on, for example, private savings first, then CPP or QPP starting at age 60, followed by pension income, OAS and GIS at age 65.
2. Review your options to generate new income
The meaning of “retirement” has changed. Where we once thought of retirement as an “on-off” switch from working (on) to retired (off), more and more Canadians report that their exit from the workforce may be gradual, extend past age 65 and include a career change, part-time work, or other ways of generating income that are different from their previous occupation.
Thus if you’ve had an unplanned early exit from a primary occupation or career, you might consider continuing to work, although potentially in a new or changed role.
Is remaining in the paid work force an appropriate choice for you? Your ability to generate income after you’ve left a primary job or career will depend on many factors, such as whether you are able to work, and, if you’re able, your desire to keep working after your unexpected early departure from the world of paid work (which may be the result of a need to care for a family member, or due to changes in your own health). But if you are able and willing to work, you may find that new possibilities open up for you once your primary career has ended.
3. Create a new plan for your future
In Step 1 and Step 2, you’ve assessed your potential sources of income in retirement, and your capacity to generate additional income via employment (including self-employment and entrepreneurship). Now it’s time to bring those elements together to create a personalized plan.
What your plan looks like will depend on your specific circumstances. Here are some factors to consider:
- Filling an “income gap:” Your plan may focus on your need to meet your financial requirements between now and when government and other pension income kicks in, whether from savings or employment (or self-employment) income. You could use private savings to fill this gap, or labour force income from working—or a combination of both.
- Adjusting your living situation: Another option you might consider is downsizing or changing your residence, if you own the property you live in, in order to convert equity in your home into cash you can use to meet financial needs, to create a living situation that’s more suitable for you now, or to reduce your cost of living over time (as a smaller home may have lower maintenance and utility costs, for example).
- Remaining in the paid work force: You may want to look at continuing to work in some capacity, whether it’s in a different job than the one you had, a new career altogether, moving to part-time or seasonal work, or exploring self-employment or entrepreneurship. If there’s an occupation or vocation you’ve always been interested in, but haven’t pursued, now might be the time.
What’s the right path for you?
In creating your own plan, keep in mind that you may be able to mix and match options over time as your needs, situation and preferences change. And if the range of decisions sounds confusing and possibly overwhelming, just the process of getting options on paper—and potentially discussing them with a trusted friend or professional advisor—can help. After all, even a planned retirement is a major life change. An unplanned, early retirement adds an extra element of surprise to your plate. Use these three steps to regain control by confirming your guaranteed retirement income and start dates, reviewing your possible options to generate income from work or private savings, and finding the best route forward for you.
For more tips on regaining control, visit Involuntary Retirement. What’s Next?
This article is intended as general information only and is not to be relied upon as constituting legal, financial or other professional advice. A professional advisor should be consulted regarding your specific situation. Information presented is believed to be factual and up-to-date but we do not guarantee its accuracy and it should not be regarded as a complete analysis of the subjects discussed. All expressions of opinion reflect the judgment of the authors as of the date of publication and are subject to change. No endorsement of any third parties or their advice, opinions, information, products or services is expressly given or implied by Royal Bank of Canada or any of its affiliates.