The “Operational Truths”… According To the Retiree 🙂
Having wrapped up the intangible “People” aspects of retirement, it’s time to move on to some of the logistical or operational aspects that impact all of us. Yes, they are all obvious things, and you may wonder why I’m talking about them at all. I suppose my task here is to get you thinking about them either differently, or in more depth than you may otherwise be doing.
I will be covering these less existential and more tangible aspects in the second and third parts of the series. And because I am going to try and get you thinking about these everyday obvious issues in a new way, I am going to do so by posing questions to you.
“It’s All About the Money, Honey”
First up, the money talk!
A major…. some might argue THE major… operational consideration is one’s financial situation in retirement. I see this, as being another one of those issues that is individually impactful. Every individual and every couple are in a different situation from everyone else. We retirees income streams, our savings, and our pension situations vary widely.
“Nice one Sherlock! How did you ever figure out that this was important to all retirees? You’re right, this is really going to be a dive down into the obvious… So why bother?”
Hear me out. To repeat for the third time… I’d like to get you thinking about your financial situation from a fresh perspective. Given the importance of your finances in retirement, this second part of the series will deal exclusively with that.
If you think about it my statement that individuals are all in a very different situation from everyone else would also be generally true for couples as well. I had a tough time thinking of a situation where both individuals in a couple would end up in retirement, in exactly the same financial position. Being able to combine savings and avail oneself of income splitting to make the two individuals in the relationship’s taxable income virtually identical doesn’t count. And if you own a business, and you and your spouse receive the exact same amount of “retirement payment” amount from this business, that doesn’t really count either.
There is also typically greater financial disparity between single people, and people who are legally coupled together. Couples have the immediate benefit of sharing two streams of income… even if one individual only receives OAS… compared with individuals who have only their own. To make matters worse couples have an advantage when filing their income tax. They have the ability to use the afore mentioned provision, income splitting, that single people cannot avail themselves of.
That said, there are some commonalties that can be applied to all our financial situations in retirement. It does not matter if you are getting by with CPP and OAS as your only sources of retirement income, or you have achieved total financial security, and can spend whatever you need to support a lifestyle that is no different from when you were working. Those commonalities are, our understanding of, and how we deal with, our own financial situations.
First of all, let’s consider our understanding, or personal knowledge, of our financial positions in retirement.
Do You Understand Your Finances?
We all have an “understanding” of our finances. Now, that may range from being totally oblivious about the workings of our sources of income and about how our money is managed or spent once we get it, to a relatively thorough understanding of where our money comes from and where we think it goes, to being an active, skilled money manager ourselves. I think it might be generally accepted that having a thorough and informed understanding of your retirement finances is better than being oblivious.
This may seem intuitively obvious, and you may be thinking it may be difficult to not understand your finances. Quite honestly, the vast majority of the of people that I talk to do understand how much money they’ve got saved, what there their major sources of income in retirement are, and how much they expect to receive each year going forward. It’s some of the subtler specifics that are often missing.
What I’m talking about is an awareness of the finer details of your finances. Things like, if you are lucky enough to have equity investments, do you know what percentage of their gained value is lost to fees. Do you have a plan that allows you to maximize the amount of tax-free income you can annually draw from your TFSA? Do you know how many retirement income streams you actually have? Even the tiniest one counts. We have 15 of them… and many are very small (e.g. credit card cash back, GOC climate credit, bank account interest, etc.)
When you were working, the argument could be made that you didn’t really have enough time to dedicate to drilling down into your finances simply because you were busy.
Fortunately, retirement will provide you with the time to spend on expanding your knowledge base and coming to a better understanding of all aspects of your retirement finances. To begin with, this may be as simple as reading the business section in your newspaper of choice every day to keep in touch with what is going on in the financial markets, or asking your financial advisor to breakdown in detail the fees that you are paying.
And if you are someone who is getting by on government pensions, and/or a small amount of savings, you may think that developing a better understanding of your finances doesn’t apply to you. My thinking is that it does apply to each and every one of us, no matter what our financial positions might be. It might be something as simple as seeing if your bank, or another, can provide you with a better plan to reduce your banking fees, or getting competing quotes on car or home insurance every year before renewal.
Are You Actively Monitoring Your Spending and Using That Information to Plan?
The other thing, all retirees should be doing immediately upon entering retirement… preferably well before that, of course… is to start actively engaging with your spending. It’s all well and good to develop an understanding of your broader financial situation; and certainly, understanding it will enhance the chances of your long-term financial planning working out better for you, but what about the day-to-day stuff?
Once again, it does not matter how much money you must live on each year, this applies to everyone. The most basic element in sound financial planning and management is to understand how and where you spend your money, and I mean absolutely every penny.
Tracking your spending is absolutely a no-brainer. And then, perhaps more importantly, using that information to strike a budget every year… and sticking to it… is also a no-brainer.
Budgeting and Tracking Your Expenses – I have previously written about budgeting and tracking your expenses a couple of times. The first time was a three-part series drilling down into all the essential elements involved… according to me anyway. We have been doing this for so long, that the categories that we track are now broken down into severe minutiae, which would be way too much for anyone who is just beginning to do this. But if you are into severe minutiae, you should read the third article in that series here. 🙂
A better read, if you were just thinking about starting, would be to read my article “The Family Finances … New Year, New Approach????“. The section on Budgeting and Tracking breaks down how we track our money into larger, more easily manageable groups for beginners.
Budgeting and Tracking Methods – There are lots of simple ways to do this. If you are still a paper and pencil kind of person, then you could just use a ledger style booklet. If you are a techno-weenie like me, you could build an Excel spreadsheet to do the same. Or if you want to take it to the next level, you could use one of the many budgeting and tracking software applications available. I use Quicken, which cost us $71.88 each year – money well spent as far as I’m concerned. Or, if you are really budget conscious, then you could download and use Mint which ostensibly you can use for free.
The endgame here is, when you understand where your money is going, you can ratchet back on things that are an obvious waste of money, thus providing you with freed up funds to spend on more important things.
Are You Up for Managing Your Own Investments?
Managing Your Own Investments – Once you get a handle on the simpler aspects of financial management, like tracking you’re spending and budgeting, you might want to try your hand at managing your own investments at some point. Having gone through this process myself, this is not something I would suggest for absolutely everyone. If this isn’t your sort of thing, then just leave the hard work to your financial advisor. But do start to develop an understanding of all aspects of how they are investing your money.
Here Is a simple way to get in on the finance management game without investing any real money or risking your own financial future. Treat it like a game. This would involve setting up an imaginary portfolio of investments and see how they perform over time. The easiest thing would be to set up an imaginary portfolio of stocks. You could actually set up any number of portfolios with different equities in them to see how they perform.
Even the pros do this. If you read John Heinzl in the Globe and Mail, you will see that he has had a long-standing “Income Growth” model portfolio that he has tracked for some time now. You could do exactly the same thing. All Globe and Mail subscribers can use the financial tracking tools offered with their Globe and Mail subscription to track real or model portfolios of investments. The simplest way to do this would simply to be to set up your model portfolio in a spreadsheet.
Even if you remain daunted by the idea of managing your own finances, pretending to do so, can be a lot of fun. 🙂
Are You Debt Free?
No? Not good!
Ideally, anyone who retires should be debt-free as they go into it. That means, you should have paid off your mortgage and all outstanding loans. And again, ideally, you should not be borrowing money unnecessarily in retirement.
Throughout retirement, the only debt we have ever held are car loans. And the only reason that we do that is because automobile manufacturers offer loan rates that are generally well below what we can make through our investments.
The benefit of being debt-free is that you have no ongoing payments that you have to worry about meeting every month. If you run into some financial speed bumps, eliminating the weight of ongoing financial commitments will remove a lot of stress from your life. Remaining debt-free is definitely something every retiree should strive to achieve.
Moving Along
Hope you have found some kernel of useful information in this piece. Onwards to the final discussion in this series!
Next Up: The Operational “Truths”… According To the Retiree … Continued!
