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Single baby boomers need cushion to pad portfolios

Single baby boomers – the youngest of which are now 52 and are roughly a decade from retirement – need to be especially diligent in building up savings.

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Emily Larimer understands, perhaps better than most, the importance of taking meticulous steps to build up her retirement savings.

The 55-year-old Toronto-based chartered professional accountant, who is single and suffers from multiple sclerosis that requires expensive drug treatment, established her registered retirement savings plan (RRSP) at age 30, and has also contributed to a tax-free savings account (TFSA) in recent years.

"You just don't know what's going to happen, so you need to set things up to care for yourself when you're older. That's why I set up an RRSP at an early age. I don't think Old Age Security is going to provide nearly enough to take care of me as I get older," says Ms. Larimer.

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To provide an extra cushion for retirement, Ms. Larimer owns her own home, has paid off her mortgage, made improvements to increase its value, and has taken in a boarder to provide rental income.

"Paying off my mortgage was incredibly important to me. It's another way that I'm taking care of myself, because nobody else is around to do that for me," she says.

Experts stress that while retirement planning is an important priority for everyone, regardless of their marital status, single baby boomers – the youngest of which are now 52 and roughly a decade from retirement, need to be especially diligent. They must pay for their mortgage, food, taxes and all other current living expenses with one income, plus save enough money to support themselves when they decide to retire, without the possible safety net that a spouse might provide.

The task may be even more daunting for women. A gender wage gap still exists in many industries. Women tend to take more time away from the work force as caregivers for family members. And statistically, they live significantly longer than men. According to the World Health Organization, in 2015 a Canadian male at 60 could expect to live for an average of 23.5 more years, while a Canadian female at 60 had another 26.4 years.

Graeme Egan, a financial adviser with CastleBay Wealth Management Inc., fee-only financial planners in Vancouver, suggests that women project a 95-year lifespan when they plan for retirement.

What to invest in is more subjective. Sabrina Castellano Smith, director of the retiree planning network for Investors Group Financial Services Inc. in Winnipeg, says a common question from her clients, including those who are single, is whether to invest in an RRSP or TFSA.

Those instruments are structured differently.

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For the RRSP, in the 2016 taxation year, taxpayers can make an annual contribution of up to 18 per cent of their previous year's earned income, to a maximum of $25,370. They receive an up-front tax deduction, and deferred tax liability until the money is withdrawn. The RRSP is set up to benefit taxpayers who expect to be in a lower marginal tax bracket when they retire. Investments inside the RRSP grow on a tax deferred basis.

Up to $5,500 of after-tax money can be contributed annually to a TFSA, and because that is after-tax money, there are no tax consequences upon withdrawal. Investments inside the TFSA grow on a tax-free basis.

"If you are single, consider maximizing your TFSA first. These are great because the investments in them aren't taxed. This is going to allow you more flexibility. When it comes time to withdraw the income, it's a little more favourable," says Ms. Smith.

But it is also important for singles to have a good mix of RRSPs, TFSAs and other non-registered account investments, along with any pension income they are entitled to, in order to provide tax efficient income stream options at retirement, she adds.

For a baby boomer in a lower tax bracket, whose income is trending downward, a TFSA might be the better first priority, says Mr. Egan. But usually people who are roughly 10 years from retirement are in their highest income earning years, he notes.

"On that basis, I would generally say that an RRSP would be the first priority because you're getting a tax deduction at the highest marginal tax rate, or pretty close, which is creating a tax refund. And presumably you're going to be in a lower tax bracket when you take the money out of the RRSP," says Mr. Egan.

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The RRSP tax refund also provides some attractive financial planning options. Mr. Egan suggests that it could be used to either pay down non-tax deductible debt, or make a contribution to the TFSA.

Retirement portfolios should always be under review, but this is especially so in the 10 years prior to retirement, when many will want to reduce volatility and risk as the window narrows, stress experts.

"I would look at the overall picture. If someone has, say, an overall asset mix of 60-40, or 70-30 being equity versus fixed income, as they approach that time I would lessen the equity component of the overall portfolio," says Mr. Egan.

For somebody who is suddenly divorced or widowed, resulting in an unexpected change in life circumstances, a visit with a financial adviser can help sort out any necessary financial changes.

Single individuals who are approaching retirement, but well behind on planning for it, might also have to adapt to changing circumstances quickly. But, say the experts, it is never too late.

"Start by taking a look at what your current cash flow looks like, [and] also reviewing your current income sources," says Shelley Forsythe, a strategist with CIBC Wealth Strategies Group in Vancouver.

"You then want to take a look [at] retirement income sources and expenses, breaking it down into fixed versus discretionary. What kind of expenses will remain the same? What will reduce, or won't be there? And are there any health-care related costs that you need to be thinking about?" Ms. Forsythe elaborates.

Ms. Smith recommends that employees approach their employer to inquire about corporate retirement savings plans that set aside a portion of pretax income for retirement.

Another strategy to consider is borrowing money to make a lump-sum catch-up contribution, suggests Mr. Egan.

Video: Carrick Talks Money: Am I paying my investment adviser too much? (The Globe and Mail)
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