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Five steps to take in the 10 years before retirement

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Q: My husband and I really don’t follow our finances all that well. Our budget works and we don’t have much debt, basically just our mortgage, and some money owing on our line of credit from helping our youngest buy her condo. We pay off our credit cards every month. Our kids stayed living at home during their university years and so it’s just recently that we became true empty-nesters. With just the two of us at home we’ve noticed some changes with our spending, which got us thinking more about our money. We have an investment advisor at the bank, and we tend to trust her suggestions about how to manage our savings so that we can retire on time. But lately we’ve thought that we should probably take more interest in our money. Where do we start? ~Roxanna

© Provided by The Province The time to consider your retirement finances is at least a decade before you actually get there.

A: Your approach to managing your money is not all that unique and it has thankfully served you well over the years. For many Canadians, as long as they earn enough to cover their various priorities and see their nest egg growing, they assume that everything is just fine. While everything might be going according to plan and setting them up for a stable financial future, it’s important that we take an active interest in our money. And it’s never too late to start.

Here are five things to do in the 10 to 15 years before retirement:

1. Align your budget with your goals

When a long-term financial goal, like retirement, is decades away, it’s easy to put off aligning our spending to achieve that goal until ‘later.’ However, ‘later’ tends to come into sharper focus as soon as we set a date for when we’d like to achieve the goal. One of the best ways to start understanding your money better is to spend time learning how to manage your budget. Take your spending off autopilot and get into the driver’s seat.

This can be an especially useful starting point if your household spending has changed. In the case of adult children leaving your home to establish one of their own, you may notice a decrease in certain expenses. Everything from running large appliances less, to needing fewer household supplies and not buying as many groceries, less people under one roof means less consumption. But if you’ve taken on financial commitments to help your children start lives of their own, reduced household expenses might be offset by new monthly debt payments.

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Be savvy with your paycheques and give each dollar you earn a job towards helping you achieve your goals. Prioritize savings, debt payments and planned expenses. When it comes to routine expenses, put every single one under the microscope. Determine which can be reduced, which must stay about the same, and which need more funds allocated towards them. Rein in any lifestyle spending that is financed with credit cards so that you can live within your means.

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2. Avoid letting debt delay retirement

Whether you owe on your home equity line of credit (HELOC), credit cards, or are still carrying a sizable mortgage, how much you owe can delay your ability to retire. A decade or so before you stop working is a great time to create a plan to pay off what you owe so that you are able to retire when you’d like to.

Consider all of your options when it comes to determining the best way to deal with your debts. It can help to speak with your financial advisor, accountant or a non-profit credit counsellor. With the current climate of low interest rates, every dollar you put towards what you owe will go further because you’re paying less interest.

Resist the urge to count on your home equity to bail you out if retirement proves too costly. Borrowing against your home once your income decreases isn’t always possible. Your financial institution may not be able to lend you more or restructure what you owe. A home equity lender often charges significant interest and/or fees, as do reverse mortgage lenders. Reverse mortgages also have a number of conditions that may be serious drawbacks, depending on your situation.

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Downsizing is another option you may want to explore as you consider ways to manage your finances better leading up to retirement. Speak with a realtor as well as your mortgage lender as you think about what downsizing will mean for you. Buying a smaller home doesn’t always lead to a reduction in housing expenses, especially if you purchase a condo in a development with high monthly strata fees. Selling your current home may also prove more costly than you anticipate. However, downsizing from a large family home that requires more than its fair share of maintenance to a home without as much of an ongoing drain on your finances could prove advantageous, especially as you age and are less able to do the work yourselves.

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3. Stagger large future expenses

When is the last time you replaced your hot water tank, bought new furniture, upgraded your appliances or re-roofed your home? It’s easy to forget to plan for these types of expenses when what we have is working just fine. However, in the years leading up to retirement, and especially if you’re a homeowner, your budget needs to include these costs.

By anticipating large future expenses you can determine your best schedule to pay for them. For example, stagger when you replace your large appliances so that costs will be staggered at the next replacement time as well. Look for deals that don’t involve buying several appliances all at once or split the deal with a friend.

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4. Invest in your health

Health, vision and dental expenses tend to be more than most retirees anticipate. As you plan for your golden years, ensure that you will have sufficient funds set aside for all the costs you will no longer have coverage for once you stop working. Also consider which expenses you’ll want to incur before your coverage ends. For example, check your policies to determine when to buy new glasses or when to have dental work done.

You may want to buy private extended health coverage at the time your employer-sponsored policies end. While these policies are tax deductible, they can be costly. Begin your research early because once you lock into a policy, should something change with your health, you may no longer be able to adjust your coverage or purchase a new policy elsewhere.

Don’t underestimate the importance of taking a proactive approach towards your health as early as possible. A commitment to regular exercise and a healthy diet, even if you start later in life, can go a long way towards minimizing unnecessary health care expenses.

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5. Review legal documents and insurance policies

An important part of managing your finances effectively means planning for what will happen if you become incapable of managing your affairs yourself. Each of us needs to have a will, power of attorney, and possibly a medical directive in place. Contact a lawyer or notary in your area for help with preparing these documents. Each one serves a very specific purpose and is used at different times and for different reasons.

Your will ensures that your wishes are carried out after you pass away, while the other two documents are used before you pass on. A power of attorney allows a designated person(s) to act on your behalf with limited scope and at specific times (e.g., to pay your bills while you’re out of the country); however, you may also allow them to act more broadly should there come a time when you’re no longer able to make your own financial decisions. A medical directive, sometimes called a representation agreement, outlines the medical decisions you would like your substitute decision-maker to make on your behalf in the event that you’re no longer able to make your own decisions about your care.

While it may be hard to think about having these documents and speaking to loved ones about your wishes, leaving them guessing should something happen to you is often much harder. As you think about your future wishes, take the time to review your life insurance needs as well. If you have current policies, including through employment benefits, ensure that they still meet your needs, or arrange for new policies if you need them.

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The bottom line on preparing financially for retirement

November is financial literacy month in Canada, so now is the perfect time to avail yourself of resources to learn more about the various money topics you’re interested in. Look for blogs, podcasts and YouTube channels from reputable personal finance leaders. Sign up for free online courses and live webinars to learn about budgeting and dealing with debt. Explore financial literacy resources available through your financial institution, community centre or library. Many learning opportunities will now be provided virtually so even in a small community with fewer resources, you may find what you’re looking for. Start small and don’t be discouraged if something doesn’t make sense right away. Investing time and energy into improving your knowledge around financial topics will ultimately pay off in the long run.

Related reading:

Top 5 Retirement Planning Tips

How to Find the Best Certified Financial Planner or Advisor

Saving for Retirement on a Small Income

Scott Hannah is president of the Credit Counselling Society, a non-profit organization. For more information about managing your money or debt, contact Scott by email , check nomoredebts.org or call 1-888-527-8999.