Best Practices When Your Accounting Client Is Close To Retirement

by Thom Tracy

2 min read

Accountants and financial planners need to have very specific planning for clients who are nearing retirement age. However, if you help your clients prepare properly, you can help them reduce their stress about retirement as they transition into their new lifestyle.

Can They Retire?

First thing you should do is to determine when and if the client can retire. During retirement, the clients will be living off a fixed income and can no longer rely on a paycheck. Clients should decide what age they would like to retire and how much they expect to spend each year. With these two figures, you can start to estimate if clients can retire based on how much they have saved and what their income streams will be.

If your clients own businesses, what are their intentions when they retire? Are they planning to sell their businesses and live off the proceeds, or are they looking to stay involved with the businesses and draw an income throughout retirement? Helping your clients decide whether to sell their businesses or stick around will help them plan for a successful retirement.

Retirement Income Sources

Most Canadians will have Old Age Security as a primary income stream as well as Canadian Pension Plan benefits if they contributed during their working careers. Both the OAS and CPP have different requirements and stipulations before your client can start receiving benefits.

For OAS, your client needs to be at least 65 years old, or the client’s spouse must already be receiving benefits. If your client is receiving income from other sources, it must be below the threshold or it could be subject to the OAS clawback.

For the CPP, you can estimate how much your client will get at retirement age. If your client takes CPP before age 65, the payment will be reduced by 0.6 percent for each month before the client’s 65th birthday. If your client can wait until after age 65, the CPP increases by 0.7 percent a month until your client reaches age 70.

Registered Retirement Savings Plan

If your client has saved money in a tax-deferred registered retirement savings plan, then this money needs to be properly allocated to generate income during retirement. As a rule of thumb, a suggested withdrawal rate for a portfolio is 4 percent per year. So, working backwards, after calculating the OAS and CPP amounts, is the 4 percent withdrawal rate from the portfolio enough to satisfy the client’s annual income needs? If not, the client will need to reevaluate income needs or delay retirement until more money can be saved.

The Canada Revenue Agency has a helpful retirement income calculator that can help you and your client determine how much income your client will need. Withdrawals from an RRSP are taxable income, so your client should avoid taking out more than what’s necessary.

References & Resources

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