Navigating the Retirement Red Zone
The term red zone was popularized by Joe Gibbs.
The legendary coach of the Washington Football Team coined the term in 1982 to designate the importance of plays run inside the twenty-yard line on either side of the field. Red zone plays are key because they are most likely to lead to touchdowns or defensive stops that will decide the outcome of a game.
Before Gibbs applied the term to football, red zone was used by the French government in the aftermath of the First World War. La Zone Rouge (Red Zone) was the term the French government applied to the 120,000 hectares of battlefields in northeastern France that they designated dangerous and inhospitable due to the presence of unexploded shells and bodies scattered across a polluted and eviscerated landscape. Although these regions are slowly being cleared of debris, over 100 years later, la Zone Rouge remains dangerous and largely uninhabitable.
In both of these cases, the term red zone is used to emphasize the urgency and importance of one’s time in these locations. Whether avoiding would be tacklers or literal landmines, it is imperative to remain focused on your goals and objectives in the red zone.
The retirement red zone is similar. Referring to the decade before retirement, the retirement red zone is a time when you should diligently stick to your savings plan, while making strategic adjustments to improve your financial circumstances as you approach retirement.
Here are five key questions to consider when you enter the retirement red zone.
Have you reached your savings milestones?
Although this may be a simple question, it is perhaps the most important indicator of whether you are on track to meet your retirement goals. Remember a useful savings benchmark is to have four times your income saved by age 45 and trying to save an additional year’s worth of income every five years to reach eight times your income at age 65 (See the Retirement Readiness Checklist for more information). These savings milestones might differ for everyone based on your retirement goals and timelines. If you’ve fallen behind your savings goals due to COVID or other unforeseen reasons, don’t worry, you’re not alone. But, as you operate in the retirement red zone it is vital to reassess and establish new savings targets to get you on track to meet your retirement goals.
Can you pay off your debts prior to retirement?
Debt is a part of modern financial life. Whether buying a house, a car, paying for education, or many other circumstances, debt is ever-present. As you enter the retirement red zone it is advisable to prioritize paying off debt to avoid any additional costs associated with holding debt—such as interest payments—during retirement. Simply put, retirement is much easier to navigate financially if you don’t need to give the bank any of your savings and can use that money to pursue your ideal retirement lifestyle.
Is your TFSA maximized and being invested for growth?
The TFSA (Tax Free Savings Account) is a program the Canadian government implemented in 2009 which enables individuals 18 and older with a valid Social Insurance Number to set aside funds tax free. Money put into TFSAs is not taxed by the government when withdrawn, making these accounts ideal for holding funds you are investing. TFSAs have yearly contribution limits and maximum contribution amounts. In 2021, the yearly contribution limit was set at $6,000 CAD and the maximum contribution room hit $75,500 CAD. Individuals begin accruing contribution room when they turn 18, so only people who were adults when the TFSA was launched will have the maximum contribution room available. No matter how much contribution room you have at your disposal, using as much of it as possible over your final working years and investing these funds for growth is key as you attempt to maximize your retirement income potential.
Would you benefit from setting up a Spousal RRSP?
A spousal RRSP (Registered Retirement Savings Plan) is often used in cases when there are large differences in the employment income of each spouse or common-law partners. How does it work? Simply, a high earning spouse invests money in a spousal RRSP under the name of their partner who has less employment income. Why is this useful? Essentially, if one spouse is in a higher tax bracket than another, putting some of that income into a spousal RRSP could decrease your tax bill in the long run because funds withdrawn from an RRSP are taxed based on the income of the individual who holds the plan. That said, the spousal RRSP has to be used with foresight. The money cannot be withdrawn in the spouse’s name for three years after the last deposit. Sorry, that’s a lot to digest in a few sentences. For a more detailed discussion of how spousal RRSPs work, check out episode 25 of the Canadian Money Roadmap.
Have you tested your planned retirement lifestyle?
Particularly if your planned retirement lifestyle includes a drastic change in your current way of life, it is often useful to give it a test drive. If you are hoping to spend six months somewhere warm during retirement, try extending your normal stay in Mexico or Arizona by a few weeks and see how you like it. If you’d like to golf daily, try playing some rounds as a single, as you may not have a group of friends to golf with every day. If you’re planning on providing daycare to your grandkids, try it for a long weekend. Whatever your retirement plans, getting a sense of what retirement life will be like can help you find your ideal retirement lifestyle.
Like the football red zone or the Zone Rouge, navigating the pre-retirement landscape can be exhilarating, but also complex and nerve-wracking. Diligently monitoring your retirement plan and making strategic, calculated adjustments will set you up to survive and thrive in the retirement red zone.