Written by Sean Cooper
Monday, November 5th, 2018
Have you given much thought to your retirement? Retirement may be years away, but it’s never too early to start planning. Whether you’re in your 20s and starting your first full-time job, or in your 50s and winding down your career, it’s important to make retirement planning a priority.
With retirees living longer than ever before, retirement planning is not something you can simply push to the back burner. To end up with a sizeable nest egg at retirement, you’ll have to sock away more money than ever before.
The good news is you can still retire comfortably — it just takes some careful planning.
Make the most of your workplace pension plan
If you're part of the labour force with a workplace company pension plan, consider yourself lucky. Pensions, which were once widespread in the private sector, are no longer the norm.
Understanding how much pension you're entitled to at retirement is important. Once you know what your pension will be, you’ll be able to figure out how much you'll need to squirrel away in personal savings to maintain your lifestyle in your golden years.
If you have a gold-plated defined benefit pension, you’ll receive an annual statement mid-year like clockwork. Here are five important things to check on your annual statement:
1. Beneficiaries. Who will be entitled to your pension if you die? You’ll want to make sure your designated beneficiaries are up to date.
2. Accrued Pension. How much money will you receive when you retire? This will help you figure out exactly how much you’ll need to set aside in personal savings.
3. Vesting Date. When will you be entitled to your full pension benefits? If you quit before your vesting date, you won’t collect a dime in pension benefits. Some provinces like Ontario and Quebec have introduced immediate vesting, where you’re entitled to pension benefits the moment you join the plan.
4. Earliest Unreduced Retirement Date. When is the earliest you can start collecting your pension without a reduction or penalty? Some plans are more generous than others. Long-serving employees are typically rewarded. For example, you could be entitled to an early unreduced pension if you’re age 55 and have 30 years of continuous service.
5. Plan Solvency. How well is your pension plan funded? You’ll want your plan to be well-funded if you want to collect your pension at retirement.
For those of us without pensions...
If you don’t have the luxury of a pension plan, there’s still hope — you just need to take a more proactive approach. Retirement may seem far off, but it’s crucial to start putting money aside early in order to realize your retirement goals. A retirement calculator is a great place to start to figure out exactly how much money you’ll need.
Here's an overview of two ways to save towards retirement.
RRSPs. RRSPs (or RSPs) allow you to shelter your money from the taxman until you withdraw the funds, which is meant to happen in your retirement years when you’re, hopefully, taxed at a lower marginal rate. But RRSPs aren’t forever. They need to convert to an income-generating plan, such as a RRIF, by the end of the calendar year that you turn 71 years old. RRSPs are flexible, meaning they can hold a variety of investments, including mutual funds, GICs and stocks. If one spouse earns more than the other during their career, spousal RRSPs could be used to split your income and save on taxes.
TFSAs. TFSAs offer a flexible way to save for short-term or long-term goals, including retirement. The main advantage of TFSAs over RRSPs is that withdrawals are not taxed. And income taken out doesn’t count towards means-tested government benefits like the Guaranteed Income Supplement (GIS) or Old Age Security (OAS). If you’re currently in the lowest tax bracket, or you think your tax bracket might actually increase in retirement, then it's particularly worth considering investing in a TFSA. Like RRSPs, TFSAs can also hold investments such as mutual funds, GICs and stocks.
While retirement may be decades away, planning early will help prepare you to live those years stress-free.