Are you planning for retirement? Did you start contributing from day one of your first job? For many of us, the answer to question #2 is no. But don’t worry, there are several ways to save today as you prepare to meet the retirement goals of tomorrow.
Many of our parents are lucky. Back in the day, it was not uncommon for companies to pay into pension plans. As employees turned 65, they could walk out of the office and into a comfortable retirement. However, these days are long gone.
Today, you may be one of the lucky ones benefiting from the vestiges of companies offering pensions. But, whether or not you anticipate receiving a pension, you still need to set aside money for retirement.
Sadly, modern retirement saving is mostly self-driven.
Ultimately, you get out what you put in. And making a poor decision may mean retirement is further off than you think — if ever!
How does retirement work in Canada?
All employed Canadians pay into the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). Canadians are eligible to stop working and start collecting CPP/QPP at 65 years old, or at age 60 at a reduced rate.
The purpose of CPP is to supplement other retirement savings. It is not anywhere near enough money to live off entirely upon retirement. CPP is considered taxable income in Canada.
When you retire, you can also access any other retirement funds you contribute into throughout your lifetime. Different retirement programs have different rules, so it is best to review your retirement plans in order to truly understand when you can afford to retire.
How do I prepare for retirement in Canada?
When you retire, you stop working. That means your income stops, too.
Lots of free time with less income can be an issue. You still need to eat and live when you retire. This is where retirement planning comes in. A well-executed retirement plan replaces that lost income so you can keep a roof over your head and food on the table.
Which is the best retirement plan in Canada?
There are many more ways to save for retirement than most people realize.
The traditional Registered Retirement Savings Plan (RRSP) — which we discuss further down — is certainly a secure way to save for retirement.
But, there are other methods for retirement savings that are open to you. Some of them you may not know about. And some you probably know about but aren’t relying on.
Canadian Pension Plan (CPP) / Quebec Pension Plan (QPP)
You pay into CPP for your entire income-earning life. You will finally get to reap the benefits of that when you retire.
Upon retirement, you will start receiving monthly payments from the Canada Pension Plan Investment Board. How long you contribute and how much you contribute determines your payment. You can start to cash in any time after the age of 60.
However, these monthly payments aren’t anywhere near enough to sustain a liveable life. No matter how long or how much you contribute, some sort of supplementary retirement income is necessary.
Old Age Security Pension (OAS)
This is a lesser-known benefit that everyone in Canada qualifies for once they hit the age of 65. This applies whether or not you’ve ever been employed, or are currently employed. You do not pay into the plan as you do with CPP. Payments reflect how long you’ve lived in Canada.
Guaranteed Income Supplement (GIS)
Unlike the previous two pension plans, the GIS is only for lower-income Canadians. It is a supplement to OAS for people who need it. Your income-tax declarations determine whether you qualify for the GIS.
Employer Pension Plans
Work pension plans come in various forms. Some are self-directed, and others are employer-sponsored. Some are a mixture of both. No matter the option, it’s best to take advantage of any opportunity where your employer helps you save for retirement.
Under some plans, employers exclusively contribute to a retirement plan that is vested (you can take it when you go) after a certain number of years of service. It pays out in full upon retirement.
With other plans, you can set money aside from each paycheque towards your retirement. Your employer may or may not contribute a percentage or dollar amount based on what you contribute. Some don’t contribute at all, but may help you save by directing funds into an RRSP before the money ever hits your chequing account.
Registered Retirement Savings Plan (RRSP)
An RRSP is a savings account that helps Canadians save money for retirement. Your contributions and earnings are not taxed for as long as you invest the funds. This allows you to grow your portfolio in time to retire comfortably. RRSPs are available in different types of investment vehicles.
Tax-Free Savings Account (TFSA)
A TFSA works like any savings account. You set aside whatever money you want (up to a government-set maximum) and you can remove it whenever you want, without penalty. While in the account, the money accrues interest — more interest than in a traditional savings account — and that interest is tax-free (unlike a unsheltered account where the interest earned is subject to taxation). And unlike a registered savings account, funds can be withdrawn at any time, tax-free.
One of the major benefits of home ownership is that it’s a great vehicle for retirement savings. Many of us have large family homes that we no longer need once the kids move out. Why sit on a large property with empty rooms? Downsizing can free up equity you’ve earned in that home to use as retirement income.
How much do I need to retire in Canada?
How much you need for retirement depends entirely on how you live now, how you intend to live until retirement, and when and where you want to retire. Here are some important questions to ask yourself in order to determine how much money you’ll need in retirement.
What is the minimum retirement income in Canada?
As mentioned earlier, the Canadian and Quebec pension plans are not meant to be enough to live off of. In fact, these funds are only meant to offset about 25% of your income. In 2019, the maximum monthly CPP payment is 1,154.58.
What is the average Canadian retirement income?
Aim to save 80% of your working income to live off of in retirement. However, because everyone’s salaries are different, individual retirement incomes can vary significantly. On average, experts recommend setting aside at least $1 million for retirement.
How to plan your retirement income
1. Your retirement goals
Consider whether you plan to travel or move into the cottage you’ve visited every summer for the last 20 years. If you have grandchildren, are you planning to contribute to their education? Knowing the age you want to retire is also a really good benchmark to start to figure out how much you need to retire.
2. Your spending habits
If you’re the type of person who lives beyond your means, be honest with yourself — how much money can you set aside now without plunging yourself into debt to keep up with your lifestyle? Living below your means today will allow you to set aside more money for the future.
There’s no point throwing tons of money into your RRSP if you’re only going to put yourself into the poor house. You don’t want to tap into that money early to pay off debts.
Are you planning to be more frugal in retirement? Or do you plan to travel the world and live the life? Your current and future spending habits are heavily influenced by how much you can, and should, invest in your retirement.
3. Unexpected expenses
Life’s curveballs don’t stop when you retire. Protect yourself and the investments you’re setting aside. Consider an emergency fund. In your savings plan, account for market changes and inflation. What gets you by in fine style today may not be enough to get you through a year of living 30 years from now.
Sit down with a trusted advisor and review all of these concerns. Seek educated projections on how to best prepare.
Retirement may seem like a far-off dream. It is something you should look forward to with excitement and anticipation, not fear and stress. Setting yourself up for the future will ensure your retirement is the reward you deserve for a lifetime of hard work.