Wednesday, August 6, 2014

When to Retire?

If you are a younger Boomer or of the next generation, you may be thinking about your retirement. Many of us have these wonderful or scary ideas about when we will retire and what we will do when we retire. The first step in this planning is to start by establishing a target age for your retirement. This  is important, because when you retire will significantly affect how much you need to save.

Consider the following:

Delaying retirement: By increasing the age when you get (in Canada) your old age pension and your Canada Pension, the government is encouraging us to work loner. This is a good idea for some, if you need to work or you have not been able to save, the longer you can build up savings, tax-deferred funds in your IRAs and employer-sponsored plans like 401Ks, (US) or RRSP (Canada) or accrue benefits in a traditional pension plan if you’re lucky enough to be covered by one, can significantly improve your financial outlook.  
In the US Medicare generally doesn't start until you’re 65. Does your employer provide post-retirement medical benefits? Are you eligible for the coverage if you retire early?  In Canada except in BC and Alberta Seniors do not pay for medical insurance.

In the US you can collect Social Security: You begin receiving your retirement benefit as early as age 62. However, your benefit may be 25 percent to 30 percent less than if you waited until full retirement age. Conversely, if you delay retirement past full retirement age, you may be able to increase your Social Security retirement benefit.   

If you work part-time during retirement, you’ll be earning money and relying less on your retirement savings, leaving more of your savings to potentially grow for the future (and you may also have access to affordable health care). If you’re married, and you and your spouse are both employed and nearing retirement age, think about staggering your retirements. 

In Canada the Canadian counter to social insurance is the Canada Pension Plan and the rules for collecting are changing. From 2012 to 2016, the Government of Canada is gradually changing the early pension reduction from 0.5% to 0.6% for each month you receive it before age 65. This means that by 2016, an individual who starts receiving their CPP retirement pension at the age of 60 will receive 36% less than if they had taken it at 65.

The following table shows the percentage by which your retirement pension will decrease for each month that you receive your pension before age 65. These amounts will change every year until 2016.

For example, if you begin receiving your retirement pension in 2013, it will be reduced by 0.54% for each month that you receive your pension before age 65.

Year of retirement% (monthly reduction)
For a person who applies for and receives their retirement pension at age 60, this represents a maximum reduction of 32.4% if taken in 2013, 33.6% if taken in 2014, 34.8% if taken in 2015, and 36% if taken in 2016.
Taking your pension after age 65
If you take your pension after age 65, your monthly payment amount will increase by 0.7 percent for each month that you delay receiving it up to age 70 (8.4% per year).
This means that, an individual who starts receiving their retirement pension at the age of 70 will receive 42% more than if they had taken it at 65.

How long will retirement last? Obtain a proper life expectancy estimate. For Canadians who want more information this site is a useful tool.  We all hope to live to an old age, but a longer life means that you’ll have even more years of retirement to fund. The problem is particularly acute for women, who generally live longer than men. 

Project your retirement expenses: Once you know when your retirement will likely start, how long it may last, and the type of retirement lifestyle you want, it is time to estimate the amount of money you’ll need to make it all happen. One of the biggest retirement planning mistakes you can make is to underestimate the amount you’ll need to save by the time you retire.

Identify your sources of income: Once you have an idea of your retirement income needs, the next step is to determine what sources of income will be available to you. Closing any "gap" is an important part of your retirement plan.

Transitioning into retirement: Review your portfolio regularly and understand your retirement plan distribution options. A financial professional can help you sort through your options and help develop a plan that’s right for you.

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