Saturday, April 25, 2015

Start your plan for retirement early

In the education system I worked in there was a course called Personal Planning, which is part of the Graduation Program. In the course the students learned how to plan for their careers, how to plan a budget, how to plan for life. It is a great course but it is taught at the Grade 10 level. Well in my experience, most 15 and 16 year old students are not thinking of planning for life. They have a short time horizon and planning for life means planning for the next weekend.

One of the skills taught, (not necessarily learned) show students how to save and how to plan. As a working person, close to or just starting to think about retirement perhaps a review of what should go into your plan for retirement might help.  

Planning for retirement is not hard, there are two main considerations, the first is time, the second is income. Lets look at time; in the 60's  the life expectancy from birth for a Canadian  was in the mid-70's for men and 80 for women. Today a woman who is 60 this year can now expect to live on average to 89, says the Canadian Institute of Actuaries, the group who sets the benchmark for pension calculations reports. A man who is 60 can expect to live on average to 87. So if you retire at 60 or 65 you still have a lot of years ahead of you.

Here is a great site for my friends in the States to help them plan The RealDealRetirement Toolbox.One of the first tools on this site is this one: 

 Will You Have Enough To Retire?  This tool is designed to give you a quick estimate whether you’re on track toward a secure retirement. Enter your age, income, planned retirement age, the amount you've saved to date and the percentage of income you save each year, and the tool will estimate how a nest egg you’ll need and how much you’re projected to have.

In Canada we do not have such a tool, so we have to figure out how much of a nest egg we will have by doing some basic research and doing some basic math.

First set a goal of how much money you need when you retire.  Here are some steps to help you figure out this amount. I suggest you need to consider your pension situation, the government pension you will receive and finally how much you want/need to save. 

First figure out your pension situation by finding out  if you contribute to a pension plan.  If the answer is yes, then ask what type of plan, is it. There are two basic plans. The first is called a  Defined Contribution Plan (which means you contribute, your employer may contribute, and when you retire you take your savings and invest in a program that will give you an annual income) the second is a Defined Benefit Plan (which means you contribute, your employer may contribute and when you retire, you receive an income based on years of service multiplied by a percentage to define what percentage of your annual wage you will receive). Some newer plans are a combination of the first two.

If you are not contributing to a pension plan, then you will have to figure out how much government pensions you may receive. In Canada, people who have worked all of their lives receive Canada Pension Plan (CPP). You must have worked and made at least one valid contribution (payment) to the CPP to qualify for a CPP retirement pension. The standard age to begin receiving the pension is 65. However, you can take a permanently reduced CPP retirement pension as early as age 60 or take a permanently increased pension after age 65. If you live in Canada you can go to the website and calculate how much you will receive when you retire. 

If you live in Canada you also receive the Old Age Security PensionThe Old Age Security (OAS) pension is a monthly payment available to most people 65 years of age and older who meet the Canadian legal status and residence requirements. Your employment history is not a factor in determining eligibility: You can receive the OAS pension even if you have never worked or are still working. To see if you are eligible, go to this website. This pension is currently $563.74 per month. If this is your only income, you may also be eligible for the supplement, which is $764.40.

So if you will be receiving the Canada pension add that amount to the Security Pension and that becomes your base monthly income in retirement. 

If you are not receiving Canada Pension then your base retirement income may be your OAS plus your supplement.

Once you have your base retirement income then if you are receiving a company pension you can add your company pension to that amount. This should give you an idea of your monthly income when you are retired in today's dollars. 

If  you think the amount your have is not enough to live, then you have to supplement this amount by savings. In Canada we can save for retirement through two programs. The first is called an Registered Retirement Saving Plan (RRSP), and the second is called a Tax Free Savings Plan (TFSA). Both these plans have limits on how much you can save per year. The RRSP limit for 2014 is $24,270. However, your 2014 RRSP deduction limit may be more than $24,270 if you did not use your entire RRSP deduction limit for the years 1991 to 2013. Your unused RRSP deduction room will be carried forward to 2014. 

The TFSA limit this year is $10,000 and if you do not contribute the maximum, the amount of unused contributions is carried forward. If you have not yet contributed to your TFSA you have $41,000 in room to invest. 

If you have not contributed to an RRSP or a TFSA and you have just invested and/or saved outside of these two vehicles, you may buy an Annuity or just draw down from your savings.  I highly recommend that you talk to your financial adviser about the most effective way to do this. You may be able to construct a vehicle that allow you to pay minimum tax.

When you retire, you may need to start taking money out of your savings. In Canada RRSP must be converted to Registered Retirement Income Funds (RRIF) once you turn 71. The minimum amount of money you can take out is mandated by the government and it starts at 5.28% and this percentage of withdrawal goes up every year. The RRIF program is designed to so that by age 95 all of the money is withdrawn. You must pay tax on this money.

The nuts and bolts of a RRIF

  • A RRIF is the sequel to an RRSP. You must convert your RRSP to a RRIF when you turn 71.

  • Your savings grow tax-free inside, but withdrawals are taxable.

  • A RRIF can hold the same sorts of things as an RRSP — stocks, GICs and mutual funds.

  • There is a minimum required annual withdrawal, but you can do it monthly quarterly or once a year.

  • If your spouse is younger, you can use his or her age to calculate the minimum withdrawal.

  • If your spouse is your beneficiary, he or she inherits your RRIF tax-free. Source:

  • If you have your money in a TFSA account, you can take out whatever you want or need, there is no restrictions and you pay no tax on the money.

    Most advisers I have talked to suggest that you should take out about 4 to 6 percent of your savings. 

    So if you, for example want another $2,000 a month to supplement your government pensions, then you need to have around $600,000 in savings. This amount would allow you to take out $24,000 a year (4%) without touching your capital. 

    So if you are in your 30's you have 35 years to save.or if you are in your 40's you have 25 years to save.  One suggestion is that you put away between 10 and 15% of your salary per year. That may be hard to do if you have a family. I suggest starting at 5% and then increasing this amount when you get a raise.

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