How much do you need for retirement? Easy answer It depends, longer answer below

As you start planning for retirement, it’s important to know how much you will need to retire comfortably. Although this is a basic question when planning for retirement, it can be very difficult to accurately calculate how much you will need in 10, 20 or even 40 years.

As a starting point, here are some factors that can affect how much you will need for your retirement. Keep in mind this list is just a start.

Your retirement goals

Your retirement goals could have a big impact on your spending habits and will form the basis of how much you need to save. How do you picture your retirement? How will that change over time?

·       Do you plan on travelling more frequently?

·       Do you want to retire earlier or later?

·       Do you want to work in retirement?

·       Do you want to start saving for a grandchild’s education?

·       Do you plan to move out of your home? Do you plan to move to a different community?

·       Do you plan to carry debt into your retirement?

Current spending versus expected spending in retirement

Your current financial obligations are likely different than they will be when you retire. So how much of your pre-retirement income will you need in retirement to maintain your desired standard of living? 70%? 60%? 50%?

There is no golden rule or set amount. The amount can vary greatly from person to person, since everyone will have different retirement goals, different levels of income and different attitudes about money. Some people might need less, while others might need more.

To get a rough estimate as to how much you will need, think about your retirement goals, how you spend your money now and how you think you will spend it after you retire. For example, whether you still have substantial debts such as a mortgage or an outstanding loan, or downsizing your home, can have a significant impact on your spending in retirement.

If you plan to move to another province or out of Canada, look into how that might impact your medical insurance, social benefits and taxes.

It is also important to consider the effects of inflation, which is the rising cost of consumer goods and services. You should think about including a rough estimate of how much things will cost when you retire using a historical average annual rate of inflation.

 If your savings are not growing by at least the rate of inflation (2.00% between 2000 and 2014), your savings can actually decrease in value over time. To help you compare your current spending with your expected spending in retirement, try FCAC’s Budget Comparison Worksheet. Once you have an idea of what your future expenses will be like, put those values in the Financial Goal Calculator, to help you create a plan to save for your retirement.

How long do you expect to be retired?

Today’s retirement landscape looks quite different than it did 30 or 40 years ago. The number of years you can expect to live in retirement has increased: on average, a male aged 65 in 2013 can expect to live to 84 and a female aged 65 in 2013 can expect to live to 87. Therefore, it is important to plan to save enough to support your desired lifestyle throughout your retirement.

Deciding when to retire is a major lifestyle and financial question, and the answer can have a big impact on how much you’ll need to save for retirement. For example, if you expect to live until you’re 90 and want to retire by 65, your retirement savings will have to last at least 25 years, but they will have to last 30 years if you retire at 60. By working five years longer, you earn five years of extra income and delay the need to access your retirement assets by five years as well. The combined effect can be a significant help in achieving your retirement goals. 

Your retirement can depend on several factors, including:

·       your retirement goals (desired lifestyle)

·       your partner’s retirement plans

·       your health or a significant other’s health

·       your current financial obligations and living expenses

·       how much you will get from private and public pensions

·       your current job as well as the availability and suitability of other job opportunities

Unexpected events

When planning for your retirement, you may wish to consider the possibility of unexpected events such as:

·       earlier than expected retirement for personal, professional, or health reasons

·       unexpected major expenses such as home repairs, car maintenance, travel etc.

·       health emergencies for yourself and/or a significant other and the need for additional care this may cause.

It is important to consider the impact of unexpected events on your retirement since they can dramatically affect your finances. With this in mind, think about starting an emergency fund for your retirement that will be larger than a typical emergency fund (three to six months of income).

While unexpected events will always be a surprise, planning what you will do in case they happen can help lessen their impact. Consider setting up a specific banking or savings account as an emergency fund and have a percentage of your pay automatically deposited into the account.

You might also wish to consider whether you have enough disability or life insurance, and whether you will need to purchase additional insurance coverage to reduce the risk and financial impact of for unexpected events.

Long-term care

Many Canadians find it difficult to think about the idea that they may need long-term care in their retirement years. However, planning for the possibility of long-term care is an important part of retirement planning. Depending on your needs, long-term care can be very expensive, so it is important to get an idea of how much it may cost and to plan accordingly.

Long-term care facilities are governed by provincial and territorial legislation. Therefore, costs may vary depending on where you live or where you decide to live. For additional information about the potential costs of long-term care, please contact your provincial or territorial government.

If available, consider critical illness or long-term care insurance coverage which can help cover some of the risk.

After carefully reviewing your potential needs, set a goal and use FCAC’s Financial Goal Calculator to help create a plan to get there.

The information above was from the government of Canada's web site on retirement planning found here

Are you retiring in Canada: Pillar 4: Real Estate and TFSA

There may be one more pillar for the Canadian who is thinking of retirement argues a new report by the C.D. Howe Institute (pdf file).This pillar is available to only 40%  of Canadians, well the other pillars are available to more of us.

These fourth-pillar assets – which include real estate, publicly traded securities, privately owned business investments, insurance products and tax-free savings account accumulations – significantly improve the outlook for Canadians’ retirement readiness, according to the report.

Jeremy Kronick and Alexandre Laurin, the authors of the report, focus on the group generally thought to be most at risk of inadequate retirement savings: employed 35-to-64-year-old Canadians. After factoring wealth already accumulated from all fourth-pillar assets, the authors found that 40 per cent of this group has potentially already accumulated sufficient wealth to sustain themselves in retirement.

Canadian households can count on various sources of wealth in retirement, notes the report. Government payments through the old-age security benefits and the guaranteed income supplement program provide a basic income for all Canadian retirees. These payments are complemented by the Canada/Quebec Pension Plan.

Combined, these government programs provide a guaranteed annual income stream and form pillars one and two of the Canadian retirement income system, according to the report. For the third pillar, the report points to workplace pension arrangements such as defined contribution and defined benefit pension plans, tax-deferred retirement savings plans and individual registered plans.

“Much of the policy debate in Canada around the adequacy of retirement saving has ignored the role of fourth-pillar assets or has tended to acknowledge their potential role but ultimately dismisses their importance,” states the report. “Despite this lack of attention by policymakers, private wealth accumulated in assets other than pension and retirement saving plans can provide a significant source of retirement capital.”

Are you retiring in Canada this year, Pillar 3: Employer pension plans

Understanding your employer pension plan

The two main types of employer pension plans include: 

·         Defined benefit pension plan (DBP)

·         Defined contribution pension plan (DCP) 

The following table below compares the two. 

Characteristics	Defined contribution pension plan (DCP)	Defined benefit pension plan (DBP)
What is it?	·         DCPs are a form of savings for retirement where you and your employer contribute an established amount to your pension each year. ·         Your contribution is usually a percentage of your pay. ·         The value of the pension is based on the performance of the investments. ·         Amount of the pension is uncertain.	·         DBPs are an agreement where the employer promises to pay a certain amount of money each year after retirement. ·         Employees often but do not always make contributions in addition to their employer’s contribution. ·         How much you receive depends on a formula, generally based on your income and years worked.
How is it managed?	·         Generally, you have to choose how your contributions are invested. ·         Consider the level of risk and time frame when making investment choices.	·         Your contributions are pooled into a retirement fund and managed by your employer or pension plan administrator/sponsor. ·         Investment results affect the amount of the employer’s contributions.
Advantages	·         You have more control. ·         You can invest in a way that suits your goals and risk tolerance. A financial professional can help you understand the risks of various investments. ·         You have the possibility of benefiting from higher returns if your investments perform well.	·         The amount of your pension is set primarily on a set formula often based on your career earnings and years of service and is therefore generally less sensitive to annual returns in the stock market.  ·         Funds are professionally managed and you are not required to make any additional investment decisions. ·         Your investment risks are pooled across time and different individuals, so that investments have time to recover from really bad years and/or benefit from years with really good returns.
Disadvantages	·         The amount of retirement income is not guaranteed. If your investments do not perform well, you have to deal with it yourself. It could be affected by the ups and downs of the stock market. ·         Some people are not comfortable managing their own retirement fund or investments. ·         Because of the limited advice available, obtaining separate financial advice may involve additional costs. ·         You may not be able to invest exactly the way you want as the employer may offer only a limited number of investment options within the plan.	·         The risk that the fund is not managed properly or that your employer experiences financial troubles or even bankruptcy can affect the amount of your pension. ·         You are not able to directly benefit from high stock market returns. These are passed along to all members in various ways (often in terms of lower contributions or increased benefits).

Both DCPs and DBPs have advantages and disadvantages, but ultimately you won’t have a choice over which type of pension plan your employer has in place. What’s most important is that you fully understand how your pension plan works.

Your pension will likely be a cornerstone of your retirement income, so if you don’t know how your pension works, be sure to speak to your human resources staff member, union representative or pension plan manager to find out.

Group Registered Retirement Savings Plan (Group RRSP)

A Group RRSP is an employer-sponsored retirement savings plan, similar to an individual RRSP, but administered as a group by your employer. Your contributions are made through regular pay-roll deductions on a pre-tax basis.

While Group RRSPs function similar to individual RRSPs, the details of the plan often vary by the employer. For more detailed information on your Group RRSP, consult your human resources, union, or pension plan representative.

Pooled Registered Pension Plan (PRPP)

Pooled registered pension plans (PRPPs) are a new type of pension plan to help Canadians save for retirement. PRPPs are designed mainly for people who do not have access to a workplace pension, such as employees of small-sized and medium-sized businesses, and self-employed individuals.

The federal Pooled Registered Pension Plans Act (the federal PRPP Act) and the Pooled Registered Pension Plans Regulations (the Regulations) came into force on December 14, 2012. 

How do PRPPs work? 

PRPPs are defined contribution (DC) pension plans. In a DC plan, you and your employer contribute a certain amount to your pension each year. In the case of PRPPs, employer contributions are optional. DC plans do not guarantee how much you will receive when you retire. Your pension income depends on how well the investments held in your DC plan perform.

Employer participation in PRPPs is voluntary. To set up a PRPP, an employer must enter into a contract with a PRPP administrator. PRPPs are administered by licensed third parties such as banks or insurance companies, not employers.

Once an employer enters into a contract, employees are automatically be enrolled as members unless an employee chooses to opt out. Members’ contributions to the pension plan will be made through deductions from their pay.

Who can join a PRPP under the federal PRPP Act and Regulations?  

You can join a PRPP offered by your employer if: 

·         you are employed in a federally regulated business or industry (such as banks, telecommunications companies, interprovincial transportation sectors, etc.) anywhere in Canada and your employer offers PRPPs

·         you are employed in any type of work in the Yukon, the Northwest Territories or Nunavut. 

You can join a PRPP on your own if: 

·         you are employed in any type of work in the Yukon, the Northwest Territories or Nunavut and your employer does not offer PRPPs

·         you are self-employed in the Yukon, the Northwest Territories or Nunavut. 

Note: The availability of PRPPs for provincially regulated employers, employees and self-employed individuals will depend on provincial government decisions on whether to put in place similar provincial legislation. 

Provinces  

Quebec: Voluntary Retirement Savings Plans

In 2013 the Quebec Government introduced the Voluntary Retirement Savings Plans Act for employers with businesses in Quebec – Voluntary Retirement Savings Plans (VRSPs) are Quebec’s version of PRPPs.

VRSPs and PRPPs are similar in many ways.  However, one of the main differences is that employers with businesses in Quebec with more than five employees must offer their employees a VRSP, a Tax-Free Savings Account, or another retirement savings plan, however, employees have the right to opt-out. 

For more information on VRSPs visit the VRSP section of the Régie des rentes du Québec website and for more detailed information on eligibility see section 45 of the Voluntary Retirement Savings Plan Act. 

More key facts about PRPPs 

·         PRPPs must be low-cost. This means that the costs charged to plan members must be at or below those charged to members of defined contribution pension plans that provide investment options to groups of 500 or more members.

·         Costs include all fees, levies or other charges that reduce a member’s return on investment, other than those triggered by the actions of a member, such as requesting copies of documents.

·         Under the federal PRPP Act, the Office of the Superintendent of Financial Institutions issues licenses for administrators to offer PRPPs.

A few things to keep in mind about employer pension plans 

If you have a defined contribution pension plan, contributing at least the amount your employer will match will enable you to fully benefit from your employer’s contributions. 

Many people switch jobs and careers throughout their working lives, which means many people might have two or more smaller pensions from different employers. 

If this is the case for you, be sure to investigate what’s best for you. Are you able to transfer your old pension to your new plan? Talk to a financial professional or your human resource advisor to better understand your options.

Are you retiring in Canada this year, Pillar 2: Canada Pension Plan (CPP)

The CPP operates throughout Canada, except in Quebec. Quebec has its own program called the Quebec Pension Plan (QPP) for workers in Quebec.

The CPP retirement pension is a monthly benefit paid to those who have contributed to the Canada Pension Plan. All Canadians over the age of 18 who earn $3,500 or more per year have to pay into the CPP. The amount you pay depends on how much you earn.

The Plan is designed to replace approximately 25 percent of the earnings on which your contributions were based over your working life. You make contributions only on your annual earnings between a minimum and a maximum amount (these are called your pensionable earnings). 

The minimum amount is frozen at $3,500. The maximum amount is set each January, based on increases in the average wage in Canada. In 2014, the maximum amount is $52,500. The contribution rate on these pensionable earnings is 9.9 percent, split equally between you and your employer. If you are self-employed, you pay the full 9.9 percent.

The average monthly payment in October 2013 was $534.51 among all beneficiaries and $594.19 among new beneficiaries aged 65. You have to apply for CPP benefits. 

The amount of your CPP benefits will depend on several factors, including how long you contributed to the plan, how much you contributed, and finally, the age at which you choose to begin receiving your CPP retirement pension. You can choose to begin collecting your CPP benefits at any time between ages 60 and 70. 

The age at which you begin receiving your CPP benefits will have a major impact on the payments you will get for the rest of your life.  There are other types of benefits that are available within the CPP:

1.  CPP Post-Retirement Benefit is a new cumulative monthly benefit paid to individuals who worked and made CPP contributions while receiving the CPP retirement pension.

2.  CPP Disability Pension is a monthly benefit available to people who have made enough contributions to the CPP and whose disability prevents them from working at any job on a regular basis. A disability pension converts to a CPP retirement pension at age 65. The average monthly benefit in October 2013 was $855.49.

3.  CPP Survivor’s Pension is a monthly pension paid to the legal spouse or common-law partner of a deceased contributor to the CPP. The average monthly benefit in October 2013 was $325.69.

4.  CPP Death Benefit is a one-time, lump-sum payment made to, or on behalf of, the estate of a deceased CPP contributor. The average one-time payment in October 2013 was $2,286.03.

For more detailed information on the CPP, visit the Service Canada website.

Canada Pension Plan Investment Board (CPPIB)

The Canada Pension Plan Investment Board (CPPIB) is a crown corporation that was created to help manage and grow the money in the Canada Pension Plan (CPP).

The CPPIB takes the money that is left in the CPP after all benefits have been paid out and invests it in a number of different assets. To learn more, view CPPIB’s infographic An Introduction to Canada Pension Plan Investment Board (CPPIB).

Quebec Pension Plan (QPP)

The QPP is a mandatory public insurance plan for those who work, or who have worked in Quebec. It provides them and their families with basic financial protection in the event of retirement, disability or death. The QPP works similarly to CPP as it is funded by contributions from Quebec workers.

Similar to CPP, the amount of your QPP payments will depend on several factors, such as how much you contributed, how long you contributed and when you chose to start collecting the benefit. For more information on the QPP, visit the Régie de Rentes du Quebec website.

Note: Pension plan benefits (such as Old Age Security, and the Canada Pension Plan are protected against inflation because they are indexed to the Consumer Price Index. This means that if the cost of living goes up, the value of the benefit goes up accordingly.

However, personal savings and investments, such as mutual funds or GICs, are generally not protected against inflatio