Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. A person who turns 65 today could be expected to live as many as 20 years in retirement as compared to a retiree in 1950 who lived, on average, an additional 15 years. Longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Need
There actually is a lifetime after retirement and the need to be able to provide for a steady stream of income that cannot be outlived is more important than ever. With the prospect of paying for retirement needs for as many as 20 years, retirees need to be concerned with maintaining their cost-of-living.
Health Care Needs
Longer life spans can also translate into more health issues that arise in the process of aging. The federal government provides a safety net in the form of Universal Healthcare, however, it may not provide the coverage needed especially in chronic illness cases. Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today.
Planning for the transfer of assets at death is a critical element of retirement planning especially if there are survivors who are dependent upon the assets for their financial security. Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent. Larger estates may be confronted with settlement costs and sizable probate fees which could force liquidation if the proper planning is not done.
Paying for Retirement
Retirees who have prepared for their retirement usually rely upon three main sources of income: Government plans, individual or employer plans, and their own savings or investments (RRSP or TFSA). A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with Canada Pension Plan and Old Age Security as a safety net for steady income.
The Canada Pension Plan
Canadians 60 years of age or older, except those residing in the province of Quebec, are entitled to the Canada Pension Plan if they have contributed at least once to the plan. They will receive an amount equivalent to a percentage of the income they earned before retirement out of which they paid contributions. For residents of Quebec, the Québec Pension Plan replaces the Canada Pension Plan.
Old Age Security
If you are 65 years of age or older, a Canadian citizen or a resident and if you have lived in Canada for at least 10 years after the age of 18, you are probably entitled to Old Age Security. The pension amount is the same for everyone but is reduced for high-income individuals or couples. Certain persons may also qualify for the Guaranteed Income Supplement, the Allowance or the Allowance for the Survivor—federal government benefits for low-income persons.
When you retire, you may be entitled to benefits under an employer-provided supplemental pension plan (SPP). The main supplemental pension plans are defined contribution plans and defined benefit plans.
- Defined Contribution Plans
Defined contribution plans are essentially plans with predetermined contributions established as a percentage of the salary or as a fixed amount. The amount of the retirement benefit is not known in advance and depends on the amounts contributed and returns
- Registered Pension Plan (RPP)
- Simplified Pension Plan (SPP)
- Group Registered Retirement Savings Plan (Group RRSP)
- Locked-In Retirement Account (LIRA)
- Deferred Profit Sharing Plan (DPSP)
- Defined Benefit Plans
With defined benefit plans, the amount of the pension is established contractually through a set formula. The amount of the employer’s contribution is determined by actuarial valuation. This contribution may vary in time but provides you with an income percentage that is known in advance. This percentage may, for example, correspond to 2% of the average salary multiplied by the number of years of service.
- Registered Pension Plan (RPP)
- Individual Pension Plans (IPPs)
- Supplemental Executive Retirement Plan (SERP)
Registered Retirement Savings Plan (RRSP)
The registered retirement savings plan (RRSP) is specially designed to provide you with retirement income. It is advantageous because your contributions entitle you to a tax deduction and generate investment income that is sheltered from income tax.
When you withdraw your funds at retirement, they become taxable. However, the taxation rate applicable is generally lower because your retirement income is usually lower, too.
The amount you may invest in your RRSP this year is determined on the basis of the income you earned last year. You may contribute up to 18% of that income, less the pension adjustment, up to a maximum of $19,000.
You may contribute to your RRSP up to the end of the year in which you turn 71. You may then convert your RRSP into a registered retirement income fund (RRIF) or other retirement income.
Depending on your needs and your investment objectives, you have several investment options when you contribute to an RRSP, including:
- Investment funds *
- Guaranteed interest funds
- Principal guaranteed with alternative investments
- Stocks and bonds * Referral arrangement
Tax-Free Savings Account (TFSA)
The Tax-Free Savings Account (TFSA) is a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).
For more information on retirement income needs and income sources, please contact us today.
*Mutual funds and/or approved exempt market products are offered through Investia Financial Services Inc. (“Investia”). Mutual funds and exempt market products are sold exclusively by Representatives who are licensed by provincial regulators and registered with Investia. Commissions, trailing commissions, management fees and other expenses may be associated with mutual fund/exempt market product investments. Please read the Fund Fact or prospectus carefully before investing. Mutual fund and exempt market product investments are not guaranteed, their values change frequently, and their past performance may not be repeated.