Retirement Planning - Steps and Things to Consider

While there is no set retirement age in Canada, 65 is when most people hang up their boots. Understanding how much you'll need to save for retirement is part of a sound financial plan. If you invest with intent at an earlier stage in life, you could step into retirement with an accomplished plan.

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What is Retirement Planning?

Retirement planning is nothing more than preparing for a time when your only job will be to relax and enjoy life. By working towards building a financial cushion, you help ensure that you enjoy a comfortable and productive retirement. You can start by establishing retirement goals and estimating the amount of money you need to save. Once that's done, you need to decide how you’re going to save that money.
Retirement planning, when done well, can allow you to live it up in your golden years.

Retirement planning can help you:

  • Retain or reach financial independence
  • Maintain or improve your standard of living
  • Deal with any post-retirement emergencies
  • Fund new adventures and hobbies

4 key steps to effective retirement planning

If you plan ahead, you can make sure that you're ready for retirement.

  1. Decide when you're going to retire. Most Canadians retire at 65.
  2. Estimate the cost of your post-retirement needs. Try to account for things like hobbies, travel, new ventures and potential debt or remaining mortgage.
  3. Think about the amount of money you would need to save in order to meet your retirement goals. This can be closely related to your current income and expenses. Also think about how your expenses could change once you retire. It could potentially go down if you pay-off all your debts and mortgages before you retire.
  4. A critical aspect of retirement planning is figuring out how much to save and where to save it.

How much would you need to retire comfortably?

A general retirement preparation rule suggests that retirement income should be about 80% of your annual earnings. However, this 80% rule is just a guideline. Depending on the type of retirement you want to have, you may want to adjust your goal. You then simply multiply it by the number of years you plan to stay in retirement. Not all your retirement income has to come from savings. You can also factor in pension funds and other sources of permanent income.

Let's assume that you need $6,000 per month post retirement.  If you're expecting to get $1500 per month from social security and $1500 per month from your pension, you would need $3,000 per month from your savings. That works out to $36,000 a year. You then need to work towards investments that would yield $36,000 per year in sustainable retirement income.

Choosing the right Retirement Plan

If you're a full-time employee, you may have access to retirement plans through your employer. This can be a good way to get a head start on retirement savings. Another option is to reach out to a financial institution for information on plans like: 

Registered Retirement Savings Plan (RRSP)

  • An RRSP or Registered Retirement Savings Plan is a savings plans that's registered with the Canada Revenue Agency (CRA).
  • There is an annual contribution limit which is 18% of your previous year's income, plus any unused contribution room from the previous years. 
  • RRSP contributions are tax deductible and can help reduce your income tax.
  • Any income earned within an RRSP is not taxed as long as funds remain within the account. 
  • RRSP withdrawals are treated like income and subject to withholding tax that’s dependent on your province of residence and amount withdrawn.

Tax-Free Savings Account (TFSA)

  • A TFSA or Tax-Free Savings Account is an account where your savings grow tax-free.
  • TFSAs are available to Canadian residents who have reached the age of majority in their province.
  • TFSA contributions cannot be deducted from your taxable income and there are annual contribution limits to adhere to.
  • Funds withdrawn from a TFSA are tax free.

Non-registered Accounts

  • The two most popular types of non-registered accounts are cash and margin.
  • These accounts allow you to hold a wide range of investments within them. This includes stocks, mutual funds, GICs, bonds, and even a number of non-qualified investments that cannot be held in a RRSP or TFSA.
  • With non-registered accounts, the income earned is taxable. This means that when you sell investments for profit, you have to pay capital gains tax, but the good news is that in Canada, only 50% of the total capital gains is taxable.

Registered Disability Savings Plans (RDSPs)

  • RDSPs or Registered Disability Savings Plans help Canadians living with a disability save for the future. These plans may also be used for retirement savings.
  • RDSPs are eligible for special grants from the government of Canada. Under Canada Disability Savings Grant (CDSG) you can get a maximum of $3,500 in matching contributions from the government in one year (up to a lifetime maximum of $70,000). With the Canada Disability Savings Bond (CDSB), qualifying low-income plan beneficiaries can also get up to $1,000 dollars a year (up to a lifetime maximum of $20,000).
  • While RDSP contributions are not tax deductible, withdrawals are not considered income. However, the growth on RDSP contributions is tax-deferred while held within the plan.
  • You can contribute as much as you want to an RDSP each year, but there is a lifetime limit of $200,000.

While retirement may seem far off, identify your goals and try to use these different accounts together in order to build a larger nest egg.

Retirement portfolio: Factors to consider

There’s a lot to think about when it comes to achieving your retirement goals. You need to develop a strategy in order to build a portfolio that works for you. Here are a few factors to consider while building a retirement portfolio that can help you plan effectively.

  • Time: Do you have a lot of time to save for retirement? Or are you starting a little later in life? If you're starting young, you can consider higher-risk investments that you are comfortable with because you have time on your side. On the other hand, if you're starting late, you should think about periodically setting aside larger amounts and considering the amount of risk you are comfortable with for your investments so you can aim to reach your retirement goal.
  • Risk appetite: Think about how much risk you're willing to take. Remember, everyone's got a different risk profile. Plus, your risk appetite can change depending on where you are in life.
  • Portfolio Diversification: It's never a good idea to put all your eggs in the same basket. Especially, when you have a financial goal. Understanding how much risk you are willing to accept can help you with your retirement portfolio.
  • Inflation: You have to adjust for inflation. To help ensure that your savings retain their value during your golden years, at a minimum, your investment should outperform inflation.
  • Liquidity:Think about how you'll get your pay out. Will a locked-in investment give you the liquidity you need? You should have a rough idea of your time horizon or when you're most likely to need quick access to your savings.

When should you retire?

Your own circumstances will help you define the right time to retire. In order to retire comfortably you really need to have a plan in place. Generally, if you're close to retirement age, have sizable savings and no debt, you could be ready to call it a day.

Retirement Planning FAQs

If you get to 65 and you're not ready to retire, you don't have to. It's a personal choice. You can delay your retirement. The good news is that your Social Security benefits will continue to increase until you get to 70.

For most people, their retirement income will come from these four sources:

  1. Personal savings and investments
  2. Employer-sponsored pension plans
  3. Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
  4. Old Age Security (OAS)

For effective retirement planning, you’ll need to know how much money you may get from each source. You need to have a plan in place long before you retire. If you do, you can have a good idea of exactly how much money you'll have when you retire.

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