At 5:30 am, the alarm shrieks a-ring, ring, ring — the death knell of sleep — and I spring out of bed mentally listing out my to-dos for the day. As I sip a hot cup of coffee, the vision of a myself lounging on a Muskoka chair by a lakeside cottage galvanizes me to perform optimally at work and thereby save crucial dollars for my retirement.
However, before saying sayonara to full-time work, you must ensure sufficient income for the autumn of life, which might be anywhere from 20 to 30 years! This requires careful planning. With the following strategies, your lakeside cottage may have to find space for a sleek boat!
Registered Retirement Savings Plan (RRSP)s encourage Canadians to save for retirement by offering tax benefits, which are twofold — contributions to RRSPs are tax deductible and the money compounds sans tax till you withdraw it. You can also open a Tax-Free Savings Account that allows your savings to grow tax-free.
Old Age Security:
Canadian citizens and permanent residents who have lived in Canada for more than 10 years after the age of 18 will be eligible for Old Age Security when they turn 65. The amount is not tied to your contributions but depends on the length of your stay in Canada.
Canada Pension Plan:
CPP is designed to replace approximately 25% of your earnings. Canadians earning $35,000 or more annually and who are over the age of 18 must pay into the CPP. The contribution rate is 9.9%, which is split equally between you and your employer. If you are self-employed, you pay the full amount. Your CPP benefit amount depends on the length of time and the amount you contributed and the age you choose to begin receiving your pension — you can start at any time between the ages of 60 and 70.
Employer pension plans:
Some Canadians will also receive benefits from employer-sponsored pension plans like Defined Benefit Pension Plan (DBP) and Defined Contribution Pension Plan (DCP). In a DCP, you and your employer contribute an established amount annually. You must choose how your contributions are invested. The amount of retirement income is not guaranteed because it’s market-dependent. DBPs are an agreement where the employer promises to pay a certain amount of money each year after retirement. You run the risk of that fund not being managed properly or your employer experiencing financial troubles, even bankruptcy.
All the above benefits will only cover a portion of your income requirement-post retirement. The reality is that only two out of five Canadians are covered by workplace pension plans and the pension provided by government won’t be enough to get by — In 2015, the maximum payout for CPP was only $12,780 per year.
To ensure you have enough income to last throughout your retirement, you need to start saving early. In the 2016 Sun Life Retirement Now report, 89% of the surveyed ranked starting to save and invest early as their number one tip. When you factor in wildcards like medical emergencies and children who need long-term support, you will need 70% of your working income when you reach retirement. This is not an unattainable target when you adopt these methods.
Pay yourself first:
This simple technique, made famous by David Chilton in The Wealthy Barber, makes saving easy. Figure out how much you want to save, set-up an automatic withdrawal plan with your bank for that amount and spend the rest.
Bank tax returns:
An easy way to boost retirement funds is to increase the amount of tax refunds saved. Also, save at least half of any pay increase you receive. When you receive another raise, keep saving the earlier amount as well as half of the new increase.
Put a brake on impulse purchases. Refuse to buy anything over $100 on the spot. Force yourself to think about it for at least a day. Also, comparison shop online for better deals.
Prepare for retirement:
Try living on your projected retirement income before quitting to see if it meets your expectations. Adjust your retirement plan accordingly.
N. Caleb | DBPC Blog