Retirement is something that every working Canadian should be thinking about, but that doesn’t necessarily mean they are.
After all, when you’re 20 years old or just beginning your career, retirement planning seems like something you’ll have plenty of time to do later. And if you’ve been working for a while, but haven’t been able to focus on retirement planning, you might fear you’ve fallen behind and feel reluctant to investigate the facts.
But there’s no time like the present for making a change. So, whether retirement is decades away or closer than you realized, here are seven New Year’s Resolutions to help you be more prepared.
1. Set a goal retirement age
Figuring out when you want to retire will help you to estimate how much money you’ll need to have saved up by the time that day rolls around.
Let’s say you’re 30 years old now and you want to retire by age 65. That gives you 35 years in which to save. So how much money will you need to retire at age 65?
A common rule of thumb is to aim to save at least 70% of your annual pre-retirement income. Then, multiply this number by 25. Why? Because another rule of thumb says it’s a good idea to plan for 25 years of life after retirement — perhaps more if you retire early. Finally, you’ll want to subtract any pension income you plan to receive.
If you earn an average of $80,000 a year while working, and expect to receive $15,000 per year in pension income after retirement, the math would look like this:
$80,000 x 0.70 = $56,000 (amount you can reasonably expect to need per year in retirement)
$56,000 x 25 years = $1.4 million (total amount you’ll need in retirement)
$15,000 x 25 years = $375,000 (total amount of pension income you’ll receive in retirement)
$1.4 million – $375,000 = $1,025,000 (total adjusted amount you’ll need to save for 25 years of retirement)
$1,025,000 / 35 years = $29,285 (total amount you’ll need to save each year to reach your savings goal)
Of course, it’s no easy feat to save nearly $30,000 per year, which is why it’s so important to start saving for retirement as soon as you possibly can, and to optimize your savings strategy to amplify every dollar.
2. Create a retirement savings plan
Once you’ve determined how much you need to save to retire at your goal age it’s time to plan how you’ll make those savings a reality.
Canada has several retirement-specific plans and programs that are worth incorporating, possibly in tandem with tax-free savings accounts, or TFSAs.
Since retirement is often a long-term goal, investing your savings is also a strategy to consider. You can choose to invest via a financial advisor, a robo-advisor or even a DIY investing platform. Each of these options has pros and cons so it’s important to do some research before deciding which method is best for your needs.
Part of deciding where and how to invest your money is analyzing risk. How much risk you’re comfortable taking on will depend on your personal preferences, but age is also a factor. If you start saving for retirement early (in your 20s), you may be able to take on more risk, as you have plenty of working years ahead of you, and time for market downturns to correct themselves. If you’re older, you’ll want to be a bit more conservative as your retirement age goal approaches, meaning registered plans and tax-free accounts may be more attractive.
3. Store your savings in the right accounts
You’ll want to make sure your retirement savings are deposited into plans and accounts that maximize each dollar.
Canada’s Registered Retirement Savings Plan, or RRSP, is an obvious choice for retirement savings because it is specifically tailored to be a retirement account.
RRSPs are tax-deferred accounts, which means you don’t pay taxes on the money you deposit, only the money that you withdraw when you retire. The assumption here is that you won’t be earning employment income while withdrawing from your RRSP in retirement, so you’ll be taxed at a lower rate. That being said, there are plenty of rules regarding RRSP contributions and deductions that you want to make sure you understand.
Another account that can be used for retirement savings (often in conjunction with an RRSP) is a Tax-Free Savings Account, or TFSA. These accounts allow you to earn interest on your deposits, or even invest them and earn dividends, without paying taxes on the gains. However, like with an RRSP, there are TFSA contribution limits and withdrawal rules you must follow, so make sure to investigate them before opening an account.
» See our picks: Canada’s best high-interest TFSAs
4. Automate your contributions
Once your plan’s in place and accounts picked out, your next step should be to automate contributions. This ‘set it and forget it’ way to save ensures you’re constantly putting money towards your retirement plan with no little effort required on your part. It’s perfect for those who might be forgetful or be tempted to spend extra funds if they’re not allocated immediately.
Automating contributions to your retirement accounts should be easy, with financial institutions allowing you to set it up online. You can choose how much you want to contribute and at what frequency.
Should something arise and you need to make a change, for example, a temporary loss in work, then you can quickly change your automatic deposits to reflect something more affordable, or pause them altogether.
5. Investigate pension plan options
Most Canadian employees pay into the Canadian Pension Plan, or CPP, and as such, can apply for CPP payments once they’re at least 60 years old. The CPP provides monthly, taxable income, and can be quite helpful as a supplement during retirement, especially if personal savings are limited.
Additionally, depending on your job, you may be able to take advantage of an employer-sponsored pension plan. There are two main employer-sponsored pension options in Canada: defined benefit and defined contribution plans.
With defined benefit plans, your employer promises to pay you a regular income after you retire. This rate is usually based on the salary you earn and how many years you have worked for the company. In this case, the employer (or pension planner) manages the fund and you don’t get to choose how it is invested.
With defined contribution plans, you know how much you pay into it but you don’t know how much you will get when you retire. The money is invested on your behalf and you may get a say in how it is invested.
Both options have their pros and cons but either way, if you are one of the lucky Canadians who have access to a pension plan provided by their employer, be sure to take advantage.
6. Determine your Old Age Security benefit eligibility
Old Age Security, or OAS, is a monthly benefit available to many Canadians who are 65 and older. Most Canadians are automatically enrolled for this benefit. If you are automatically enrolled, you will receive a notification from Service Canada after your 64th birthday.
If Service Canada doesn’t have enough information for you on file, you may be required to apply for OAS, and you’ll need to contact Service Canada to do so.
How much you will receive from OAS depends on how long you have lived in Canada (although some other countries may qualify) after the age of 18.
Typically, OAS starts when you turn 65 but you can choose to defer it to increase your total benefit. Every month that you defer your OAS, 0.6% will be added to your payments. You can defer payments until age 70, for a maximum additional benefit of 36%.
7. Get your estate in order
Preparing yourself for the financial aspect of retirement is challenging enough, but you’ll also want to think about what will happen to those hard-earned assets — property, savings and investments alike — after you’re gone.
Estate planning involves creating a will and taking other steps to ensure your wishes are honored when you pass away. Without a comprehensive estate plan, division of your assets could be decided by the estate laws in your province or territory, to the possible exclusion of the people and entities you care about.
The bottom line: Get started today
It’s never too early to start thinking about retirement. The sooner you start, the more time you’ll have to save, and maximize those savings through registered plans, investments and tax-free accounts. But if you haven’t started yet, don’t panic. The above tips will get you moving toward retirement readiness, and have you feeling more confident in no time.
TFSA contribution limits place an annual ceiling — $6,000 for 2022 — on how much you can contribute to a tax-free savings account. Over-contribute and you’ll have to pay a tax penalty to the CRA.