Retirement planning can be challenging when determining where your income will come from.
Many Canadians would like to retire earlier and we are living longer. In fact, Statistics Canada estimates the average Canadian will spend about a third of their lifetime in retirement. How much money will you need to save so you can enjoy a retirement lifestyle of your choosing? That depends on what you estimate you will need to live on each year in retirement. As a general rule, between 50% and 80% of your annual pre-retirement income before taxes is required to maintain your current standard of living during retirement.
Accumulating enough money during your working years to build the savings for an annual income stream in retirement is crucial.
Your preferred retirement lifestyle is more likely to be achieved if you set your goals, commit to your plan. It is important to also consider three primary sources of income that may be available to you in retirement.
Three Primary Sources of Retirement Income
- Government Plans
There are two primary programs that provide income benefits to Canadians. The Old Age Security (OAS) program offers a monthly benefit to Canadians at age 65. The benefits are subject to certain residency requirements and higher income pensioners also repay part or all of their benefit (clawback) through the tax system. OAS also supports lower-income retirees through a Guaranteed Income Supplement (GIS) and Allowance, formerly called a Spousal Allowance program. OAS pensions are taxable and OAS is financed from government general tax revenues. In the third quarter of 2017 the OAS maximum monthly benefit payments were $583.The second program is the Canada/Quebec Pension Plan (C/QPP). It provides benefits based on the total number of years you have worked in Canada, the amounts you have contributed to the plan over those years and the age when you want your pension to start. CPP benefits are also taxable and you may apply as early as age 60.; The 2017 maximum monthly benefit payments are $1,114. The majority of Canadians do not receive maximum benefits. You can look up your personal CPP statement at the services Canada website.If you’re planning for retirement, you must decide how much income from these plans will support your retirement goals. Statistics Canada studies have shown government programs provide less than 40% of an average retiree’s income. Consider using a conservative estimate, between 25% and 35%, when calculating how much these plans will support your retirement income.
- Company Plans
A second potential source of retirement income is a group retirement plan. A company sponsored plan such as a Group RRSP gives you a great advantage in saving for retirement and will be a key component of your retirement income. According to Statistics Canada, about 60% of working Canadians do not have a company-sponsored retirement program.The total savings available to you at retirement is comprised of two elements: the contributions you and your employer make to the plan, and the investment growth on those contributions. Along with government benefits and other personal savings, these retirement savings funds will be used to provide your annual retirement income. The number of years until your retirement and the growth of your investments will have a significant impact on your accumulated savings.
- Personal Savings
A third possible source of income that you can draw on in retirement is your personal savings. These include registered (also called tax-assisted) savings and non-registered savings.Registered savings are accumulated in a Registered Retirement Savings Plan (RRSP). Under an RRSP, your personal contributions build up interest, or investment income, on a tax-deferred basis until you make withdrawals. There are limits to the amount you can put into an RRSP. Your contribution room becomes smaller as contributions are made to company-sponsored registered plans. Each year, Canada Revenue Agency (CRA) calculates your personal RRSP contribution limit and advises you through your Notice of Assessment, which you receive after you file your annual income tax return.
Savings may also accumulate in a Tax Free Savings Account (TFSA). This allows Canadians to set money aside and watch those savings grow tax free throughout their lifetimes. TFSA savings were introduced in 2009 to all Canadians over 18 years of age to save up to an annual maximum where contributions grow and earn income tax-free. The money can be used for any purpose and contributions are not tax-deductible.
When determining exactly how much to save to achieve your retirement goals, a number of factors such as your age, years to retirement, current annual income, your retirement goals and your savings come into play. Planning for retirement is not a simple task and we encourage discussing your financial future with a qualified professional advisor on a regular basis.
Learn More about a Co-operators Group RRSP
As the Canadian population ages, saving for retirement has become more important. Together with the Co-operators, ASSOCIUM GAIN offers a simple and effective way for organizations of any size to support their employees.