The annual rush to save for retirement is soon upon us. Despite the efforts of financial planners and investment advisors alike, a vast majority of Canadians continue to make their annual RRSP contribution all at once right before the deadline.
Boomers Are Retiring
As the population of Canada ages, there is a shift from away from moving money into retirement savings to thinking about structuring retirement income. As we save for retirement, we ask, “How much do I need to save?” As we approach retirement or begin retirement, we start to ask, “Where will my money come from?”
Start With Spending Goals
There is a tendency to start with income first. In fact, you are far better off starting with establishing your spending goals or costs of retirement first.
Budget – This dirty little word can carry a lot of negative feelings and emotions. However, I encourage you to think about your costs in retirement. What will be your regular expenses? Property tax, utilities, telephone, groceries are all regular expenses.
Some expenses go away – If you have planned everything well, you may not have a mortgage or will pay it off within a few years in retirement.
Plan for fun – If you have dreamed of taking vacations in retirement, you can expect to have some additional costs in the early years. I have heard than many who are newly retired will spend more in the first few years even if they have not planned for it. Anticipate some additional expenses in the first few years.
Once you know what you will spend in retirement, you can now look at filling the need with income.
Know Your Retirement Income
You should begin by taking stock of where your retirement income will come from. Some of this income will come from a government sources, savings, or private pension plans. Here are some of the sources of income you may receive in retirement:
Canada Pension Plan (CPP) – If you have worked all of you life in Canada you will receive some form of CPP. As of May 2009, the average annual CPP benefit was just under $9,800 per year (the maximum was $13,270).
Old Age Security (OAS) – If you have lived in Canada for 40 years since age 18, you may be entitled to OAS. If you annual income is below $66,000 you would be entitled to the full benefit of $10,905 per year. If you have been in Canada for less than 40 years, the rate is lower and if your income exceeds $66,000, your OAS will be reduced and eliminated by $107,000.
Private Pensions – If your employer sponsored at defined benefit pension plan, you will know exactly how much you will be paid in retirement. If the plan was a defined contribution plan, you may be able to fix your income by purchasing an annuity.
Retirement Savings Plans – Including RRIFs, LIFs and LIRAs can all be used to generate income at retirement. You have a couple of tax-deferred options where either you can draw a percentage from your account annually or you can use the funds to purchase an annuity to provide income for life.
Income for retirement can also come from other sources such as from non-registered (open) accounts, or from reverse mortgages.
Review & Reassess
Once you know how much you need and where the money will come from, its time to put it together. If you do not have enough, it is time to re-evaluate your spending goals. Perhaps you can trim some expenses, downsize the home, or work a little longer in retirement.