2020 was a very unpredictable year, and like many of us, you may be wondering if your plans for retirement need to be adjusted.
With the market updates and changes to government benefits, a check-in may help make you feel more confident about your future plans. Here are 4 steps to keep in mind.
Get a sense of your lifestyle changes
Different retirement lifestyles have different financial needs, and your priorities may have changed over these last several months. So whether your focus is on family time, travelling or finding a passion closer to home, taking stock of your lifestyle plans – and how much they will cost – is a great place to start to assess if you need to make changes to your retirement plan.
To estimate the amount of retirement income you’ll need to support your lifestyle, it’s often easiest to think about it as a percentage of your pre-retirement income. Do you think you can live on 50% of what you make today? Or will you need the full 100%? Or does your magic number fall somewhere in between? The amount that’s right for you will depend on both the type of lifestyle you plan to lead and the financial demands you’re likely to face once you’re retired. Considering mortgage payments, support for children and parents, as well as other obligations will help you determine the amount of income you’ll need to bring in.
Create a retirement pay cheque
Most Canadians have multiple sources of income in retirement to create a pay cheque, and understanding what each can provide will help you effectively save and plan for that lifestyle you have in mind. Typically, retirement income comes from 3 primary sources: government benefits, employer pension, and your personal savings.
If you’ve worked steadily over the years, you’ve likely contributed to either the Canada Pension Plan (CPP) or the Quebec Pension Plan (QPP). When you retire, you may be able to start collecting benefits from these plans. The amount you can receive will depend on your contributions and when you start collecting.
Most Canadians begin receiving CPP or QPP payments at 65. You can start to collect as early as 60, but keep in mind you’ll receive less if you start receiving benefits before your 65th birthday. If you wait until you’re 70 to begin collecting benefits, your payments will be higher than if you start at 65.
Old Age Security (OAS), on the other hand, is a non-work-related pension that you may receive if you are 65 or over and meet certain requirements. The maximum annual benefit is roughly $7,360 but is reduced through a recovery tax when you reach a certain level of annual income. For example, when your income for 2020 is over $79,054, the recovery tax reduces the OAS benefit. If your income is $128,137 or higher, the recovery tax will be 100%.
Most large employers, and even some of the smaller ones, provide employer pensions. Understanding how much retirement income your pension may provide could be tricky, though.
Since employer pension plans come in different shapes and sizes, it’s a good idea to take the time to get an accurate estimate of what your personal pension will provide for you. A financial advisor can help you through this process to come up with an estimate.
Because government benefits and pensions alone may not cover your entire retirement income needs, it’s a good idea to look at your personal savings to make up the difference. Personal savings may consist of your Registered Retirement Savings Plan (RRSP) – which you have to convert to a Registered Retirement Income Fund (RRIF) or annuity by the end of the year in which you turn 71 – and other savings and investments, such as your Tax-Free Savings Account (TFSA). Real estate or business interests could also round out your available money.
The government has also introduced changes to RRIF minimum withdrawals for 2020 and personal tax measures as part of Canada’s COVID-19 response plan. For more information, visit Jamie Golombek’s tax savings tips on our personal advice centre.
Bridge any gaps
Once you’ve identified the amount of money you’ll need in retirement and figured out how much you’ll have available to you, it’s time to see where you stand. Will your income meet your retirement needs? Or, are there any gaps you need to fill? If your income looks like it’ll fall short of your needs, there are a few things you can do:
Increase your savings
Don’t wait until it’s too late to check whether your savings will meet your needs. A regular investment plan can help you stay disciplined while providing flexibility. You may be seeing some savings because you aren’t travelling or spending as much on entertainment. Take the opportunity to save this money for your retirement.
Revisit your investment objectives
Look at your risk tolerance and investment objectives overall. You may be willing and able to take on more risk for a portion of your assets and adding more investments that offer greater potential for growth.
Retire a little later
Each year that you put off your retirement and have employment income is one less year you’ll need retirement income, and one more year you can continue saving. Delaying retirement may also increase the value of your employer pension and CPP or QPP benefits. Plus, Canadians over 65 can keep working and still receive their monthly Old Age Security pension income. The recovery tax will still apply, though.
Consider part-time work or a second career
If you’re thinking about a second career, or you simply want to keep active in the workforce, paid work during retirement can make a significant difference in the amount of money you will have available. Even modest earnings can help bridge the income gap.
Develop a retirement income plan
All of your income sources need to work together if you’re going to make the most of your benefits, pensions and retirement savings. Drawing too much from your RRIF, for example, could affect OAS payments. Developing a plan that looks at your benefits and investments is a key step in the retirement planning process. Plus, adjusting your investing strategy and taking advantage of government benefit changes as you approach retirement can help you meet your retirement saving, income and monthly cash goals.
Retirement is an important time of your life, and you’ll have worked really hard to get there. A financial advisor can help you understand your income sources, review your pension statements, and develop a retirement plan in light of all the changes that have taken place this year. Reach out to your advisor today.