Making sure we have enough money in retirement is one of the most pressing financial responsibilities most of us will face. But it is also a hugely daunting task, giving rise to many questions. Here is The Globe’s guide to retirement saving and investing: RRSPs, TFSAs, CPP, other pensions and more.
Don’t forget that March 2 is the deadline to contribute to registered retirement savings plans for the 2019 tax year. And the 2020 contribution limit for tax-free savings plans is $6,000.
How much to save?
One concern that looms large over retirement planning is how much you will need to save. To do that, you need to consider how much you will spend. The consensus among financial planners is that you’ll likely need 70 to 80 per cent of your working income to maintain your lifestyle in retirement. You could spend more if you plan to travel a lot or pursue an expensive hobby. Or you could spend less if you downsize your home, the kids are off your “payroll," or you live a simpler life. But the 80-per-cent rule is a good starting point.
Finding the right mix of investments
There’s no such thing as the ideal retirement savings plan. There are flaws in every security you might consider, from low return to high risk. But there are many that offer a reasonable combination of risk and return, and that’s where to focus your attention. Here are four guidelines to consider: long-term performance, consistency, fees and risk
We can learn a lot from how the professionals manage the assets in big pension plans. The 2019 annual report of the Canada Pension Plan Investment Board showed that 19.1 per cent of the fund’s assets comprised fixed-income securities, such as bonds. Only 15.5 per cent of the fund’s assets are in Canada; the rest are invested globally. Most of us probably need to boost our fixed-income allocations and add more foreign securities to our plans. Here are some securities to consider.
RRSPs vs. TFSAs
Should you invest in an RRSP, a tax-free savings plan or both? The answer depends on many factors – age, debt levels, goals, current income, tax rate, expected retirement income and more. RRSP contributions will reduce your tax bill when you put the money in the account, but you will be taxed on the money when you withdraw it. TFSA contributions won’t reduce your tax bill when you put the money in, but you won’t be taxed on any gains when the money is withdrawn. Here are some scenarios to weigh. And here’s what to consider if you’re starting to save later in life.
How CPP, OAS and GIS factor in
The wealth that you’ve accumulated won’t be your only source of income in retirement. You need to take into account other benefits from the Canada Pension Plan, Old Age Security and, for some low-income retirees, the Guaranteed Income Supplement. They have to be considered in unison for tax implications and the potential some government benefits will be clawed back.
These four online calculators can help you determine how much income you can expect every year once you’ve left the workforce:
- The Personal Enhanced Retirement Calculator
- The Retirement Cash Flow Calculator
- The Canadian Retirement Income Calculator
- MoneyPages SmartPlanner
You can find out how much CPP you will receive in retirement by obtaining an official Statement of Contributions and an estimate of your future monthly Canada Pension Plan benefits. Log in to your My Service Canada account or call the Canada Pension Plan at 1-800-277-9914.
The downside is that the estimate won’t necessarily be accurate. If you’ll be starting CPP soon – say you’re 58 and plan to retire at 60 – the estimate should be pretty close. But if you’re retiring at 55 and want to know how much CPP you’ll get if you wait until 65, the government’s estimate could be too high.
There’s now another way to estimate your Canada Pension Plan benefits. CPP expert Doug Runchey has teamed up with certified financial planner David Field to develop an online CPP calculator. Free registration is required to use the tool, which lets you upload your statement of CPP contributions and then play around with different retirement ages and future earnings scenarios to determine your CPP benefit.
A big question for many considering retirement is when to take CPP. There are advantages to delaying CPP payments to age 70. The standard figure cited for this scenario is that it increases benefits to 142 per cent of what they would be at 65. But many worry about dying early and leaving money on the table.
There are situations where taking CPP at 60 makes sense. They’re summarized in a post in the Boomer & Echo blog: When you need CPP income to pay your bills, when you have a reduced life expectancy and when you have no CPP contributions from age 55 to 60.
One of the tests of a well-planned retirement is how prepared you are to pay your taxes. If you’re receiving retirement income from Canada Pension Plan retirement benefits, Old Age Security and any combination of your own savings and a company pension, expect to have a balance owing when you file your taxes. That should be factored in when you’re calculating how much you’ll spend yearly in retirement.
Even if you have a pension, you still should be saving for retirement. There are two main types of employee pensions in Canada, defined contribution (DC) and defined benefit (DB). Here’s how pensions work, how their value is calculated and why they are so important.
Defined benefit pension plans offer an advantage by providing a known future income stream. In today’s work force, it’s unwise for people to count on being with the same employer for their entire career – that’s where personal savings come in.
DC pensions help you save for retirement – employees contribute and their employers add a matching amount. But once you retire, it’s up to you to turn those accumulated investments into income. Making this pivot is one of the most overlooked aspects of retirement planning.
Other retirement savings vehicles: Group RRSPs, LIRAs and lock-in RRSPs
In lieu of pension plans, some companies offer group RRSPs, which are like a regular RRSP. You can make withdrawals to buy or build a home using the Home Buyers’ Plan, for example, which is something that you can’t do with a defined contribution pension plan. The biggest difference between a group RRSP and a regular RRSP is that your employer is able to make contributions directly from your payroll into your account. A group RRSP can be a helpful tool, but there are a few things to be aware of when you’re considering enrolling in your company’s plan.
When you change jobs, you may be in the position to move your pension savings from your previous company. That usually requires opening a locked-in retirement account (LIRA) or a locked-in registered retirement savings plan (locked-in RRSP). Once you take out those pension savings from your previous employer, it is up to you to invest the money for your future, as government rules prevent you from cashing in. Here are 10 rules to know about these locked-in accounts.
Income during retirement: RRIFs and annuities
In the year you turn 71, you will be required to choose among these options for your RRSPs: withdraw, transfer to registered retirement investment funds (RRIF) or purchase an annuity.
If you transfer your assets into a RRIF, you will be required to make a minimum withdrawal each year, based on a percentage of the fund’s value, starting with the year you open it. (If you withdraw more than the minimum, you can expect your financial institution to withhold a percentage of the excess amount and remit it to the government.)
With a RRIF, your investing goals will skew toward generating income and preserving capital. Here is a model RRIF portfolio focusing on low-risk assets that provide decent cash flow.
By contrast, you pay a lump sum for an annuity that guarantees a steady income stream for life. You lose a little upside potential but you also eliminate some major risks. Here are some considerations when deciding if an annuity is for you. You also may want to consider converting your retirement dollars to a blend of annuity income and savings.
More on retirement savings and investing
This guide was compiled by S.R. Slobodian with articles from Rob Carrick, John Heinzl, Gordon Pape, Tim Cestnick, Frederick Vettese and The Canadian Press.