The Retirement Plan

Planning for your retirement is a wise move at any age. While you probably won’t be as concerned with retirement planning in your twenties as you will be in your forties or fifties, it is never too early to start.

Today, the average life expectancy for Canadians is about 85 years for women and 81 years for men. Since Canadians are living longer, it is important to start saving and planning ahead as soon as possible. Your retirement years may last as long as your working years, so you want to be sure you can spend them in relative comfort.

Exactly how much you will need to save depends on the lifestyle you want for your golden years. If you wish to be able to travel or to winter in a warm climate, you will need additional retirement income. In general, you should aim to have 60% to 80% of your pre-retirement purchasing power during retirement.

Where will my retirement Income come from?
Canadians used to count on company pension plans plus the Canada Pension Plan/Quebec Pension Plan to provide for their retirement needs. Today, however, far more people are self-employed, and the annual CPP/QPP payout is only $8,500 or less depending on your income. So Canadians are having to assume increased responsibility for providing their retirement incomes.

What are Registered Retirement Savings Plans?
For most Canadians, a Registered Retirement Savings Plan (RRSP) is the cornerstone of their retirement strategy. Since 1957, Canadians have been able to shelter a portion of their earnings from taxation by investing them in RRSPs. The interest, capital gains and dividends generated by these retirement savings are also sheltered. Yet a surprising 71% of eligible taxpayers fail to take advantage of this tax deferral opportunity.

What income can be sheltered in RRSPs?
RRSP contributions can only be made by individuals with “earned income” taxable in Canada.  this includes salaries, self-employment income, alimony and rental income, but not income from pensions or investments.

How much can I contribute?
Contribution limits are based upon earned income. The limits are set annually by the federal government and are adjusted for any company pension plan to which you may be a member. Your MC Wealth Management planner can help you to determine your maximum allowable contribution.

At what age should I begin contributing?
You should contribute as much as you can as soon as you can. Even modest regular contributions can snowball over the years into a significant retirement fund as shown in the Power of Compounding example below.

If Sally invests $5,000 a year for 40 years starting today, she will accumulate more than twice as much as Bob who waits 20 years and then invests $10,000 a year for 20 years.  The total amount each invested is the same, but compare the results (based on a constant 7% rate of return).

Sally’s total RRSP fund after 40 years of $5,000 annual contributions: $1,000,000

Bob’s total RRSP fund after 20 years of $10,000 annual contributions: $400,000

What are my retirement income options?
By the end of the year in which you turn 71, you are required by law to convert your RRSP into regular retirement income. At that stage, you may pursue one or a combination of the following options:

1. Withdraw RRSP funds
One option is to collapse your RRSP and withdraw the funds. But then you have to pay tax on the full amount. Not surprisingly, this is the least popular.

2. Purchase an annuity
Alternatively, you can purchase an annuity.  this provides you with a guaranteed income, either for a specified number of years or for the rest of your life. But because interest rates are determined when the plan is set up, you could face a loss of buying power during inflationary times.

3. Roll RRSP funds into a RRIF
Another option is to roll your RRSP funds into a Registered Retirement Income Fund (RRIF). Most people choose this option because it offers the kind of flexibility and tax deferral benefits associated with an RRSP. You can still invest your retirement savings as you wish, and the income generated within the RRIF keeps growing tax-free until it is withdrawn.

You may withdraw as much income as you need, provided it meets a government-imposed minimum annual amount. And you can decide whether the payout is to be monthly, quarterly, semi-annually or annually.

Retirement is the culmination of a life’s work, and you’ll want it to be a time of financial freedom. By planning now, with the help of your MC Wealth Management representative, you can take the right steps to reach you destination.