Wouldn’t it be great to look forward to your retirement rather than worry about how you are going to manage financially when you are no longer working? The key to this security is having a well-planned retirement strategy, reviewing it annually, at a minimum, and sticking to it.
The first step in retirement planning is to determine how much income you will need on a monthly or annual basis to maintain the lifestyle you desire in retirement. Your financial advisor can help you through this process.
Once you determine how much money you need, you will have to find sources for that money. There are many different sources, but three are most common.
In retirement, most Canadians will have three potential sources of income to draw upon for living expenses.We call these The Three Pillars.
Let’s start with the centre pillar, since this is the one that most Canadians will receive. CPP/QPP is funded by your contributions and was designed to replace up to 25% of income in retirement. OAS is funded by government revenues and is distributed based on age, legal status and number of years resident in Canada. The average Canadian will earn less than $18,000 per year in public pensions. Clearly, you will need alternate sources of income during your retirement years.
There are two types of employer-sponsored pension plans:
1) Defined Benefit (DB) pension plan
With this type of plan the amount of retirement income you will receive is known. The calculation is typically based on years of service and annual salary. While different plans will have different ways of calculating the plan members’ future income, the common denominator is that the employer takes all the risk. If the plan’s investments don’t perform as expected, the employer has to make up any shortfalls to ensure that theplan members receive their full entitlement. Because of that, all of the investment risk is on the employer, and for this reason many employers have turned to Defined Contribution plans.
2) Defined Contribution (DC) pension plan
While both employer and employees contribute to these plans, the amount of income is largely dependenton how the plan member invests his or her contributions. In this type of plan, the risk is with the plan member.
For this reason, DC plan members need to put in extra time with their advisor to ensure their fundsare invested appropriately.
In the private sector between 1991 and 2006, DC plan coverage jumped from 14% to 27%,* demonstrating that employers are less willing to take the investment risk associated with guaranteeing a future income.
* Source: CGA of Canada study “Gauging the Path of Private Canadian Pensions: 2010 Update on the State of Defined Benefit and Defined Contribution Pension Plans,” 2010.
This is the one pillar of retirement funding which rests entirely on your shoulders. Personal retirement savings include your Registered Retirement Savings Plan (RRSP), Tax-Free Savings Account (TFSA), non-registered investments and Guaranteed Lifetime Withdrawal Benefits (GLWB). The earlier you start to contribute, even if you start with a small monthly contribution, the more money you will accumulate to help fund your retirement. Of course, there is only so much money to go around, so talk to your advisor about what combination is best for your situation.
Talk to a Professional.
The information contained herein is intended as general information only and is compiled from sources believed to be reliable, but no representation or warranty, express or implied, is made as to its accuracy. Information and examples (i) are not intended to provide specific financial, tax, insurance, investment, legal or accounting advice and should not be relied upon in that regard, and (ii) do not constitute a specific offer to buy and/or sell securities. Clients should not act or rely on this information without seeking the advice of a professional. Transamerica Life Canada and its affiliates cannot guarantee the accuracy or completeness of information presented and accepts no responsibility for any loss arising from any use of or reliance on such information.
Embrace the three P’s
Look at your situation today
Expect the unexpected
Insure your family’s future
Debt be gone
Pay yourself first
Creating a retirement strategy
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