The days of being sent off in the sunset with a gold watch, a pension and health insurance for life are gone forever I'm afraid.
We now have to rely on our own savings, the Canada (or Quebec) Pension Plan and Old Age Security. Only a lucky few get an employer-sponsored pension. These savings have to last longer because we are living longer.
The good news is that over your lifetime of accumulating - and withdrawing money - most of the funds will come from investment income, not capital. This is because of the miracle of compounding: not only your capital earns investment income, but investment income continually increases the amount invested that can potentially earn income.
If you are within ten years of retirement there are a few things you need to do to make sure you'll have enough.
Compare your income with your expenses during retirement and see if they match up. Few people will have exactly the amount of money they will need in retirement. Most will have a shortfall. If this is your situation, there are a few ways to close the gap and make your savings go further.
Where will you find additional savings? Here are some suggestions for active workers.
1. Maximize contributions
Make the maximum contribution to your workplace savings plan through payroll deductions. Contribute the maximum to your RRSP. If you have a savings plan with your employer with matching employer contributions, contribute enough to get the maximum matching amount.
Your contributions to an RRSP or defined contribution pension plan earn tax-free investment income and they are fully tax-deductible.
2. Retire at a later age
Staying employed as long as possible has several advantages.
Having an income gives your retirement savings more time to grow. Employment income also means continued savings for a few more years. Your employer also provides life insurance, dental and health benefits, so you don't have to cover these expenses as long as you work.
As well, there is a social benefit to working that is often as important as the income you can draw from your employment.
3. Decide on the best time to start receiving pension income
The amount of monthly CPP will be highest the older you are when you start receiving it. At age 62, your CPP will be reduced by 18%. At age 68 it will be increased by 21%.
If you participate in a defined benefit pension plan, you will have to decide as well on the pension commencement date. Try to meet the conditions for an unreduced pension. If you can't meet the eligibility criteria, try to you minimize the early retirement reduction to your pension by starting it as late as possible.
If you have a spouse, select a pension option that provides for a survivor benefit for your spouse, even though your monthly benefit will be reduced.
If you need the money immediately, you have no choice but to take it. But is you can wait, the increases after age 65 are greater than the reductions before 65.
There is no hard and fast rule. Early retirement will give you a smaller pension but it will be payable over a longer period, while taking it at age 65 or later will give you a higher pension payable a shorter expected period.
4. Control your expenses
You can downsize or relocate so your living costs are in line with what you can afford.
However, the years before retirement are the worst time to take on large debts, such as a home equity loan. And this includes loans to your children. Your retirement money must be left untouched and serve only your retirement needs.
If you run out of money, you will have to ask others to bear the financial burden for your care later on.
Large purchases are also unwise such as a new car or vacation home if you need to save.
5. Invest wisely
Get knowledgeable about investing or get a professional to do this for you.
Your must take on just enough risk to earn a decent return while staying comfortable with your investment strategy. Savings accounts and money market funds earn less than the rate of inflation. So you are essentially losing money with these ultra safe investments.
In the next post, we will look at planning income and withdrawals, in particular when to draw income and what type of account should be accessed first.
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