Retirement Planning: The Ultimate Guide on Retirement Finance

planning retirement

Retirement planning can be a bit challenging from a financial point of view. You are not working any more and it can be sometimes hard to find other sources of income, especially in case of urgent necessity. Taxes, inflation and existing debts can make it even more difficult to manage your finances. However, it is not impossible. The key to prepare for this time properly is to make a good and solid financial plan in advance. Here we will give you some tips on how to do it. 

What do you need for retirement planning:

If try to summarize, your retirement planning will include:

  1. Get a comprehensive picture of how you see your retirement 

That means that you will have to think in advance and about all the possible details of your life in retirement. That will include the age when you would like to retire, the lifestyle you are having now and would like to have in the future, the details about where you would like to live, whether you will need additional care and assistance, will you live in your own house or opt for seniors’ residences. All that will define how big your retirement budget should be and how much you have to save up during the time when you are still employed. 

  1. Set your retirement goals

This point has much in common with the previous one, but still not completely. Your goals for retirement can be very different from the ones you have during your pre retirement life. They can prove to be more or less costly but it is better to include them still in your retirement planning. 

  1. Define your sources of income 

This is probably the main part of your planning. On retirement your sources of income will be very different from the ones you have right now. However that doesn’t mean that you will be completely cut in finances. Consider all the possible options of retirement planning programs. And there are many, just research them in-depth and find out the ones that will suit you better. 

  1. Create an emergency fund 

It is really important that a broken car or any type of urgent situation doesn’t cause significant damage to your retirement budget. Your emergency fund should be put into an easily accessed place from where you can withdraw your money without any additional difficulties. Probably, a good  investment strategy or a high interest savings account will fit you the most for this purpose. In any case an emergency fund will help you to cover at least part of the unforeseen expenses and will let you not rely only on credit cards. 

  1. Think about insurance

Buying good insurance for your retirement and even during a working life is a very good type of investment. Health expenses are usually very costly and sometimes people need a long treatment. Insurance will alleviate the financial burden of health expenses not only for you but also for your family. Most probably with good insurance your family and you will be able to continue to live with more or less the same lifestyle. Do not forget that the younger and healthier you are the cheaper insurance is.

How much money will I need to afford a decent retirement? 

It is not an easy question and probably one of the most difficult ones to answer. Especially if your calculations have to be made for years to come. However, there are some main rules you can follow. Some analysts suggest that the sum you will need at retirement is about 60%-70% of your previous income level. Others raise this sum up to 70-100% of your monthly budget. However, the real amount of what you will need is directly tied to the two things: your wishes or lifestyle habits and the payment obligations you already have. Answering at least some of the following questions can help you to make an idea of how much finances you will need. 

Try to decide:

  1. Whether you want to travel or not?
  2. How far and how often?
  3. What kind of transport do you prefer?
  4. Do you have a car?
  5. How much money do you need in a year for its maintenance?
  6. Do you have any loans or mortgages?
  7. How soon will they be paid off in full?
  8. Will it happen before you retire?

Even if you are married or single will have a direct impact on how your budget is due to be calculated for retirement. All of the mentioned above should not be the things to neglect, but to carefully think about and plan in advance. You have to make a clear and detailed picture of what your expectations are and how much you will need to implement them. 

The second rule is to pay yourself first. That means that you have to make sure that not a single dollar is spent from your budget before you make at least a 20% percent contribution to your future retirement. Here is some good news too. Most Canadians already start to make contributions to their future retirement funds at the age of 18 via social insurance programs like CPP and OAS along with the other programs. 

What is a CPP and how does it work? 

The CPP or Canada Pension Plan is a social insurance program created in 1965. It is a monthly, taxable benefit provided to the Canadian retirees and disabled contributors, which replaces up to the fourth part of your pre retirement budget. If you qualify for it, the CPP will be paid to you for the rest of your life. 

In order to qualify for CPP you have to fulfill the following criteria:

  • The age of at least 60 years old;
  • To have made at least one valid contribution to the CPP throughout your life.

Valid contributions constitute work executed in Canada or “credits” from common-law partner, or spouse following the end of a relationship. The CPP requires mandatory pay-as-you-go contributions by all workers, including self-employed individuals. 

The CPP is not an automatic payment. That means that you must apply for it. It should be done in advance before you want your pension to start. 

The process of application will take some time. Once you send the completed application form it will  take from 7 to 14 days for online applications and within 120 days for applications sent by email or delivered at a Service Canada Centre. The process can also take longer in some situations. The amount of CPP you will receive is based on your average earnings throughout your working life, your contribution to the CPP and the age you decide to start your retirement. 

When can I start receiving my CPP benefits?

A standard time to start receiving your CPP pension is around 65 years. However, you can start it already at 60 or as late as 70. You should also take in consideration that the amount of your CPP pension will be directly connected to the age you start receiving it. The basic rule is the later you start, the more is the pension you will receive. At the age of 70 you will obtain the maximum size of the pension possible, that means that there is no difference whether to retire at the age of 70 or at 75, and no more incentives to wait. The maximum CPP in Canada is a bit higher than $1000 per month. 

Extra CPP benefits 

In addition to the CPP you may also qualify for other CPP benefits. Like in the case of the main CPP you will need to apply for most of them . 

Among the extra CPP benefits are:

  • Post retirement benefit (you won’t need to apply for it if you are already receiving the CPP retirement pension) 
  • Disability pension 
  • Post-retirement disability benefit 
  • Survivor’s pension 
  • Children’s benefit.

Post retirement benefit program is destined for Canadians who continue to work after retirement. That means that if you are over 60 years old and already receiving your CPP benefits but continue to be employed and contribute to the CPP, you will be able to obtain more benefits from the CPP program. 

There are also some specific criteria of eligibility. Disability pension is the monthly payment you can get if you are:

  • Under 65 years old 
  • Have made enough contributions to the CPP 
  • Have a mental or physical disability that prevents you from regularly doing any kind of substantially gainful work
  • Have a long term disability of indefinite duration or is likely to result in death. 

There are two types of CPP disability benefits: the CPP disability benefit and the CPP post retirement disability benefit. You will receive the CPP post retirement disability benefit if you are between the age of 60 and 65, already receive the CPP retirement pension for more than 15 months or have become disabled after starting to receive the retirement pension. Once you turn 65 your CPP disability pension benefit is automatically changed to a CPP retirement pension. The basic disability benefit payment is around $500. 

Children’s benefit can be obtained in case you are getting a disability benefit and have dependent children. In this case your children can also have monthly payments if you qualify for it. That option surely will not work for the majority of those who plan their retirement but should be considered as an additional source of income if it is your case and the case of your family. 

If you were not single and have had a spouse or a common-law partner it is also important to know that the contributions your partner had been making during their working life, may be partly recovered by extra types of extra CPP pensions. The survivor’s pension is a monthly benefit paid to the legal spouse or common-law partner of the deceased contributor. 

According to the CPP legislation, a common-law partner is a person of either sex who has lived with you in a conjugal relationship for at least 1 year. If you are a separated legal spouse and the deceased had no common-law partner you may also qualify for this benefit. 

The amount of how much you receive will depend on the following factors:

  • Whether you are above or not the age of 65 
  • How much and for how long the deceased contributor has paid into the CPP.

Depending on those factors as well as the age and the time the deceased had been paying into the CPP will be established the amount of the survivor’s pension you are to receive. 

Finally, the death benefit is a one-time payment to the estate on behalf of the CPP contributor. Death unfortunately will also demand extra spendings which is good to plan in advance. With a death benefit, if you qualify, your estate will be able to receive as much as $2500 as a one-time payment.

Take note that not always you can opt for the standard CPP programs. Apart from special requirements for most of them, there are also special social insurance programs for people who work or who have worked in Quebec. Those programs are aimed to complement each other and to ensure that all contributing Canadians are protected and provide them with necessary financial aid in the event of retirement, death, or disability.  

How to increase your CPP pension? 

There are also ways to increase the amount of your CPP with the CPP enhancement program. Starting from 2019 the CPP enhancement works as a top-up to your CPP. You will receive higher pension benefits in exchange for higher CPP contributions. If until 2019 the CPP has been replacing only one-quarter of your average work earnings, the enhancement means that the CPP will begin to grow and to replace up to one-third of the average work earnings after 2019. The CPP enhancement will only affect you if in 2019 you still were employed and making your CPP contributions. Consequently, the maximum amount of the CPP will receive individuals who have started their working life in 2019. 

Those who effectuate the enhanced contributions for 40 years, will reach the maximum CPP  retirement pension increase by up to 50%. The same scheme is applied for the CPP post-retirement benefit, the disability pension, and other types of extra CPP benefits. The program will be realized in phases (starting from 2019) and will suppose a gradual increase in contributions over more than seven years. The aim of it is to reduce the number of Canadian families who risk not being able to save enough money for retirement. The new plan will be destined for all workers in Canada except Quebec. 

Retirement Planning: An Employer Pension Plan 

An employer pension plan is a registered plan, under which you and your employer, or your employer only, regularly contribute money to the plan. On retirement, you start to receive an income from the plan.  

Employer pension plans can be divided into two main types: 

  • The defined contribution plans and
  • Defined benefit plans

With the defined contribution pension plan you will know exactly how much you will contribute but will not know how much you will get when you retire. If you opt for this type of plan, your money will be invested in one or more products on your behalf. When you retire, the amount of money you receive will depend on how your plan is managed and how those investments perform.  You may also be able to choose where to invest your money.

A defined benefit pension plan is another type of employer pension plan, where your employer promises to pay you a regular income after you retire. In this case, usually, both you and your employer contribute to the plan. The contributions are pooled into a fund, which is managed by your employer or pension plan administrator. With this type of retirement planning, you do not have the option of choosing where to invest your money. The income you will have on retirement is calculated based on your salary level and the time you have been contributing to the plan. These payments will not depend on how well the investments have performed.

If you have changed jobs during your career it is also possible that you may have two or more pensions from different employers. Try to find this out by talking with your financial planner or your human resources representative.   

Retirement Planning: The OAS benefits 

The Old Age Security pension is another type of social insurance benefit you start to receive once you retire. As in the case of CPP, it is a monthly payment you can get once you are 65 years old. In most cases Canadians are automatically enrolled for OAS, however, sometimes you will need to apply for it. 

The payments will start one month after you are 65 years old. You can also delay your OAS payments – that will increase the amount of the pension you are to receive. As of march of 2022 the maximum OAS payment is $642.25. It is also regularly reviewed in order to reflect increases in the cost of living, based on the consumers’ prices index. Among the recent changes is an automatic 10% increase of the OAS for those above 75. Also, the OAS is never reviewed towards decrease if the cost of living goes down.    

The amount of how much you will get depends on how long you have been living in Canada and some other specific countries after the age of 18. 

Note that you will also have to pay tax on the OAS payments. Unfortunately, the OAS benefits are taxable through means-testing. I.e., if your income surpasses a certain level, the government will reduce your benefit through an OAS clawback, known as the “recovery tax”.   

Retirement Tax Planning 

Once you retire it does not mean automatically that you stop paying taxes. Taxes are a tricky thing and sometimes you should also research which options will work best for you. It happens that your income should not exceed some limits if you want that your after-tax income does not change on retirement. How big those limits should be, is to be determined individually. 

It results that the Canadian tax legislation generally works better for people who are not single. Especially on retirement. There are some cases when retired people get married in retirement for tax savings. It happens mainly because the majority of the retirement incomes can be split with your spouse or common-law partner. And if you are a single person there is no one to split that income with and that means that the full tax liability falls on you.

With some easy calculations, you can find out that splitting your incomes within a couple will help you to save up a really significant amount of money on your retirement.  Explained in a simple example, that means that if you have a net income of $100.000 you will save up to $6.000 – $9.000 annually on taxes if you divide your incomes within a couple and will pay the taxes only from $50.000 of income each. 

What is an RRSP?

RRSP is a Registered Retirement Savings Plan. It is a savings account that helps you to save money for retirement, where contributions are temporarily protected from income tax. As long as that money remains invested these are tax-deterred sums and they start to be taxed only when you begin to withdraw the funds. That basically means two things: you are saving money on taxes while earning more, and the second is that you are paying fewer taxes when you start to withdraw this money as your income has already become lower.

The bank analytics suggest that one of the best options for couples is to contribute to the spousal RRSP when you are still employed. A spousal RRSP is a type of RRSP account that names your spouse as an “annuitant” or an owner of the plan though you are the one who is making the contributions. This type of RRSP makes sense when one of the spouses is earning more than the other does and this situation will most probably stay for the entire time of the employment. In this case, the spouse with a higher income shifts some of it for the lower-earning spouse, to lower their own tax bracket.

They contribute to the spouse’s RRSP instead of their own, lowering their own taxable income but deducting the contribution from their own taxes. When it is time to retire, the lower owner withdraws the funds. This results in a lower tax burden than the higher owner would occur. Also, it gives an additional benefit of relieving the tax load when you are still employed by splitting the funds.  

Retirement Planning: Tax Free Savings Accounts

A Tax-Free Savings account is a type of registered savings plan that lets you grow your money tax-free. Actually, it is used for a wide range of investment products. The main benefit of it is that you do not have to pay any taxes on the income from the investments held on your TSFA, including interests, capital gains or dividends. 

In Canada, the TSFA is a very popular tool, used for investment by more than half of Canadians. It can serve as an additional instrument for saving money, including the money for your retirement along with the other plans you are contributing to, like RRSP. It is also important that the money you invest in TSFA are easily accessible, while the withdrawal of it will not require any additional costs. 

Inflation and Retirement 

Inflation is one of the key factors which worry Canadians in terms of retirement savings. Due to the acceleration of inflation in recent years, three in ten Canadians estimate it as the main threat for their retirement planning and place it among the top worries. The other impact of inflation is that it impedes saving more for retirement.

While daily spending is increasing, the growth of inflation is making it harder for individuals to save up for the time they are unemployed. It is hard to make solid calculations, however, you can make some in order to predict how much the consumer goods and the cost for them will rise in the coming years. It will help you to make an idea of how much money you will need in addition to the already planned sums. Also, the amount of money you are getting from OAS and CPP benefits is already protected against inflation.

Retirement Planning: Consider discounts for seniors 

Retirement is also a time when you can take advantage of the discounts for seniors. Many banks are offering special proposals for seniors like low-fee bank accounts or even special no-cost banking accounts for seniors with low level of income. Other businesses have considerable discounts, which usually include a wide range of goods and services like groceries, entertainment, insurance, travel, public transportation. Try to profit from your retirement. Good retirement planning can give you more opportunities than you expect.

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