Retirement planning today has taken on many new dimensions that never had to be considered by earlier generations. For one, people are living longer. A person who turns 65 today could be expected to live as many as 20 to 30 years in retirement as compared to a retiree in 1950 who lived, on average, an additional 15 years. Longer life spans have created a number of new issues that need to be taken into consideration when planning for retirement.
Lifetime Income Need
There actually is a lifetime after retirement and the need to be able to provide for a steady stream of income that cannot be outlived is more important than ever. With the prospect of paying for retirement needs for as many as 30 years, retirees need to be concerned with maintaining their cost-of-living. The core of our Government Pension system (Canada Pension and Old Age Security) at this time is partially indexed and as this is drawn by most retirees it gives a little added security against inflation. A few pensions have indexing attached but unfortunately because of the great cost to defined benefit pension plans this benefit is one component that is being adjusted on a regular basis.
Health Care Needs
Longer life spans can also translate into more health issues that arise in the process of aging. The provincial governments provide a limited safety net in the form of Medicare, however, it may not provide all the coverage needed especially in chronic illness cases. Planning for long-term care and medications, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today as few individuals have benefits in retirement to cover medical or dental expenses.
Planning for the transfer of assets at death is a critical element of retirement planning especially if there are survivors who are dependent upon the assets for their financial security. Planning for estate transfer can be as simple as drafting a will, which is essential to ensure that assets are transferred according to the wishes of the decedent. Larger estates may be confronted with probate fees and sizable income tax liabilities which could force liquidation if the proper planning is not done.
Paying for Retirement
Retirees who have prepared for their retirement usually rely upon four main sources of income: Canada Pension, Old Age Security, individual or employer-sponsored qualified retirement plans, and their own savings or investments. A sound retirement plan will emphasize registered plans and personal savings as the primary sources with Canada Pension and Old Age Security as a safety net for steady income.
Canada Pension Plan and Old Age Security
Canada Pension was established in the 1960’s as a safety net for people who, after paying into the system from their earnings, could rely upon a steady stream of income for the rest of their lives. The age of retirement, when the income benefit starts is 65 which is referred to as the “normal retirement age”. Now, a person can collect Canada Pension at the age of 60 on a reduced benefit basis. The amount paid in benefits is based upon the earnings of an individual while working. If a person wanted to continue to work and delay receiving benefits, they could do so build up a larger benefit.
Old Age Security is currently payable at age 65 (and age 67 if born after 1961). OAS comes from taxes collected from all Canadians. Please refer to Service Canada for further information.
Employer-Sponsored Retirement Plans
Most employer-sponsored plans today are established as “defined contribution” plans whereby an employee contributes a percentage of his earnings into an account along with an equal amount by the employer, that will accumulate until retirement. As a registered plan, the contributions are deductible from the employee’s current income. The amount of income received at retirement is based on the total amount of contributions, the returns earned, and the employee’s retirement time horizon. Unfortunately there is no guarantee at the end of the contribution period.
Depending on the size and type of the organization, there might be a “defined benefit plan”. Less than 30 % of Canadian companies still have this type of retirement program which does give a preset amount of income in retirement based on tenure and final years of income earned. Some organizations have “Hybrid contribution plans” which are a mix of the two types above
Registered Retirement Savings Plans (RRSP’s) and Tax Free Savings Accounts (TFSA’s) are tax qualified retirement plans that were established as way for individuals to save for retirement with the benefit of tax favoured treatment. The traditional RRSP allows for contributions to be made on a tax deductible basis and to accumulate without current taxation of earnings inside the account. These plans are tax deferral accounts and must be collapsed by the end of the year one turns 71 into the next stage where an income stream starts in the year on turns 72. A TFSA is funded with after tax dollars and is allowed to grow on a tax free basis. For many this is a better choice for long term savings.
As with any Government program there are many rules and regulations that need to be adhered to for more information on retirement income needs and income sources, please contact us today.