A recent CIBC study showed that 32% of Canadians between 45 and 65 have nothing saved for retirement. Even more stark, according to a BMO study, 56% of Canadians are not confident they will have enough money to retire.
In another post, we cover six things we tell our clients to keep in mind when planning for retirement. This one is all about understanding what goes into a successful retirement savings plan, including the accounts, process, and steps to retirement.
What does that mean exactly? Read on to find out... and make sure you have enough saved when you finally cut into that retirement cake on your last day!
Understanding the financial jargon you’re bound to encounter.
When it comes to retirement planning, one of the worst parts is all of the acronyms. Here are the big ones you’re bound to encounter and what each one means.
- Canada Pension Plan (CPP) — This is a government funded resource but throughout your entire working life you contribute to it. Contributions are made once you start earning $3,500 or more — these are called your pensionable earnings. You pay into your CPP at a certain rate, and your employer pays into CPP at a certain rate, and these rates change yearly. You become eligible to receive your CPP between the ages of 60 to 70 years old. When you decide to retire, you can fill out an application to start receiving your CPP benefits. At this point they become monthly payments that supplement your income when you retire.
- Old Age Security (OAS) — This is a benefit you are (usually) automatically enrolled in when you turn 65 (Canada’s retirement age). You can receive a higher Old Age Security pension amount for each month you decide to delay your first payment.
- Registered Retirement Savings Plan (RRSP) — Your RRSP is an investment account that is given tax-sheltered status by the government. Any income earned on the account is not taxed until withdrawal. This gives you the opportunity to invest each year, up to an annual limit (https://www.canada.ca/en/revenue-agency/services/tax/registered-plans-administrators/pspa/mp-rrsp-dpsp-tfsa-limits-ympe.html) (2022 is $29,210). While the money you contribute is a tax deduction, whatever money you withdraw is subject to income tax for the year it’s withdrawn. Then, by the time you’ve reached the age of 71, the RRSP changes into a RRIF.
- Spousal RRSP — This is an RRSP that has been set up in the name of a spouse, then used as a way of income splitting. The account can be registered in the name of the lower-income spouse, but the contribution can be used against the higher-income partner. It has very similar rules to the RRSP.
- Registered Retirement Income Funds (RRIF) and Spousal Retirement Income Funds (SRIF) — These accounts are registered with the federal government — with money taken from your RRSP — that give you a steady income during retirement. Before, you were putting money into your RRSP to accumulate savings for retirement. When you switch over to an RRIF or SRIF, you withdraw the same money, but as retirement income. These accounts have a set minimum withdrawal requirement that occurs each year once you reach the minimum age. You can open them at any time but must open them by the end of the year you turn 71. While you withdraw taxable income to fund your retirement, the money that stays in the RRIF or SRIF continues to grow while sheltered from tax.
- Home Equity Line of Credit (HELOC) — A HELOC is a useful income source for retirement if you have your net worth in real estate. They are a revolving source of funds, much like a credit card, that you can access as you choose. Many HELOCs have withdrawal and repayment periods, but not always.
Once you retire you receive some government assistance with CPP and OAS income, but these dollar amounts change and could affect your comfortability and lifestyle in your retirement. This is why it’s recommended that you also save for retirement through an RRSP.
Once you’ve officially retired, what comes next?
How to access and use your retirement savings.
Understanding withdrawal is key to a successful retirement plan. Figuring out how much to withdraw and the best time to do it will ensure that your money lasts throughout your Golden Years.
- How do withdrawal rates affect your retirement? — Withdrawal rates determine the minimum amount needed to keep up with your lifestyle — the amount should always be based on income needs after taxes. It is important to set goals and plan intervals to check on your retirement savings, doing this will keep you on track to reach your goals or to find out if your lifestyle is affecting them.
- What is considered a Safe Withdrawal Rate (SWR)? — A SWR should account for your lifestyle as well as inflation and an active market. In turn, this can impact your withdrawal rate. SWRs will ensure your money doesn’t run out faster than anticipated. You can manage your money easier with a safe withdrawal rate, which lets you take out your invested money for retirement, as income, at a pace that won’t affect your lifestyle.
- What are the risks you should be aware of ? — The risk is having your retirement savings spent faster than you planned for. This can happen when large withdrawal rates are compounded with a volatile market. You can mitigate risk by having a diversified portfolio, meaning your money is spread out over a variety of different investment opportunities. To avoid withdrawal risk, it’s important to have a withdrawal strategy in place.
- What strategy should you take? — At Bick Advisors, we advocate for the cash wedge strategy. This strategy allocates your money so that you have what you need to meet your income needs for 3–7 years, and still have low-risk investments tied to the market. It’s also important to note when you plan to start taking your CPP and OAS payments. Waiting will give you larger payments but less money to invest earlier on, while tapping into them as soon as you can gives you steady income but lower overall payments.
Saving for retirement is never a one-size-fits-all solution. At Bick Advisors, we want to help you live the life you want without having to make sacrifices during your Golden Years.
Our goal is to help you create a diversified portfolio to protect your investments and continue to provide wealth during your retirement. Are you ready to start planning? Talk to a trusted advisor today.