You may have a clear vision of your retirement, and at the same time, it may feel like a distant deadline that’s a lifetime away. Depending on your timeline to prepare for life after work, there are things you can be doing right now to better prepare yourself for financial freedom. To help, here are four retirement strategies and considerations every Canadian should be thinking about.
Strategy #1: Maximize CPP Benefits
The Canada Pension Plan, or CPP, provides taxable monthly income for retired individuals. Monthly CPP payments are not the same for everyone. The amount paid will fluctuate based on individual factors including:1
- How old you are when you start receiving payments.
- Total contribution amount and duration of contributions.
- Average earnings before retirement.
- Your age.
You may choose to begin receiving payments as early as age 60, but it’s important to determine how your payments will be impacted. For those who choose to start receiving payments before age 65, monthly payments are reduced by 0.6 percent. This equates to around 7.2 percent annually. This reduction will continue until a maximum of 36 percent is reached, or the individual turns 65.2
If you decide to wait until after the age of 65 to begin receiving payments, you may see an increase of 0.7 percent per month or around 8.4 percent per year. This increase will continue until benefits reach an increase of 42 percent or the individual receiving them turns 70.2 Delaying CPP benefits could result in higher monthly payments. But you’ll want to weigh this option carefully. If you find you’re short on monthly income in retirement and accumulating debt, for example, you may find that claiming your benefits early may be a necessary step. Work with your financial advisor to determine how your CPP payments will fit in with the rest of your retirement strategy.
Strategy #2: Strategize Savings
Setting aside savings is often easier said than done. Creating a strategy and sticking to it can help you achieve your long-term savings goals. Work with your financial advisor to develop a game plan and build accountability. You may find it beneficial to pick a percentage of your income into savings each week, such as five or 10 percent. Many of our clients have funds automatically transferred to a savings account regularly, making it rewarding and effortless.
One important thing to note about saving is that the sooner you start, the greater you’ll have in retirement, thanks to compounding interest. A small amount of money accumulating compounding interest over decades can yield significant savings for your retirement.
Strategy #3: Understand the Difference Between TFSA & RRSP
The two most common savings plans utilized for retirement are Tax-Free Savings Account (TFSA) and Registered Retirement Savings Plan (RRSP). The question is, which should you be putting your money into and when? While they share similarities, a few key differences between a TFSA and RRSP can make a difference in your tax obligations now and in retirement.
Your TFSA contributions are made using after-tax dollars. The maximum amount you can contribute to your account changes yearly, with the 2022 TFSA annual contribution limit being $6,000.3
Your RRSP contributions are tax-deductible. Whenever you choose to withdraw, your withdrawals will be taxed like income. The yearly contribution limit for RRSPs in 2022 is $29,210.3
One of the key differences between the two vehicles surrounds suitability for your income. Unlike a TFSA, the RRSP may be more effective if you have a higher income and are in a higher tax bracket now than when you expect to be in retirement. You may find that contributing to a mix of both account types could help round out your retirement savings strategy.
Strategy #4: Prepare for the Effects of Inflation
Inflation is tricky and shouldn’t be ignored when preparing for retirement. When not adequately planned for, inflation can be detrimental to your retirement savings. As the cost of goods rises, the value and buying power of some retirement accounts diminish.
To help prepare for inflation's effects on your retirement, you may have to consider changing your lifestyle expectations to better preserve your savings or working with an advisor to find investment options that adjust with inflation.
Whether retirement is right around the corner or several decades away, there are things every Canadian can do now to set themselves up for financial freedom. As you consider your retirement savings strategy, work with your trusted financial professional to develop a personalized, goal-driven approach.