For many, retiring well means diligent saving through your work life. While it sounds simple, the reality of preparing and saving for retirement requires good planning and professional advice. A survey by the Financial Consumer Agency of Canada found that 53 percent of adults are unaware of how much they need to save for retirement.1
It is never too early to take the time to consider how your prospects for retirement may look. To start, here are six things to be aware of right now.
#1: Get to Know Your Retirement Needs
The good news is that people increasingly understand and value saving and preparing for retirement. About seven in ten Canadians who are not yet retired are preparing financially for retirement, either independently or through a workplace pension plan.
However, debt for those under age 65 has increased, making saving for retirement more challenging. Average Canadian household debt represented 177% of disposable income in 2019, up from 168% in 2018. These numbers mean that many adults have debt exceeding their disposable income. If you feel saving for retirement is too much of a challenge, focus on first paying off your consumer debt.1
#2: Understand Your Savings Account Options
A Registered Retirement Savings Plan, or RRSP, helps defer tax. It is an option many Canadians take advantage of since you do not pay tax until the money is withdrawn, usually during retirement. This may be a more cash-efficient option for those who believe their taxable income will be lower in retirement than contributions made during their income-earning years. RRSP contributions reduce your taxable income for the tax-year made since withdrawals are taxed instead. And there is no tax on the growth inside the RRSP.
A Tax-Free Savings Account, or TFSA, was introduced in 2009. It helps Canadians aged 18 and older set money aside tax-free throughout their lifetime. TFSAs are more than a savings account; they can be used as an investment vehicle. Any amount contributed and income earned in the account, such as investment income and capital gains, is generally tax-free, even when withdrawn.
#3: Contribute to Your RRSP and TFSA
Which is better, investing in your RRSP or a TFSA? If you have funds available, there can be benefits contributing to both.
Choosing a tax-deferred retirement account like an RRSP means delaying the tax obligation until retirement. While it is an advantageous move for most, life is unpredictable. Nobody knows for certain what their future tax rate will be, but planning with a professional can help you see the bigger picture of the future. Since there may be a possibility, you could have a higher-than-expected tax obligation. Working through the financial planning process can help you uncover those blind spots.
You use your after-tax dollars to contribute to your TFSA, and it is tax-free from inception to retirement. Investing in both retirement account types could help round out your retirement readiness.
#4: Avoid Early Withdrawals
Prematurely withdrawing from your retirement savings means losing valuable principal and interest that could have been income in retirement. It may also mean losing valuable tax benefits and paying a tax penalty for withdrawing early. If you can only contribute to either an RRSP or a TFSA, discussing what may be best for your situation with a professional may help you have better cash flow outcomes. Investing in an RRSP first may help maximize your tax benefits for the year contributions are made. Ideally, you want to put money into an RRSP when your income level is higher and then withdraw the money when you are in a lower tax bracket in retirement.
#5: Understanding Your Pension Plan Offerings
When you work for a larger corporation, there is a chance you may have a pension plan. There are two different types of employer-sponsored pensions - defined benefit plans and defined contribution plans.
Some employers provide defined benefit plans. The benefit is defined beforehand, knowing the amount you will receive monthly once you retire. As an employee, you do not need to contribute to the pension plan, and you will not have an individual account. It also means you will not say how the funds are invested in the pension plan.
By contrast, defined contribution plans mean that the benefit during retirement is unknown, but you and your employer will contribute to this plan. Instead of being a part of a larger pension fund, you’ll have an individual account that you and your employer will fund. You’ll also be able to decide where your funds are invested.
Talk to your employer and work with your financial advisor to make sure you understand your pension plan availability and options.
#6: Talk to Your Financial Advisor
Suppose you want to maximize the impact on your future retirement. In that case, we recommend you work with a financial advisor with whom you are comfortable with sharing specifics about your situation. They can provide you with realistic expectations, savings goals and investment advice based on your tolerance for risk. Be open and honest in your discussions. It is okay to share your hopes and dreams and express fears and anxieties regarding future retirement.
When it comes to a successful retirement, you must be knowledgeable, confident and diligent in your planning efforts. If you are used to living a particular lifestyle and want to continue doing it once you are no longer working, planning is critical. And if you are unsure where to start, speak with a trusted financial professional. And if you think we may be a fit, reach out for a discovery call.
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