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 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 20 years, retirees need to be concerned with maintaining their cost-of-living.
Health Care Needs
Longer life spans can also translate into more health issues that arise in the process of aging. The ever increasing cut-backs with our provincial health care coverage means more and more of these costs must be covered by the retiree. Planning for long-term care, in the event of a serious disability or chronic illness, is becoming a key element of retirement plans today.
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 substantial estate administration tax, which may be reduced or avoided with a proper estate plan.
Paying for Retirement
Retirees who have prepared for their retirement usually rely upon three main sources of income: government pensions (such as CPP/QPP and OAS), individual or employer-sponsored qualified retirement plans, and their own savings or investments. A sound retirement plan will emphasize qualified plans and personal savings as the primary sources with government pensions as a safety net for steady income.
CPP/QPP and OAS
The Canada Pension Plan (CPP) operates throughout Canada except in Quebec, where the Quebec Pension Plan (QPP) provides similar benefits. It provides a monthly benefit to eligible applicants who will receive a full retirement pension at age 65. You can also apply as early as age 60, with reduced benefits, or as late as age 75, with an increased benefit.
The Old Age Security (OAS) Pension is a monthly payment available to most Canadians applicants who are 65 years of age and meet the Canadian legal status and residence requirements. There is an option to defer the payment in order to increase the amount.
Other OAS benefits include the Guaranteed Income Supplement (GIS), Allowance and Allowance for Survivor, are available for low income earners.
Employer-Sponsored Qualified Plans
Most employer-sponsored plans today are established as “defined contribution” plans whereby an employee contributes a percentage of their earnings into an account that will accumulate until retirement. As a qualified 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.
RRSPs and TFSAs
Registered Retirement Savings Plans (RRSP) and Tax-Free Savings Accounts (TFSA) area both useful vehicles in savings for one’s retirement. With a RRSP, eligible contributions are deducted from earnings to reduce income taxes and they remain tax deferred in the plan until they are withdrawn. Eligible TFSA contributions are made with after-tax dollars and the funds are not taxed within the plan or when they are withdrawn.
For more information on retirement income needs and income sources, please contact us today.