In our early years, retirement isn’t much more than a distant idea. Often it’s portrayed as a time to pursue adventure and realize dreams. Then, as we move forward in our lives, that idea takes clearer shape and we start to take stock of our resources and tools we need. We keep dreaming about what retirement might look like, but we start looking at the practical, and in today’s world, that means money.
And while retirement is about more than money alone, it remains at the centre of determining when it's possible to retire, and what's possible when you get there.
What does today's retirement look like?
Individually, and as a society, we are living longer. Medical advances have reduced infant mortality, eliminated many life-threatening diseases and conditions, and extended lives through better health care. Today, we’re less concerned about surviving to retirement, and focused more on thriving through it.
We will have more years in retirement, and healthier bodies to enjoy it. We’re no longer just parking ourselves in rocking chairs and on park benches, so we need to think consciously about how we’ll spend our time, and how we’ll pay for it.
Life expectancies are longer, and health care is better, but eventual decline is inevitable. We'll likely spend more years dealing with eventual health problems and the adjustments they require. That's why it’s vitally important to be prepared on many levels: socially, emotionally and financially.
Consider as well that there are more multi-generational families living at the same time now than ever before. Whether you’re an elder, a youngster, or belong to one of the sandwich generations in-between – that interconnectedness will have an impact on everyone.
How do you save money and live within your means?
Let’s consider present you and retired you, and the financial trade-offs between. To take care of yourself now and in the future, there are three principles that you can use as a guide: Live within your means now, save to fund your future self, and live within your means when you get there.
These steps may seem obvious, but they can be difficult to put into action without a clear picture of your current financial state. Once you have the big picture, you can design a budget that fits your life – it doesn’t have to be complicated. To get started, you need an overall view of major income sources and spending. Then, you can start making your budgeting more detailed and strategic as you become more familiar with the money you have coming in and out.
Most often, your principal income source is your own earning capacity – so protect it! Healthy living can protect your ability to work, and you could also consider disability and life insurance for contingences you can’t control.
How do your taxes impact retirement?
Taxes can be a complicated topic. While you don’t need to suddenly become an expert, you do need to understand enough about taxes to make educated decisions.
For starters, you earn your employment and business income in pre-tax dollars and make your personal purchases in after-tax dollars. As well, your income – and therefore your tax bracket – will usually go from low level in your early working years, up through your peak career, and back down in retirement. Knowing this, you can be more realistic and targeted in your saving and spending choices.
Understanding taxes also gives you context for public pension and private savings programs, in terms of what’s available to you, their proportionate value, and the tactics you can use to get the most out of them.
How much money can you expect to get from public pensions?
There are two main public pension programs: Canada Pension Plan (CPP) and Old Age Security (OAS).
CPP is a publicly-run insurance plan for workers. You pay premiums out of wages during your working years, and that entitles you to a retirement pension. The maximum annual pension beginning at age 65 in 2019 is $13,855. You can begin as early as age 60 but if you do that, the amount is reduced by about 36%.If you delay to age 70, you can get about 42% more. Presently, the average actual pension at 65 is $8,150.
A person is entitled to a full OAS pension after 40 years of Canadian residency after age 18. The full annual pension at age 65 is around $7,290 (it’s indexed quarterly), though you can get almost a third more if you delay to age 70.
These programs provide a firm foundation for retirement, but most people will want (or need) to supplement this with private savings.
How do you build your personal savings for retirement?
Under a registered pension plan, an employer is responsible for making payments to retired employees. The value of the pension is negotiated between employer and employees, and can be quite complex. The employee has no tax liability while working, and simply pays tax on the pension when they receive it.
You can also make tax-deductible contributions to a registered retirement savings plan (RRSP). The exact contribution is determined based on your earned income. In 2019 the maximum contribution room is $26,500. Investment growth is tax-sheltered. Withdrawals are taxable, and usually made by moving the RRSP to a registered retirement income fund (RRIF).
If you are a Canadian resident over 18, you can contribute a maximum of $6,000 annually (current as of 2019) to a tax-free savings account (TFSA). Contributions to a TFSA are not tax-deductible, but growth and withdrawals are tax-free.
Where does your home fit in?
Whether you rent or own, housing is usually your largest expense in any given year, and over your lifetime. Renting is a pay-as-you-go proposition, leaving you exposed to year-to-year market movements. By owning your home you can offset a large portion of your future shelter costs by allocating some of your savings as home capital. As a bonus, capital gains on your principal residence are tax-free when you sell, though in the meanwhile you can’t actually spend your home capital.
Retirement can seem like one decision after another, always trying to put the right pieces together – it can be challenging.. Armed with a deeper understanding of the basics outlined here, you can be better prepared to meet those challenges and more confident in the decisions you make as you head toward and live in your retirement.
Want to talk more about these important issues? Speak to your Meridian Wealth Advisor
A version of this article was originally published on November 23, 2018