Planning for a lengthy, healthy and financially secure future should be a lifelong process.
This is the third article in a three-part series devoted to planning for the financial opportunities and challenges that can arise throughout different stages of life. The first article, “Starting out and moving up,” is available here. The second, “Partnering up and settling down,” is available here.
Whether your retirement is just around the corner or further down the road, the key to eventually enjoying it is preparedness.
People have different goals for their post-career lives. You may long for peaceful strolls along a beach or trips to exotic destinations, or simply wish to pursue your personal passions at your own pace. Retirement can be whatever you envision it to be, depending on how financially and physically prepared you are.
Have a plan
Studies reveal that most pre-retirees look forward to their retirement, seeing it as a new, fulfilling chapter in their lives.[1] Yet, it’s also common for anxiety to increase, driven largely by financial uncertainty, as retirement nears. Building and maintaining a plan can help minimize worries about having enough money and can be the basis for some good discussions with your advisor.
Currently, the average life expectancy in Canada is 82.[2] This means that, thanks to progress in individual health and wellness, the average time people spend in retirement is getting longer. You should therefore plan for the possibility that you will spend more time in retirement than you may have previously thought.
Contribute early and often
Competing demands for your money can make it challenging to hit your retirement savings goals. However, contributing what you can, when you can, lets every dollar you save benefit from the longest possible period of growth.
Committing to an automated savings routine can help take some of the pressure off setting aside a percentage of your income when other needs are vying for your money. In this respect, don’t overlook the advantages of belonging to an employee-sponsored group benefit plan that offers substantial access to health care and insurance protections while you are working. The savings you can accumulate through the benefit package coverage can be directed towards other priorities, including maximizing contributions to the group retirement investment plan.
Getting an early start on saving can provide some peace of mind, considering many people admit to waiting too long to begin. A 2022 survey found that of Canadians who were retired or within 10 years of retirement, only 33 per cent said they were in great shape financially.[3] On average, retirees had started saving specifically for retirement at age 37 but wished they’d begun nearly a decade earlier.[4]
Saving early boosts the power of compounding interest, investment returns and, eventually, retirement income.
Building a retirement nest egg
Although opinions vary on how much money a person should aim to save for retirement, the amount usually falls within the range of 70 to 80 per cent of your pre-retirement peak income. Regardless of what type of retirement lifestyle you intend to lead, building a sizable nest egg that meets your needs should remain a goal throughout your working life.
Saving for retirement commonly involves investing in registered plans that are focused entirely on providing you with a reliable source of income when you leave the workforce. Here’s a list of some of the conventional investment vehicles that Canadians typically use to accumulate their pre-retirement savings and to provide retirement income.
Retirement savings
Registered Retirement Savings Plan (RRSP). The annual contribution limit is 18 per cent of your earned income in the previous year to a maximum dollar amount set by the Canadian government each year, plus any previously unused contribution room. Pre-retirement contributions reduce taxable income. Tax is payable only when funds are withdrawn. An RRSP must be converted into a RRIF (see below) by the end of the year that you turn 71.
Registered Pension Plan (RPP). Employees and their employers can deposit pre-tax income in an RPP account until the employee retires. Upon retirement, the employee can withdraw the money for any reason. Only withdrawals, not contributions, are taxable. There are two different types of RPP in Canada: defined contribution and defined benefit.
- Defined contribution plan. Retirement income depends on how much you and your employer contribute and how well it performs in the market. Contributions are usually based on a percentage of your salary.
- Defined benefit plan. Guarantees a specific income at retirement. Your retirement income is determined by a formula.
Tax-Free Savings Account (TFSA). Unlike other registered savings plans, TFSA savings are not subject to taxes even when they grow to impressive amounts. Some people are accustomed to using their TFSA for short- and medium-term savings goals, but they can be an effective tool for long-term retirement saving as well, though the $6,000 annual contribution limit is small compared to the allowable limits of other registered savings accounts. If you make a withdrawal, you can’t reuse the allowable contribution room until subsequent years (unlike an RRSP, where you never regain your contribution room after a withdrawal). Learn more about TFSAs here.
Retirement income
Payments from all the following sources are generally taxable and can be split between spouses and common-law partners starting at age 65.
Registered Retirement Income Fund (RRIF). While you make contributions to an RRSP, you receive income (via withdrawals) from a RRIF (a converted RRSP after age 71). There’s a required annual minimum withdrawal but no maximum.
Life Income Fund (LIF)/Locked-in Retirement Income Fund (LRIF). These accounts are like a RRIF, but with a required annual minimum payment and a maximum payment restriction.
Prescribed Retirement Income Fund (PRIF). Also like a RRIF, a PRIF is funded by money from locked-in RRSP accounts. There’s a required annual minimum payment, but unlike a LIF, there’s no maximum payment restriction.
Restricted Life Income Fund (RLIF). Funded by money from locked-in RRSP accounts governed by federal pension legislation only. There’s a required annual minimum payment and a maximum payment restriction.
Annuity. An annuity contract can provide guaranteed regular income for the rest of your life or for a specified number of years. Withdrawals from registered annuities (funded by RRSPs, RRIFs and their locked-in account equivalents) are fully taxable as income.
Since there are critical differences that separate various retirement investment products from one another, your advisor can help determine which of them align with your goals. Don’t forget other sources of income, including non-registered investments, other assets and efficient tax planning, that can combine to make a significant difference to enriching your retirement fund.
At the same time, be aware of accepting too much risk or paying high fees for services and investments, which can deplete your savings. All the more reason to discuss your risk tolerance and fee structures that will work towards your best interests.
What about home equity?
Owning a home is a solid investment that can provide a firm base of financial security. But although the appreciating housing market has been a boon for many Canadians in recent years, real estate remains vulnerable to the effects of other economic events, including recessions and market corrections, and generally should not be considered a wellspring of retirement funding. Moreover, accessing the full equity value of the home means selling it at some stage, which may conflict with many retirees’ desire to live in their home for as long as possible.
There are ways to tap into the value of your home while you live in it. In Canada, people over 55 years of age who own their home can apply for a reverse mortgage or home equity line of credit (HELOC) that grants access to up to 55 per cent of the home’s value without paying principal or interest charges until you sell. There’s also an all-in-one mortgage that works like a HELOC, but it combines both savings and debts into a single bank account that covers everyday transactions along with longer-term investment goals. Many homeowners prefer to leverage their home equity to pay for the odd emergency or for home renovations. Diversifying your savings in other ways (mainly through investment accounts) can make it less likely that you’ll need to access your home equity to support your retirement spending.
A healthy retirement
Aside from the positive lifestyle changes people look forward to in retirement, aging may also present new challenges, such as health and financial situations that perhaps weren’t as worrisome in your younger years.
Some recent Canadian government research on the effects of aging and chronic diseases on senior citizens found that a person aged 65 today can expect to live another 21 years. However, it’s also estimated that only 15 of those 21 years will be lived in full health.[5] As is often said, what good is retirement if you’re not healthy enough to enjoy it? Thankfully, you can influence your outcome.
Behavioural insurance is the life insurance industry’s innovative program that offers incentives and rewards you for living a healthier lifestyle. You can earn points for completing activities that are good for your health, such as getting regular medical and dental checkups, adopting better nutritional habits and staying physically active. With this type of program, being dedicated to improving and protecting your health can even save you money by earning discounts on premiums.
Insurance is a solidly reliable way to protect yourself and provide your loved ones with some added financial security, especially in your golden years. Like retirement contributions, having the right type and amount of life insurance is a worthwhile investment in yourself and your family’s future.
Leaving a legacy
At some point, everyone pauses to reflect on their past achievements, their relationships and the positive impact they may have had on people, organizations and communities – in other words, on their life’s legacy. An estate plan is where much of that legacy can be preserved by passing on money and possessions to loved ones through a will. Putting the proper legal documents and plans in place is not only the responsible thing to do, it also greatly reduces the stress and complexity of asking others to figure everything out at the end of your life.
Enjoy the ride
A financially fit retirement is a realistic, achievable goal that can help ensure your later years are what you dream of them being. If you’re hoping your road to retirement will be a smooth one, speak to your advisor to help iron out the details of planning for, and living in, this stage of life. After all, your retirement should be a time to celebrate, not a cause for worry.
This worksheet can help you begin to explore the many facets of retirement planning.
[1] Edward-Jones-Age-Wave-Final-Report_CA.pdf (edwardjones.com)
[2] Health at a Glance 2021 : OECD Indicators | Health at a Glance | OECD iLibrary (oecd-ilibrary.org)
[3] Ibid.
[4] Ibid.
[5] Government of Canada. Aging and chronic diseases: A profile of Canadian seniors.
