Retirement

Retirement planning includes determining your retirement goals, then creating and implementing a plan to make them reality.

Retirement can seem complicated, but it doesn’t have to be. With the right knowledge, you can face the future with confidence—whether you’re looking 5, 15 or 50 years down the road.

No matter your age, the best time to start thinking about retirement is now.

When retirement is 30 to 40-plus years away, putting $25 or $100 per paycheque into an RRSP is a great place to start. Investing small amounts over a longer period of time can have a greater impact on investment results than saving a larger amount for a shorter period of time.

If retirement is closer for you, it’s never too late to start saving. Your Registered Retirement Savings Plan (RRSP) enjoys tax-free investment growth until age 71, giving you 5, 10, 20 years to start growing your savings.

Wherever you’re at, saving for retirement is as simple as starting now with what you have—even if it’s $25 per paycheque.

Start by understanding your current financial situation. Here are a few things to pay attention to:

1. Your current cash flow 
The more you understand where your money is going, the more control you can have over it.
Start by creating a budget. Already have a budget or know your monthly cash flow? Move to the next step.

2. Pay your debt
Start paying off any debt you have so you can free up your money for retirement savings and other goals.

3. Know your credit score
Poor credit or inaccurate credit information might be stopping you from getting the best interest rates, which leaves you with less money available to invest. Request and review your credit report to solve any issues.

4. Think about your emergency fund
Financial surprises happen, but they don’t have to come between you and a fulfilling retirement. To protect your retirement savings plan, build an emergency fund.

To answer that question, think about what you want your retirement to look like and know where your income will come from.

Ask yourself:

• When would you like to retire?
• Where will you be living?
• What will you be doing with your time?

Answering these questions will help you determine:

• How much money you will need in retirement.
• If you are on track to save that amount.
• How much additional saving you’ll have to do to reach your retirement goals.

If your retirement is many years away, the answers to these questions may not be clear now, and that’s okay. You’re already taking a first step in retirement planning by thinking about it. Revisit these questions as your specific retirement goals and expenses become clearer.

Here’s a list of the main sources of income during retirement.

1. Government benefits
   
   1. Canada Pension Plan (CPP): CPP benefits are financed by mandatory contributions made through deductions from your paycheque, or if you're self-employed, through direct payments to the Canada Revenue Agency. The amount you'll receive is based on your contribution history and the age you start receiving your payments.
      
      
   2. Old Age Security (OAS): A government retirement benefit that is funded from general tax revenues, not contributions. OAS benefits depend on your residency in Canada after age 18. The amount you qualify for will depend on how long you lived in Canada after age 18.
      
      
   3. Employer pension plan: If you’re a member of an employer sponsored pension plan, you can get pension benefits when you retire. Take a look at the details of your plan to know what type of pension you have, either a defined benefit plan or a defined contribution plan and how much you can expect to receive when you retire.
      
      
   4. Personal savings and investments: Your employer pension and government benefits alone are likely not enough to fund your retirement goals. That’s why your retirement savings plan is important. It’s also why we recommend you make the maximum contribution to your RRSP and TFSA.

While your situation is unique and so is your road to retirement, here are a few general tips:

• Find out how much you will be entitled to through CPP & OAS. Your CPP is available through your MyServiceCanada Account.
• If you are a member of an employer pension plan, look at your statement to know what you will get when you retire.
  
• Get the current balances in your personal investment accounts.

Where should you invest for your retirement? Let’s take a look at RRSPs, TFSAs and cash accounts.

Registered retirement savings plans (RRSPs) 

RRSPs are “tax-deferred” investments. Your RRSP tax-deferred money grows, giving you earning potential and tax savings if you’re in a lower income tax bracket in retirement than when you made the contribution. 

You don’t pay income tax on the money you put into your RRSP in the year you make the contribution, but you do pay tax on your withdrawals. 

The government limits the amount you can put into your RRSP each year. That limit is called your available RRSP contribution room. It’s determined by unused contribution room carried forward from the previous year, plus the new amount allotted for the year. The new amount is either 18% of your previous year’s income or the current year’s RRSP dollar limit, whichever amount is less.

Tax-free savings account (TFSA)

A tax-free savings account (TFSA) is an investment account that provides tax free savings and growth. A TFSA is more flexible than an RRSP because it helps you save money on taxes, not just retirement. Every Canadian resident who is 18 years of age or older can open a TFSA. 

You pay regular income tax on your TFSA contributions in the year that you make a deposit, but those contributions then grow tax-free. You don’t pay tax on your withdrawals, even if you’ve earned significant investment returns on your contributions.

Similar to RRSPs, the amount you can put into your TFSA is limited by your individual contribution room. Each year how much you can deposit is increased by the TFSA dollar limit for that year. And if you haven't made a deposit in the past few years, any unused contribution room carries over. 

Cash accounts

You can also use non-registered cash investment accounts to save for retirement. Earnings from a non-registered investment are usually taxable in the year they’re earned. How you’re taxed depends on the type of income the investment produces. Different taxation is applied to interest, dividends and capital gains.

Unlike RRSPs and TFSAs, there are no limits to the amount that can be contributed to and accumulated in a non-registered account. If you’re already maxing out your tax-efficient RRSP and TFSA, a cash account is an option to continue to grow your retirement savings.

Which one is right for you?

There are many ways to save for retirement. Connect with your financial institution to see which accounts could help you reach your goals.

Three tips for reaching your retirement goals 

1. Keep saving in your retirement accounts: Life comes with unwanted challenges. Do your best to keep investing in your RRSP or TFSA, even if you have to adjust the amount.

2. Increase how much you save when you can: Whether it’s a lump sum payment to your RRSP or increasing your automatic savings amount by $25, set a realistic goal to increase how much you save each year.

3. Look at your plan regularly: Make some time every year to look at your retirement savings plan, check your goals, make changes and celebrate your successes. You’re getting closer and closer to creating the future you want.