Sources of retirement income determine just how much you will have when you retire. Yet half of Canadians expect pensions to be their largest source of retirement income, and yet many Canadians have no idea how much they will receive from the various pension sources that are available, including any pension that they might receive from their employment. How can a person plan financially for their retirement if they do not have any idea of what their Sources of retirement income will be when they retire? How do they know much they need to save to give them the life style they wish to have without having this basic level of information?
Many Canadians and Americans for that matter believe they will likely need to work well into their retirement years to give them the kind of lifestyle they wish to have. Let’s look at the possible sources of income for a person aged 65 in Canada. Americans reading this post will be able to do their own assessment as well by looking at the pension sources they have in their country.
The common sources of retirement income at age 65 are:
Company Pension plan – the amount you receive will depend on how many years you have paid into the plan and how much you have paid. Early withdrawal prior to 65 will decrease the amount that you will collect from the company plan and also the type of plan the company offers.
Canada Pension plan – the amount you receive will depend on how many years you have paid into the plan and how much you have paid. Early withdrawal prior to 65 will decrease the amount that you will collect from the CPP
Old Age pension – this is a fixed amount which all Canadians will collect. However if your income from other sources is higher than a prescribed amount the government will claw back some or all of the OAS pension.
RRSP investments- you can contribute to an RRSP until age 69 and then you must convert the RRSP to a RFIFF and start withdrawing money from the plan. You can also withdraw at age 65 as well, however there will be less to withdraw.
Other Investments – these are investments you may have outside of your RRSP. These could consist of investment properties, mutual funds, as well as the family home.
Supplemental pension amounts if your income is below a certain level
Part time or full time work after 65 – many Canadians will supplement their income by continuing to work beyond 65. There is the added benefit that this work keeps them involved and active in the community, and challenges their minds with interesting work.
Canadians expect part-time or occasional work (26 per cent) and income from their own investments (24 per cent) to be supplementary sources of income during retirement. Thirty per cent of Canadians aged 35-54 expect to be working in retirement, suggesting the concept of a traditional retirement is disappearing.
Regardless of your current age, it is important to develop a budget based on the expected income from various sources. This is really the first step to assess if you will have sufficient funds at retirement. It may take some digging to find the estimates for each pension source; however it will be worth it to assist in planning your retirement. Your HR person can assist you with the company pension plan estimates and the government web sites will help with the CPP and OAS pensions. Of course all numbers will be based on the assumption that you work until 65 to maximize your pension income. Usually if you retire early, the pensions will be decreased by some amount to reflect less time for your pension contributions.
Once you have these numbers a financial advisor can assist you with estimating the amount of money you will need to save to provide the lifestyle you are looking for. Your savings plan will be based on this amount needed to generate the amount of money you will need at retirement. You will need to make assumptions about inflation and the percentage of income you will generate based on your investment profile and risk tolerance. Invest conservatively and diversely to protect your retirement savings
Having enough money for a comfortable retirement (68 per cent) is the most important consideration in deciding when to retire. However, half of Canadians (53 per cent) who have established financial goals feel they are somewhat short or nowhere close to where they think they should be to ensure a comfortable retirement, up from 36 per cent in 2007.
The amount of money saved that a person will need at retirement is a very personal number. It depends on the amount of pension income as well as on personal goals, plans and expectations for retirement. On average, retirees have a goal of nearly $270,000 as the amount of money required for a comfortable retirement, down from nearly $450,000 in 2007. People not yet retired think they will need nearly two and half times that amount, or almost $660,000, down from almost $900,000 in 2007.
Clearly the recent economic turmoil during 2008 and 2009 has had an especially sobering effect on consumer’s savings objectives. The fluctuation of the investments during this time has scared many people and caused them to rethink their retirement plans. Fortunately if you are invested in conservative solid investments, they are generally returning to the pre-downturn numbers that we were used to.