Good retirement planning a cornerstone of long-term financial health

Advice on planning for retirement often boils down to the same simple rule: start yesterday.

While starting to save early is certainly great advice to follow if you’re relatively young, there is much more to planning for your retirement than simply being an early bird. Retirement planning involves and influences any number of financial decisions you make throughout your working years, from how you invest your money to picking between jobs to deciding which company pension plan option is right for you—provided you’re one of the approximately 40 per cent of British Columbians lucky enough to belong to one in the first place.¹

Ultimately, seeking out the advice of a trusted financial advisor is your best bet for figuring out how to plan for your retirement, but it’s also important to establish a good understanding of the basics as you go about making decisions that will impact your long-term financial health.

How much should I save?

Knowing how much you should save, and how, is maybe the key question when it comes to planning for your retirement, and of course the answer will be different for everybody.

In the past, 70 per cent of your pre-retirement income has been the typical income goal for your retirement years, but with more and more people now carrying mortgages and other consumer debt into retirement, for many this amount will no longer be enough. When making your own calculations, make sure you factor in any lingering debts when crunching the numbers. To get started figuring out what you’ll need to save, the Government of Canada and both have helpful calculators available.

Why should I save and invest through an RRSP or TFSA?

Whether you choose to save through an RRSP or a TFSA, there is a simple reason why either one makes for a great investment tool: compound interest. In different ways, RRSPs and TFSAs both allow you to save on taxes when you invest, generating more compound interest than other investments, thus making it that much easier to save. When deciding between RRSPs and TSFAs, remember to look into the benefits and drawbacks of each.

I have a pension through my employer. Do I still need to save?

Short answer? Yes. Even without knowing any details about your particular pension plan, it’s always a good idea to have your own savings in place. Pensions, though fantastic when you have them, aren’t something you can necessarily depend on, as they can be subject to unexpected changes by your employer or, in a worse-case scenario, even become insolvent.

That said, a pension is obviously a great resource to take advantage of, and when given a choice between otherwise equal job offers, one with a pension and one without, choosing the job with a pension plan could ultimately result in hundreds of thousands in additional retirement income.

What sorts of questions should I be asking when choosing my pension, assuming I have a choice?

When opting into any pension plan, it’s important to get all of the available options and details up front. Only then can you make informed choices that match your needs and values. Similarly, when it comes time to leave your employer, there are many questions to ask and decisions to make regarding your pension.

For example, do you ultimately want a set amount of monthly income from your pension plan, or would you prefer a more flexible option, such as converting your pension to a locked-in RRSP? Do you want the option of naming a beneficiary other than your spouse, such as your children or a charitable organization? Are there medical benefits or other benefits for remaining a member of the pension plan? How many years of service will you need in order to avoid receiving a reduced pension? What happens if you switch jobs?

These are only a few of the questions to ask when determining how an employer pension plan could contribute to your retirement plan. As with all aspects of retirement planning, when it comes to your pension, it’s always a good idea to seek the advice of a trusted financial advisor.

Any other tips?

Remember to budget for changes to Old Age Security and the Guaranteed Income Supplement). When the Government of Canada recently raised the age of Old Age Security eligibility from 65 to 67, the Guaranteed Income Supplement went along with it. This means that in addition to the roughly $550 in lost monthly income from Old Age Security, people between the age of 65 and 67 who qualify for the supplement could lose up to an additional $750, reducing the combined income for those two years by as much as $1,300 per month, based on 2012 numbers. As the supplement eligibility is governed by income, those with low income will be most affected by these changes.

When making your retirement budget, remember to include these changes in your calculations and have a plan in place to cover the gap. Saving for this period through a TSFA might be a good option.

In some cases, your employer is obliged to make the full pension contribution—so the employer’s portion as well as your portion—as long as you remain on disability. In other words, if your employer is asking you to take your pension early, it may be because they simply want to get out of their financial obligation, not because they actually have your best interests at heart. Retiring earlier in this case could mean a smaller pension for years to come.

To make sure the advice you’re getting is actually in your best interest, not just your employer’s, be sure to seek out unbiased, informed advice from a trusted financial advisor or pension consultant.