Making a retirement plan
What do you see yourself doing when you retire? Perhaps youíre taking your grandchildren on a trip or making upgrades to your home with your partner? Maybe youíd rather volunteer at your favourite not-for-profit, or learn a sport to meet new people? Whatever your retirement dreams are, they donít happen overnight. Youíll need a retirement plan in order for those retirement dreams to come true. But where do you start?
Planning all the way to retirement
Mell is 28 and lives in Cambridge with her partner. She recently paid off her student debt and her credit card debt, and has turned her focus to retirement planning. Her parents immigrated to Canada when she was young, and she sees how hard it is for them to make ends meet now theyíre older. They didnít have a pension at work and didnít save enough when they were young so they still work at 70. She doesnít want that to happen to her, so she met with a financial planner and made long term goals for herself. With the help of the planner, she decided to automatically transfer $50 into an RRSP account and $50 into an emergency savings account from every bi-weekly paycheque. Thatís all she can afford now, but that adds up to $200 in savings every month. Thatís also $200 less in disposable income per month, which doesnít seem like a lot, but it has meant going out with friends less than she used to. She now hosts potluck dinner parties instead of going out to restaurants.
Often people meet with a financial planner to create a retirement plan that is specific to them. If you want to do this, make sure they have sufficient pension knowledge, as not all do. Many people opt to make their own plan. Regardless of your preference you need to gather some documents and information to make sure you have the details you need to make informed financial decisions.
Hereís a list of things you should do before developing your own plan or meeting with a financial planner:
1. Gather your ID
If meeting with a financial planner, they may ask for information (e.g. driverís license) to confirm your identity.
2. Gather your financial documents
These documents are needed to calculate what your assets are and what you may need to save for retirement:
- Pension plan paperwork, if any
- Bank account statements including savings and chequing accounts
- Registered Retirement Savings Plan (RRSP) statements, if any
- Tax‑Free Savings Account (TFSA) statements, if any
- Other investment statements such as bonds, stocks, mutual funds
- Tax returns issued by Canada Revenue Agency for the last six years or for however long you have been working if less than six years
3. Make a list of your current expenses
Knowing how much you spend now will give you insight into how much you might spend when youíre retired. Take a look at three months of credit card and bank statements to see where your money has been spent. Some expenses you may have include:
- Utility bills (hydroelectricity, water, gas, sewage and waste collection)
- Other bills (phone, cable, internet, Netflix, Spotify, insurance)
- Property tax
- Entertainment (movie tickets, concert tickets, going out with friends, books etc.)
- Food (groceries, eating out at restaurants, Starbucks, Tim Hortons)
- Alcohol, if this applies (store bought, going to bars, clubs and breweries)
- Pet supplies, if this applies (food, treats, toys, medical expenses)
- Home supplies (toilet paper, paper towel, cleaning supplies, light bulbs, etc.)
- Transportation (public transit, car, rideshare)
4. Make a list of your debts and loans
Create a list of all the debts and loans you currently have, how much you still owe on them, what payments you make and how regularly you make those payments. This information will be used to assess what could potentially be paid off by the time you retire or what you will still need to plan for. Debts and loans you may have include:
- Student/education loans
- Car payments
- Mortgage on primary residence
- Credit line (secured or unsecured)
- Mortgage on other property (summer home, cottage, property overseas, rental property)
- Credit card debt
- Loans from family/friends
You may have heard thereís a magic number to what you need to have saved before retirement, but that doesnít fit everyone. Use the Government of Canadaís Retirement income calculator to see how much you may need in retirement, and begin thinking about how you can save towards that.Some of the information about expenses and debts you have gathered above will be used here.
6. Understand what you can potentially receive from the government and your employer
In Canada, the government has set up supports to provide some income during retirement, such as the Canada Pension Plan and the Old Age Security program. These funds are not designed to fully support you when you retire, but rather be supplemented by your workplace retirement savings plan, pension plan and/or personal savings. To understand what you may be able to receive, visit the Government of Canadaís Public pensions webpage and review your pension plan documents. The difference between these supports and what youíll need to spend each year in retirement is what youíll need to save.
7. Take small steps towards retirement planning
Now that you know approximately what you need in retirement and what youíll get from the government and any workplace retirement savings plan or pension plan, you need to start saving to close the gap.
Other assumptions used to develop these numbers are:
- Defined Contribution (DC) pension plan based on 10% of salary contribution per year (5% from employer and 5% from employee) and a 2.5% salary increase per year
- Assumes a 4.0% investment rate of return per year under the DC pension plan.
- Assumes she starts receiving the Old Age Security (OAS) and Canada Pension Plan (CPP) benefits at age 65 with a benefit increase rate of 2.0% per year.
- The projected CPP benefits (including the CPP enhancement) are estimated based on an assumption that she will be paying the full CPP contributions during her 35 years of working life.
- The estimated values of the total income, OAS and CPP are calculated based on an assumed discount rate of 4.0% per year.
Itís a daunting amount, so you need to get started now. Pay your retired self first, donít wait until you have money left at the end of the week or month.Take baby steps by setting up automatic bank account deductions and transferring them into an RRSP. Join your workplace retirement savings plan. Or make finding a job that provides a registered pension plan part of your criteria for your next job search.
Whether you decide to create your own retirement plan or meet with a financial planner, the key is to do it now when you have time on your side.