"Will I be okay?" As Financial Planners and Advisors we are often asked this simple question. The answer depends greatly on your lifestyle, how you are saving for retirement, and whether you have professional guidance or are trying to manage your investments alone.
What is Retirement to You?
The most important factor in saving for retirement is the lifestyle you would like. Some are happy leading a modest life. They shop the sales, buy the cheaper cuts of meat. They are home bodies, and rarely make large purchases. Others are more extravagant. They buy the sirloin steak, spend their winter in Palm Springs, and they don't hesitate to make large purchases. The more extravagant life you lead, the more income is required to fund it, and the more you will need to have saved for retirement.
How do we pay for Retirement?
The Canada Pension Plan (CPP) and Old Age Security (OAS) are two important sources of income for retirees. This year they will provide the average Canadian with approximately $15,000. However, this alone will likely not be enough, and many Canadians will rely on their employer pension plan. There are two main types of employer plans.
A Defined Benefit Plan provides a guaranteed income based on a formula (average earnings, years of service, etc.). This provides income for your life and the life of your spouse. However, they are not flexible and can run the risk of becoming underfunded. Sears recent bankruptcy is a harsh example where the pension employees receive is much lower than what they expected.The second type is a Defined Contribution Plan. Here, you and your employer contribute a percentage of your salary to a plan managed by a pension fund. Your contributions grow over time and when you retire you have a lump sum of money to draw on. Your investments and the income you withdraw are controlled by you, making this type of plan much more flexible.
What do I do with My Pension?
When you do retire you will have options on how to draw from your pension. A Defined Benefit Plan offers payment and guarantee options that look something like the following:
- $1,900/month – 0% Guarantee
- $1,800/month – 60% Guarantee
- $1,600/month – 100% Guarantee
In this example, if you chose to receive $1,800 per month and you were to pass away, 60% or $1,080 would continue to be paid to your spouse for the remainder of their life. You can also move the commuted value (total value of you pension) to an advisor or manager of your choice. There could be some tax consequences, however you will have far more control over how you use your money and how you pass it on to your heirs.
If your pension is a Defined Contribution Plan, then you will need to manage the withdrawals and investments yourself. You can leave your money in the pension plan, or you can move it without tax consequences to a trusted advisor.
We started this article with a simple question, “will I be okay?”. It is likely that after reading this through that question has remained unanswered. This was not my intent when I began writing this piece. I was hoping to reach some profound conclusion that would put all your collective minds completely at ease. But the reality is this is a personal question. You will not find your answers in a “7 Keys to a Happy Retirement” article your friend shared on Facebook.
Everyone’s situation is different, and we have only scratched the surface. What if I’m a business owner? Do I save or do I invest in the business to later sell and retire on the proceeds? What if I’m a farmer and my land, cattle, etc., is my pension plan? What if my job is my life and I don’t want to retire? How do I pass my wealth on to my spouse and children?
The odds are against you if you try to manage it alone. Those who work with a professional Financial Planner on average accumulate 2.73 times (273%)* more wealth than those who do not. That is not because we are stock picking magicians, but because we work with you to uncover and develop your goals, long and short term. We build savings and investment plans to make sure you achieve them. We work with you through all of life’s stages and its many changes. And once we get there, we’ve achieved your goals and you’re ready to take that step into retirement, we’re there to make sure your money is protected and provides you the retirement you worked so hard to reach.
Speak with your Wealth Advisor about how building a retirement plan can help you reach your goals.
Someone's sitting in the shade today because someone planted a tree a long time ago. Warren Buffet
Disclosure. This in an opinion piece and all opinions expressed are mine alone and do not necessarily reflect the opinion of Innovation Credit Union, Credential Asset Management Inc., or our other advisors. The information contained in this email was obtained from sources believed to be reliable; however, we cannot guarantee that it is accurate or complete. This article is provided as a general source of information and should not be considered personal investment advice or a solicitation to buy or sell any mutual funds. Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Commissions, trailing commissions, management fees and expenses all may be associated with mutual fund investments. Please read the prospectus before investing. Unless otherwise stated, mutual fund securities and cash balances are not insured nor guaranteed, their values change frequently and past performance may not be repeated. *Montmarquette, Claude. “An Economic Analysis of Value of Advice in Canada,” CIRANO.