You may have a clear vision of what you want your retirement to look like. Or, it may feel like a distant deadline that’s a lifetime away. Wherever you are in your timeline toward retirement, there are things you can be doing right now to better prepare yourself for financial freedom. To help, here are four retirement strategies and considerations every Canadian should be thinking about.
Strategy #1: Maximize Your CPP Benefits
The Canada Pension Plan, or CPP, provides taxable monthly income for retired individuals.
Monthly CPP payments are not the same across the board, as the amount paid will fluctuate based on individual factors including:1
- How old you are when you start receiving payments
- Total contribution amount and duration of contributions
- Average earnings before retirement
- Your age
You may choose to begin receiving payments as early as age 60, but it’s important to first determine how your payments will be impacted. For those who choose to begin receiving payments before age 65, monthly payments are reduced by 0.6 percent. This equates to around 7.2 percent annually. This reduction will continue until a maximum of 36 percent is reached or the individual turns 65.2
If you decide to wait until after the age of 65 to begin receiving payments, you may see an increase of 0.7 percent per month or around 8.4 percent per year. This increase will continue until benefits reach an increase of 42 percent or the individual receiving them turns 70.2
Delaying your CPP benefits could result in higher monthly payments. But you’ll want to weigh this option carefully. If you find you’re short on monthly income in retirement and accumulating debt, for example, you may find that claiming your benefits early may be a necessary step. Work with your financial advisor to determine how your CPP payments will fit in with the rest of your retirement strategy.
Strategy #2: Strategize Your Savings
Setting aside savings is often easier said than done. That’s why creating a strategy and sticking to it can help achieve your long-term savings goals. Work with your financial advisor to develop a game plan and build accountability. You may find it helpful to pick a percentage of your paycheck to put into savings each week, such as five or 10 percent. If possible, work with your bank to have funds automatically transferred to your savings account each pay period. This takes the manual work out of saving, making it effortless and easy.
One important thing to note about saving - the sooner you start, the greater you’ll have in retirement thanks to the effects of compounding interest. A small amount of money accumulating compounding interest over decades can yield significant savings for your retirement.
Strategy #3: Understand the Difference Between TFSA & RRSP
As you prepare for retirement, there are two common types of savings plans typically utilized - a Tax-Free Savings Account (TFSA) or a Registered Retirement Savings Plan (RRSP). The question is, which should you be putting your money into now?
While they share similarities, there are a few key differences between a TFSA and RRSP that can make a difference in your tax obligations now and in retirement.
Your TFSA contributions are made using after-tax dollars. The maximum amount you can contribute to your account changes yearly, with the 2021 TFSA annual contribution limit being $6,000.3
Your RRSP contributions are tax-deductible. Whenever you choose to withdraw in retirement, your withdrawals will be taxed like income. The yearly contribution limit for RRSPs in 2021 is $27,830.3
One of the key differences between the two vehicles surrounds suitability for your income. Unlike a TFSA, the RRSP may be more effective if you have a higher income and, subsequently, are in a higher tax bracket now than when you expect to be in retirement. You may find that contributing to a mix of both account types could be helpful in rounding out your retirement savings strategy.
Strategy #4: Prepare for the Effects of Inflation
Inflation is a tricky concept to wrap our heads around, but it shouldn’t be ignored when preparing for retirement. When not properly planned for, the effects of inflation can be detrimental to your retirement savings. Think about it - as the cost of goods rises, some retirement accounts' value and buying power diminish.
To help prepare for the effects inflation may have on your retirement, you may want to consider things like changing your lifestyle expectations to better preserve your savings or working with an advisor to find investment options that adjust with inflation.
Whether retirement is right around the corner or several decades away, there are things every Canadian can do now to set themselves up for financial freedom. As you consider your own retirement savings strategy, work with your trusted financial professional to develop a personalized, goal-driven approach.
This content is developed from sources believed to be providing accurate information. It may not be used for the purpose of avoiding any federal tax penalties. Please consult legal or tax professionals for specific information regarding your individual situation. The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.