As April comes to a close, most people have been busy completing their income tax returns for last year, either by themselves or with the help of an accountant. If an accountant finished your tax return, they probably gave you some important advice—more long-term tax planning is essential. While you may say to yourself at the moment that you will consider your long-term tax planning goals next year, like a forgotten New Year’s resolution, it’s easy to shuffle those plans to the back of your mind until tax time rolls around again. However, the best time for long-term financial planning is now, and a crucial element of long-term planning is an effective retirement plan.
Retirement Planning by the Numbers
When it comes to creating a detailed retirement plan, as a general rule, you want to aim for at least 70 to 80 percent of your pre-retirement income for each year of your retirement. While retired, you may spend less money on savings, housing, tax, and transportation to work, but you will likely spend more on hobbies, utilities, and healthcare.
In past years, there have been many advertising campaigns geared towards the idea of retiring at age 55. But is that a realistic goal? Let’s examine that idea in more detail. If you currently earn $100,000 per year, how much do you need to save in various ways to retire? You want to have at least 70 to 80 percent of that $100,000 available for each of your retirement years.
If you retire at 55 and predict that you will live until you are 85, does this mean you need to have $2.1 million (30 years multiplied by $70,000) when you retire? Fortunately, the answer is no. The amounts you have invested in your retirement plan assets (RRIFs, pension plans, etc.) will continue to earn investment income. If we assume that your pension assets earn 2 percent per year and have $1,000,000 in your pension assets when you retire, you will require $70,000 for about 17 years. Under this situation, and if you retire at 55, you will run out of money well before you turn 85. Under the same $1,000,000 scenario, if you retire when you are 65, you will receive $70,000 until you reach 82. So, how much is required to earn a $70,000 per year pension? About $1,600,000. However, if you want a pension that pays $80,000 per retirement year, the necessary pension amount would be slightly higher than $1,900,000. Hopefully, this information has you considering just how much you will need in each year of your retirement and what you can do starting now to raise the necessary funds.
Workplace Pension Plans
Creating a realistic retirement plan that also meets your financial goals will take careful preparation and likely require the advice and recommendations from a trusted financial consultant. The first item to consider is the pension that you earn from your place of employment.
Defined Benefit Pension Plan
If you work for an organization that offers a defined benefit pension plan, you are fortunate. In this type of plan, the employer covers any pension deficits.
Defined Contribution Pension Plan
However, in the case of a defined contribution plan, the employer is not responsible for any pension deficits; the employer contributes to a pension fund of your choice. In this case, you choose a well-managed plan and pay a fee for this service–and it is worth it. The people that manage these funds are well-trained and experienced.
Canada Pension Plan Benefits
When it comes to the Canada Pension Plan (CPP), some will recommend that you take your CPP receipts early (i.e., before you turn 65). This is a good decision if it helps you reach the total amount of money needed to provide the annual pension income you require. If it doesn’t achieve this goal, you might choose to wait until you reach 65. You may even wait until the age of 70 as the amount of money paid will increase.
RRSPs and TFSAs
Part of your pension planning will likely involve RRSPs and/or Tax-Free Savings Accounts (TFSAs). Putting money into an RRSP during times of earning high incomes (higher tax rates) allows you to withdraw money from the RRSP when you retire, and it will be taxed at a lower rate. Money invested in TFSAs before retirement does not generate a tax deduction, but any investment income earned from a TSFA will not be taxed when you withdraw from it during retirement.
Contact Glenn Graydon Wright LLP in Oakville for Expert Retirement Planning Advice
When it comes to creating a realistic retirement plan, it is essential to understand the money you will need to live the lifestyle you want once you are no longer earning an income from an employer. The professional accounting experts at Glenn Graydon Wright LLP come in. Our team of trusted consultants can help you review your financial situation and guide you through the necessary steps to achieve your retirement goals. Let us help alleviate your worries for the future, so you can be confident you can live comfortably once you retire. To learn more about how we can help you with your retirement planning needs, give us a call today at 905-845-6633 or connect with us online