A third of Canadians expect a lottery win to play a part in funding their retirement plans. Consider that the odds of holding a winning ticket in a 6/49 format lottery are more than 14 million to one. You're more likely to be struck by lightning (which might eliminate the necessity for retirement planning altogether).
The lottery-retirement issue is a fanciful one. But it underscores the fact that most Canadians don't think much further beyond Registered Retirement Savings Plan (RRSP) and investment calculations when it comes to retirement planning. Take a look at the big picture:
Will your house be paid for? Will you still be supporting children? If you get sick, will a plan support the costs of prescriptions and treatments, or do you need private health insurance? Heaven forbid your spouse or partner should pass away -- could you get by on the reduced benefits?
That's the wake-up call. The good news is, a properly planned retirement is possible. But it can't be achieved passively. Now is the time to be aggressive about taking responsibility for your retirement plan and take the action necessary to put it in motion. These five steps are a place to start.
1. Figure out what retirement lifestyle will look like. After so many years a wage slave, it's tempting to think you won't be able to get enough free time. You will. Part of a financial retirement plan includes a retirement lifestyle plan. Do you have hobbies you'd like spend more time on? Will travel play a large role in your retirement plans? Will you be moving out to the country like you always said you would? Have a long discussion with your partner about how you envision spending your days. The more complete the visualization, the better the starting point for your retirement planning.
2. Determine how much it will cost to live that lifestyle. Try to make a realistic assessment of the costs of the individual elements of that lifestyle -- travel, accommodation costs, spoiling the grandchildren, all that -- on an annual basis. How long do you plan to keep up that lifestyle before gearing down to a more sedentary life? And remember to factor in private health insurance costs, if necessary.
3. Work out how to fund that lifestyle. You might have reached a scary number in Step 2. How do you reach it? Well, you probably have a start on that equity already. The money in your RRSP accounts will continue to compound interest. If you own your home, you may have a large amount of equity you can realize by downsizing. But it's critical to maximize the continuing benefits of RRSP contributions and deposits to Tax-Free Savings Accounts (TFSA), and to understand the differences.
RRSPs defer income tax -- you treat it as income for tax purposes after retirement, when your income is likely lower. You've already paid tax on the income that goes into a TFSA, but it accrues interest without incurring a tax penalty. You can withdraw money from a TFSA at any time without penalty. The contribution limit is $5,500 this year, compared to $5,000 in previous years, which is considerably lower than the 18 per cent of income you can contribute to an RRSP. But the limit for TFSAs carries over. TFSAs were introduced in 2009. If you've never contributed, then this year, you've got more than $30,000 in cap space you can use. TFSAs aren't guaranteed, though, so an aggressive TFSA chosen to make money can also lose money. TFSAs and RRSPs are appropriate for different purpose; you can find more information in this article on H&R Block's Tax Talk Web site.
4. Make income-splitting work for you. Income from the Canada Pension Plan (CPP) and the Registered Retirement Income Funds (RRIF) and RRSP income can be pooled in retirement, lowering the amount of tax the spouse with the highest income must pay. But there are plenty of opportunities to split income before retirement, even if the federal government hasn't implemented its long-promised spousal income-splitting plan (we're hoping for that in 2015).
There are many income-splitting tactics for couples with disparate incomes -- there is a comprehensive article on the subject on the Boomer and Echo blog -- but the one that has the most direct impact is the spousal RRSP. You can contribute directly to a spouse's RRSP, gaining a tax break today and splitting income further down the line. The caveat is that contributions to a spouse's RRSP count against your RRSP contribution limit, so if you only have $10,000 in headroom, contributing $5,000 to your spouse's RRSP means you can only contribute $5,000 to your own.
5. Determine a start date and plan toward it. Everyone wants to retire as soon as they can, but you have to work out a realistic date. How long will it take you to accumulate the various assets you'll need to fund your retirement? One important thing to bear in mind is your company pension or RRSP-matching plan. Will a few more years substantially impact your pension entitlement? And remember, if your company matches your RRSP contributions in lieu of a pension plan, you're getting a 100 per cent return on investment. There aren't a lot of investments like that.
A comfortable retirement can be a daunting prospect, but you have the tools available to make it happen. It starts with knowing what you want your retirement to look like. The clearer the picture you have, the easier the road is.