As a financial planner, I hear lots of questions about retirement and pensions so I’m going to answer four of the most common ones for you here.
Retirement planning influences many financial decisions you make throughout your working years.
Things like how you invest your money to picking between jobs to deciding which company pension plan option is right for you – provided you’re one of the approximately 40% of British Columbians lucky enough to belong to one in the first place.
1. How much should I save?
Knowing how much to save is a key question when it comes to planning for your retirement. And, of course, the answer will be different for everybody.
In the past, 70% of your pre-retirement income has been the typical income goal for your retirement years. But the income goal you set for yourself really depends on the type of lifestyle you want to have in your retirement. For example, someone with modest plans and spending habits can get by on as little as 50% of their pre-retirement income, while others with more extravagant ideas in mind may need 80 to 90%. Also, more people are carrying mortgages and other debt into retirement, so make sure you factor in any remaining debt you might have when crunching the numbers. To get started figuring out what you’ll need to save, the Government of Canada and Vancity both have helpful calculators available.
2. Why should I invest through RRSPs and TFSAs?
Whether you choose to save through an RRSP or TFSA (or both!), there is a simple reason why both are great investment tools: compound growth. These accounts act as containers for your investments. Inside them, your money can grow and accumulate tax-free. In different ways, RRSPs and TFSAs both allow you to save on taxes when you invest, which leads to more compound growth than other investments (and makes it that much easier to save). When deciding between RRSPs and TSFAs, remember to look into the benefits and drawbacks of each.
3. If I have a pension through my employer, do I still need to save?
Short answer? Yes. Even without knowing any details about your particular pension plan, it’s always a good idea to have your own savings in place. Pensions, though fantastic when you have them, aren’t something you can absolutely depend on 100%, as they can be subject to unexpected changes by your employer or, in a worse-case scenario, even become insolvent.
That said, a pension is obviously a great resource to take advantage of, and when given a choice between otherwise equal job offers, one with a pension and one without, choosing the job with a pension plan could ultimately result in hundreds of thousands in additional retirement income.
4. What should I consider when choosing my pension?
When opting into any pension plan, it’s important to get all of the available options and details up front. Only then can you make informed choices that match your needs and values. Similarly, when it comes time to leave your employer, there are many questions to ask and decisions to make regarding your pension.
For example, here are some important questions to consider:
- Do you ultimately want a set amount of monthly income from your pension plan, or would you prefer a more flexible option, such as converting your pension to a locked-in RRSP?
- Do you want the option of naming a beneficiary other than your spouse, such as your children or a charitable organization?
- Are there medical benefits or others for remaining a member of the pension plan?
- How many years of service will you need in order to avoid receiving a reduced pension?
- What happens if you switch jobs?
These are only a few of the questions to ask when determining how an employer pension plan could contribute to your retirement plan.
If you do one thing, seeking out the advice of a trusted financial advisor is the best way to figure out how to plan for your retirement.
And now a word from our lawyers: