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Rudiments of retirement readiness

In our early years, retirement isn’t much more than a concept somewhere beyond the curve of a distant horizon. Often it’s portrayed as a time to pursue adventure and realize dreams.

Then as we move forward in our lives, that horizon takes shape.  We survey the landscape, chart a direction and take stock of the resources and tools we need for a successful journey.  Without completely abandoning the romanticism, we must turn to the practical, and in today’s world that means money.

So while retirement is about more than money alone, it remains at the centre of determining when it's possible to retire, and what's possible when you get there.

What does today's retirement look like?
Individually and as a society we are living longer.  Medical advances have reduced infant mortality, eliminated many life-threatening diseases and conditions, and extended lives through better health care.  Today, we’re less concerned about surviving to retirement, and focused more on thriving through it.

We will have more years in our retirement, and healthier bodies to enjoy that time.  We’re no longer just parking ourselves in rocking chairs and on park benches, so we need to think consciously about how we’ll spend our time, and how we’ll pay for it.  

And while health has improved, eventual decline is inevitable.  That too will extend out for a longer time, and generally more decisions and adjustments will be required along the way.  It’s vitally important to be aware and prepared on many levels: socially, emotionally and financially.  

Consider as well that there are more multi-generation families living at the same time now than ever before. Whether you’re an elder, a youngster, or one of the sandwich generations in-between – that interconnectedness will have an impact on everyone.  

How do you save within your means? 
Let’s consider present you and retired you, and the financial trade-offs between.  To take adequate care of both of you, there are three principles that you can use as a guide: Live within your means now, save to fund your future self, and live within your means when you get there.  

That may seem patently obvious, but it can be difficult to put into action without a clear picture of your current financial state.  That’s where budgeting comes in, but it need not be an overwhelming undertaking.  To get started, you need an overall view of major income sources and spending, and then you can get more granular and strategic with your budgeting as you become more comfortable with it. 

Most often your principal income source is your own earning capacity.  Live healthy to protect this greatest asset, and also consider disability and life insurance for contingences you can’t control.

Do you understand your tax position? 
Tax can be a complicated topic.  While you don’t need to become an expert, you do need to understand it sufficiently so you can make educated decisions.  

For starters, you earn your employment and business income in pre-tax dollars and make your personal purchases in after-tax dollars.  As well, your income – and therefore your tax bracket – will usually go from low level in your early working years, up through peak career, and back down in retirement.  Knowing this, you can be more realistic and targeted in your saving and spending choices.

This also gives you context for public pension and private savings programs, in terms of what’s available to you, their proportionate value, and the tactics you can use to get the most out of them.

What can you expect from public pensions?
There are two main public pension programs: Canada Pension Plan (CPP) and Old Age Security (OAS).

CPP is a publicly-run insurance plan for workers.  You pay premiums out of wages during your working years, for which you are entitled to a retirement pension.  The maximum annual pension beginning at age 65 in 2017 is $13,370.  You can begin as early as age 60 but if you do that the amount is reduced by about a third, or if you delay to age 70 you can get about 40% more.  Presently, the average actual pension is $7,727.

A person is entitled to a full OAS pension after 40 years of Canadian residency after age 18.  The full annual pension at age 65 is just over $7,000 (it’s indexed quarterly), though you can get almost a third more if you delay to age 70.  

These programs provide a firm foundation for retirement, but most people will want and need to supplement this with private savings.

How do you build your private savings?
Under a registered pension plan, an employer is responsible for making payments to retired employees.  The value of the pension is negotiated between employer and employees, and can be quite complex.  The employee has no tax liability while working, and simply pays tax on the pension when it is received in retirement.

You may also make tax-deductible contributions to a registered retirement savings plan (RRSP).  It is based on your earned income, the maximum contribution room being $26,010 in 2017.  Investment growth is tax-sheltered.  Withdrawals are taxable, usually taken by moving the RRSP to a registered retirement income fund (RRIF).  

If you are a Canadian resident over 18, you may contribute $5,500 annually (current in 2017) to a tax-free savings account (TFSA).  Contributions to a TFSA are not tax-deductible, but growth and withdrawals are tax-free.

Where does your home fit in?
Whether you rent or own, housing is usually your largest expense in any given year and over a lifetime. Renting is a pay-as-you-go proposition, exposed to year-to-year market movements.  By owning, you can defray a large portion of your future shelter costs by allocating some of your savings into home capital.  As a bonus, capital gains on your principal residence are tax-free when you sell, though in the meanwhile that home capital can’t be spent.  

Deciding whether, when and how to sell a home can be an emotional prospect, on top of financial concerns.  

And as large as that is, there are many smaller decisions that in sum can be equally challenging to contemplate. Armed with a deeper understanding of the retirement rudiments outlined here, you can be better prepared to meet those challenges and more confident in the decisions you make as you head toward and live in your retirement.

Speak to your Meridian Wealth Advisor for perspective on these important issues.