Retirement Income: Is there a magic number?
Canadian Prime Minister Stephen Harper spoke at the World Economic Forum on January 16, 2012, where he indicated that changes were coming to Canada’s retirement income system. He stated, “Our demographics constitute a threat to the social programs and services that Canadians cherish. For this reason we will be taking measures in the coming months to ensure the sustainability of our social programs and fiscal position over the next generation.”
Two months after Harper’s speech, Finance Minister Jim Flaherty confirmed the age Canadians could expect to receive Old Age Security (OAS) pensions would be pushed back gradually from age 65 to 67.
This change to one of the three pillars of the Canadian retirement income system has come at a time when many of us are already concerned with investment market volatility, rising housing costs, underfunded pensions and the possibility of interest rates rising over the next few years. All of these factors have contributed to a feeling of unease amongst Canadians who are already retired, nearing retirement or beginning to contemplate their retirement date. This has been compounded by the realization that we are also living longer than past generations and as a result our savings will have to last longer.
How much do we need to retire?
While many experts have long believed that you should aim at replacing 60% to 70% of your pre-retirement income, others have recently suggested that number could be as high as 75% to 85%.
The answer to this question however is not as simple. It is dependent on many individual factors, such as the date you want to stop working, the lifestyle that you want to lead when that happens, your marital status as well as the sources of income that will be available to you in retirement and the legacy (if any) that you want to pass on.
While there is little doubt that the retirement landscape has changed, so to has our perception of what our golden years should entail. While many still envision wintering in sun and surf, most of us realize that a phased entry into retirement spent among family and friends is the more likely scenario.
What can we do to prepare for retirement?
According to many it is a matter of simply saving more and reducing debt. This statement understates the complexity of the planning involved in determining the costs and viability of retiring. For example while some expenses such as mortgage payments, commuting costs, childcare and RSP contributions may decline, others such as health related costs may increase.
Consideration also needs to be given to the timing of when to begin government pensions such as the Canada Pension Plan (CPP). While the normal age for receiving CPP is 65, you can elect to move up this start date to as early as age 60. However, if you do so, your pension amount will be 36 % less than had you taken it at age 65. Conversely, you can also elect to delay taking CPP to as late as age 70. If you start receiving your CPP pension at the age of 70, your pension amount will be 42 % more than if you had taken it at age 65.
Thought also needs to be given to income taxes. The Canadian tax system provides seniors with several opportunities to realize tax savings. Many tax savings opportunities such as the age credit are subject to claw backs once a certain income threshold is surpassed. As a result tax planning opportunities such as pension income splitting with a spouse also needs to form part of the retirement income plan.
While retirement is often a date that we look forward to with much anticipation it comes with its own set of financial worries. Determining the lifestyle that we want to lead in our golden years is also largely driven by our financial capacity to meet the demands of our dreams. Both the Canadian retirement income and tax systems offer retirees flexibility, choice and opportunities to either split or share income with a spouse.
When it comes to pre-retirement planning and designing a retirement income all of these options should be explored in order to achieve a long lasting and stress free retirement lifestyle.
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