Gordon Pape
Feb. 19, 2020
Almost two-thirds of Canadians fear they will not have enough money to fund their retirement. But most of them aren't doing anything much about it.
Those are two of the surprising facts to emerge from a new survey of more than 1,500 people by Leger on behalf of Questrade Inc.
According to the findings, younger people (aged 18-54) are the most concerned. But a high percentage of them are not planning to make any changes in the way they're doing things.
Why? Because they're content to follow the advice of their financial adviser (25 per cent), or they're overwhelmed just thinking about it (23 per cent), or they're not aware of other alternatives or don't have time to research them (31 per cent).
Taken as a whole, the survey reveals that many Canadians suffer from a lack of knowledge when it comes to retirement planning - this despite extensive media coverage, especially around this time of year, and many books on the subject, including some of my own.
So, let's try to demystify the retirement planning issue. Start the process by asking yourself three questions.
1. Do I really need to worry? If you're a member of a defined benefit pension plan, especially one in the public sector, probably not. These plans guarantee income for life, usually at a level that will enable you to maintain your standard of living. Unfortunately, according to 2018 data from Statistics Canada, only about 25 per cent of the population belong to such plans. The rest of us should worry.
That includes those who belong to defined contribution pension plans, which are becoming more common. These plans provide retirement income, but it's not guaranteed. The amount you receive will depend on how well your investments in the plan perform over the years.
If you have no plan at all, your retirement income is entirely on your shoulders. If you don't put any money aside, you'll have to live off the Canadian Pension Plan, Old Age Security, and the Guaranteed Income Supplement. Together, they may provide a subsistence income, but not much more.
2. How much should I save? If you're in the "need to worry" group, the next step is deciding how much you need to save. The short answer is more than you might think. And the older you are when you start, the higher that number gets.
I can't give you a precise target because it depends on several factors including your time horizon and your financial needs after retirement. But look at it this way. If you want an income of $40,000 a year after retirement, you would have to accumulate a fund of $800,000 to withdraw that amount at a five per cent rate.
If you're 35 now and plan to retire at 65, you have 30 years to build your fund. At a six per cent average annual compound rate of return, you would need to contribute about $10,000 a year to achieve that.
3. Where should I save? A tax-sheltered plan, without question. We are fortunate to have two choices: RRSPs and TFSAs. The annual maximum for TFSAs is $6,000, so if you can contribute more the RRSP is the better choice. It's also best for those in a high tax bracket because you can deduct your contributions. TFSAs offer no tax advantage, other than tax-sheltering within the plan. They work best for lower-income people.
Work with an advisor to figure out the answers to these questions and put your plan in place. You'll be happy you did.
Copyright 2020. Toronto Star Newspapers Limited. Reproduced with permission of the copyright owner. Further reproduction or distribution is prohibited without permission. All Rights Reserved.
This article was written by Gordon Pape Advice from The Toronto Star and was legally licensed by AdvisorStream through the NewsCred publisher network.
