RETIREMENT
You've saved for
retirement, but where's your plan?
ANDREW BINET
The Globe
and Mail
Published Friday,
Jun. 11 2010, 1:22 PM EDT
Last updated Tuesday, Jun. 15 2010, 6:14 AM
EDT
Catherine Khan had let her husband take
responsibility for their retirement planning. When he passed away, she quickly
found that she had a lot to learn about managing her family's savings.
Fortunately, Ms. Khan's husband had been saving and
planning for retirement since his thirties. For many Canadians, however, this
is not the case.
All Canadian baby boomers will be eligible for
retirement within 20 years However, less than half have an adequate retirement
strategy, warns a report by the BMO Retirement Institute.
The results of BMO's survey, conducted in May and
released on Wednesday, "clearly underscore the need for the country's
boomers to shift their focus from saving for retirement to retirement income
planning," the report says. Only 48 per cent of boomers approaching
retirement have begun to plan for investments and contingencies with a
financial adviser.
According to a report released by
Statistics Canada this month, 80 per cent of working Canadians
are saving for retirement. Nevertheless, only half have a good idea of how much
they actually need to save in order to sustain a comfortable standard of living
in retirement.
Saving measures, however, aren't enough to secure a
sustainable retirement, says ," says Tina Di Vito, head of the BMO
Retirement Institute. Without planning for efficient spending, "the
retirement lifestyle you were hoping for may not be sustainable," she
says.
Ms. Khan, whose daughter is starting medical
school, retired two years ago. Still, she said she is confident that she will
be able to help fund her daughter's tuition, as well as sustain a comfortable
retirement lifestyle in Lake St. Peter, Ont., because of careful planning.
When most Canadians think about retirement planning
in their thirties and forties, they consider it in terms of saving for a future
date. But RRSP contributions can become "almost like auto-pilot," Ms.
Di Vito warns.
During retirement, you begin to use your savings,
and how you withdraw and use that money will significantly effect how long it
will last. The spending decisions you make in the first five years of
retirement, she says, "will have significant implications for the rest of
your retirement years, and I don't think that people have actually come to
grips with that."
Canadians often think their health care costs are
taken care of by the government. But as we live longer, saving strategies that
account for health concerns, such as long-term care insurance, home care,
dental costs and similar health-related expenses, are becoming more important.
"The fact that we are living longer requires
our money to last as long as we do," says Ms. Di Vito.
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When people realize that they will outlive their
money, they are shocked, says Greg Kennedy, a financial planning specialist at
Meridian Credit Union. Mr. Kennedy fears that many Canadians have a big gap
between what they spend on "toys and big houses" and what they commit
to retirement.
A budget is an important first step. But what about
taxes?
"Taxes don't just disappear because you are
retired," cautions Ms. Di Vito. In planning for withdrawals from such
devices as Registered Retirement Income Funds (RRIFs), taking account of taxes
is essential.
Even if growth in an RRIF was derived from
dividends and capital gains, withdrawals are taxed as income from one's
interest or salary, which can "create unpleasant surprises," BMO's
report says. Withdrawals can shift your tax bracket if not planned carefully,
potentially leading to situations involving limited cash flow and even the
gradual elimination of old age security benefits. Tax-free savings accounts can
be a helpful way to avoid such risks.
Understanding what you are entitled to in terms of
pension payment is an essential step toward sustainable retirement planning.
Canadian Pension Plan resources are no longer enough to support the average
lifespan, and employer pensions continue to decrease, the report says.
While the monthly maximum payment to an individual
from the CPP is just under $1,000, the average cheque mailed out in 2009 was
only for about half of that, says Ms. Di Vito, who worries that Canadians often
don't fully understand how much they are entitled to.
While most people in the boomers' parents'
generation had a stable pension, the situation is not the same today. There has
been a "dramatic reduction" in pension availability, and many of the
pensions that do exist have "no guarantee of outcome," Mr. Kennedy
says.
Larger companies tend to have defined benefit
pension plans, which guarantee income throughout your retirement based on a
percentage of your salary, but most smaller companies will usually have defined
contribution pension plans. Defined contribution plans don't provide guaranteed
income during retirement; rather, your employer agrees to contribute on your
behalf into a particular plan, the sum of which you receive upon retirement.
There is no guarantee how much there will be when you retire, nor how long it
will last. Defined contribution pensions put "a lot more risk on the
individual employee," says Ms. Di Vito, as seen by those who retired in
2008 who discovered that the pension sum they received was drastically lower
than they had expected, due to the economic recession.
While the share of Canadian seniors in low-income
bands is among the lowest of industrialized countries, groups such as
immigrants and the divorced have higher rates of low income than the rest of
the population.
Immigrants who arrived in Canada after 1980 are
three times as likely as others to believe that their retirement income will
not be sufficient to comfortably cover monthly expenses, according to Statscan.
One of the important things that recent immigrants will benefit from in terms
of planning for a sustainable retirement is investigating whether Canada has a
reciprocal social security agreement in place with their country of origin. For
immigrants who have contributed to a pension policy in another country, there
are opportunities to make claims on that.
The share of divorced seniors is nearly three times
higher now than it was in 1976. The odds are high that an individual will be
single at some point in their retirement, and the chances of that person being
a woman are even higher, Ms. Di Vito says. It is also critical to account for
the implications of one partner dying before the other. Even such measures as
keeping up-to-date wills and designating the proper beneficiaries of bank
accounts can go a long way, she says.
"Retirement income planning is very, very
different from income planning and it's crucial that Canadians get the advice
that they need," Ms. Di Vito says.
Some things to consider when planning
your retirement:
·
Be consistent.
·
Know what type of pension you might be
entitled to, and how long it is likely to last.
·
If you have a partner, ensure that you
both understand your financial situation and the plans that you have in place
for retirement.
·
Understand how withdrawals from your
savings and investments will be taxed.
·
Be sure to factor in contingencies like
medical expenses.
·
If you are new to Canada, see if you
are eligible to claim social security benefits from your home country.
FOR A FREE RETIREMENT INCOME CHECKUP
& FREE RETIREMENT INCOME PLAN PLEASE CONTACT:
ROBIN BEHAR,
MBA
PENSION INCOME CONSULTANT
PHONE:
515-739-8157
EMAIL:
robin.behar@gmail.com