Getting your bearings: making sense of your savings and retirement options
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Getting your bearings: making sense of your savings and retirement options
Whether you’ve recently started on your career path or you’re a veteran member of the workforce, now is the time to think about saving for retirement and other financial goals.
That’s not always easy when we’re bombarded by so many acronyms used to identify today’s investing and savings choices. With terms like DCPPs, RRSPs
and TFSAs tossed around, it can seem quite overwhelming.
With a bit of knowledge – and, for certain people, help from a qualified financial advisor – you can get your bearings, and make smart financial decisions to
help ensure your savings plans are on track.
Why it matters?
Even if retirement seems far away, it’s important to think about it now. While most Canadian taxpayers will qualify for a government stipend such as the
Canada Pension Plan/Quebec Pension Plan, Old Age Security or other supplements, they are only meant to provide partial income in retirement.
It’s critical to think about other optional savings programs to help ensure a retirement income that reflects your standard of living. You should also
consider other savings methods to meet additional short-term financial needs.
Sorting it all out
The first step is figuring out which savings plan suits you, what type of workplace retirement plan you may already be enrolled in, or the options at your disposal.
At a most basic level, you can decide to accumulate personal savings that are non-registered, meaning that any income you gain is taxable. There are many
choices such as bank accounts, Canada Savings Bonds, guaranteed investment certificates (GICs) and others. These products can help you save for nearterm
goals, like a vacation, an emergency fund or longer-term objectives such as a home ownership. The tax advantages of a Tax Free Savings Account, discussed later, provide a terrific alternative for nonregistered savings.
Or, to encourage Canadians to save for retirement, the Federal Government allows you to take advantage of registered savings vehicles through which the tax is deferred – and your savings grow tax-free – until you withdraw them from the plan. These are called Registered Retirement Savings Plans (RRSPs), and can include many of the same types of investments that are offered in non-registered savings plans, such as mutual or segregated funds, guaranteed funds, stocks or bonds. Each year, you can contribute up to a maximum annual amount, based on your income and past contribution room, to your RRSP. See your Notice of Assessment from the Canada Revenue Agency.
Are you part of a company pension or savings plan?
While all members of the Canadian work force over age 18 automatically contribute to the Canada Pension Plan mentioned above, many also benefit
from a pension or retirement savings plan offered by their employer.
These registered pension plans generally fall in two categories: Defined Contribution Pension Plans (DCPP) or Defined Benefit Pension Plans (DBPP). DCPPs are more common these days. They are structured so that both you and your employer contribute to your plan each year, but you must decide how to invest these contributions. Most employer DCPPs give you a range of investment options to reflect your goals and investment knowledge. With a DCPP, benefits are determined by the amounts you and your employer contribute and the performance of the investments chosen.
A DBPP provides an individual with a specified income for the duration of their retirement. Usually your employer contributes on your behalf (you may also need to contribute) and your employer decides how to invest the funds. You don’t have to make any decisions and you don’t pay tax until you receive the benefits. Even if you are part of this type of plan, it’s wise to accumulate extra savings for your short- and long-term goals, or in case you switch jobs and your DBPP is not fully transferrable.
Saving with workplace profit sharing
Some employers may offer an Employee Profit Sharing Plan (EPSP) that allows employees to share in the business profits. While there are many rules
about how payments are made, employees receive the profit sharing funds regardless of their own performance or contribution, whereas variable pay plans often set criteria based on an employee’s work performance.
It’s important to note that EPSP members must pay tax annually on the amount allocated to them. Alternatively, some employers set up a Deferred Profit Sharing Plan (DPSP) that allows the employee to delay paying tax until they take funds from the plan, similar to an RRSP. Only employers can contribute to a DPSP. Employers may also offer to pay your EPSP share directly into a Group RRSP.
Other savings options
There are also many savings vehicles to help build a nest egg for other near-term goals, besides the basic ‘non-registered’ options mentioned earlier. For example,
the Federal Government offers a Tax Free Savings Account (TFSA) that allows anyone over 18 to invest up to $5,000 each year in a range of investments. You
don’t get a tax deduction, but all growth earned in the TFSA is tax-free and you can withdraw the funds at anytime without paying tax.
Where to start?
With so many choices, it’s important to determine which ones best fit your financial goals, considering your age, time horizon until retirement and other
priorities. For example, since RRSPs are intended to save for retirement, there can be tax penalties for withdrawing funds early. Therefore, you should consider
other ways to save for short- and long-term goals, such as a non-registered savings vehicle. A TFSA can make a good emergency fund, since it may be easily cashable, depending on the investments you choose.
It is important to talk to a qualified financial advisor who can explain these issues in detail and help you make wise choices, based on your own circumstances. A little planning today can help you chart your bearings for a secure financial future on the not so distant horizon.
Savings options at a glance*
|Examples of investment choices||Taxable earnings?||Suited for short- or long-term savings?||Fixed return?|
|Defined Contribution Pension Plan||Range of investment options.||Tax deferred until withdrawn from plan. Immediate tax deduction provided for employee contribution.||Long-term.||No. Return depends on investments chosen and their performance.|
|Defined Benefit Pension Plan||Investments usually determined by employer.||Tax deferred until withdrawn from plan.||Long-term.||Yes. The Plan sets specific income payments in retirement.|
|RRSPs||Same as DCPP.||Tax deferred until withdrawn from plan. Immediate tax deduction also provided.||Long-term.||No. Return depends on investments chosen and their performance.|
|EPSP||Employee may receive as a cash payment or other options such as company shares.||Taxable annually.||Short- or long- term.||No. Payments depend on business profits and EPSP rules.|
|DPSP||Same as DCPP.||Tax deferred until withdrawn from plan.||Short- or long- term||No. Payments depend on business profits. DPSP rules, investments chosen and their performance.|
|TFSA||Same as DCPP.||Tax exempt.||Short- or long-term||No. Return depends on investments chosen and their performance.|
|Non-registered savings||Bank account, GICs, savings bonds, mutual funds, etc.||Taxable annually.||Short- or long-term||No. Return depends on investments chosen and their performance.|
|Government sponsored retirement supplements||Canada Pension Plan (CPP)/Quebec Pension Plan (QPP), Old Age Security (OAS), Guaranteed Income Supplement (GIS).||See details on government websites such as http://www.hrsdc.gc.ca/eng/oas-cpp/index.shtml|
* Seek professional qualified advice and/or additional information for full details, regulations and rules related to all savings and investment vehicles mentioned.
Simply call Sun Life Financial’s Customer Solutions Centre at 1-866-224-3906, Option 1, any business day from 8 a.m. to 8 p.m. ET., or consult with your financial advisor to discuss your retirement plan, and determine which options suit your needs to realize your vision of retirement for you.
If you have a general question or suggestion about this newsletter, please send an e-mail to email@example.com or write to my money At a Glance Newsletter, Group Retirement Services Marketing, Sun Life Financial, 225 King Street West, Toronto, ON M5V 3C5.
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