Sorting out the retirement savings superhighway
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Sorting out the retirement savings superhighway
Although you may prefer to put retirement planning on the back-burner due to the uncertain economy, markets and household finances, this delay tactic won’t get you any closer to your long-term financial goals.
It’s a better idea to take the time to consider the range of retirement savings options – including ones that satisfy today’s economic realities – make a plan, and stick with it. The reward could be a good night’s sleep, knowing you’re on the right path.
What are your options?
It’s not easy to sort through the various savings plans that go by many names and confusing acronyms like RRSP, TFSA and DCPP.
Although we’ve broken out the basic category options in the chart on the following page, it may also help to think of each of them as a separate ‘highway’ to your destination – retirement. First, you choose the highway based on your basic needs and advantages of that route, you then must also choose the ‘lane’ you want.
For example, you might select the ‘slow’ lane, and buy an investment product like a safe, secure guaranteed fund. Or you may prefer the ‘fast lane’ and select products like mutual funds or stocks. It all depends on what feels right to you and what fits your needs, including how fast you want to get there and what risks you’re willing to assume.
Of course, this is a very simplified explanation. For one thing, saving for retirement doesn’t limit you to choosing just one highway or a single lane. You can actually steer multiple cars toward your destination at the same time. You can also shift lanes (i.e. change investments over the course of the journey). But remember, you must always be mindful of factors like your gas gauge, your speed, road conditions and your progress towards your end point.
The main ‘highways’ of retirement saving
|Category||Also known as...||Taxable earnings?||Suited for short or long-term savings?||A few considerations|
|Registered plans||Registered Retirement Savings Plan (RRSP)||Tax deferred until withdrawn from plan.||Long-term||Your savings grow tax free until you withdraw them and you receive an immediate tax deduction for your annual contribution.|
|Tax-Free Savings Account (TFSA)||Tax exempt||Short or long-term||Easy to withdraw, so a TFSA can also serve as an emergency fund.|
|Employer-sponsored plans (Registered)||
Defined Contribution Pension Plan (DCPP),
Deferred Profit Sharing Plan (DPSP)
|Tax deferred until withdrawn from plan.||Long-term||
Easy to participate at the workplace and cost savings as part of a group.
Many employers offer win-win matching contributions.
Employees Profit Sharing Plan (EPSP),
NREG plans or ad hoc savings accounts
|Taxable annually||Short or long-term||
Convenient and easy to cash in if needed.
Since income is taxable, this could be a good choice after you’ve maxed your registered/non-taxable contributions.
|Government sponsored retirement supplements||
Canada Pension Plan (CPP)/Quebec Pension Plan (QPP),
Old Age Security (OAS),
Guaranteed Income Supplement (GIS)
Designed to provide an income during retirement.
See details on government websites.
|While most Canadian taxpayers will qualify for these government stipends, they are only meant to provide partial income in retirement. It’s critical to accumulate other savings to meet your standard of living.|
Remember, with the exception of government sponsored retirement supplements, your income is not guaranteed and your return depends on the investments you choose and their performance.
Weighing the pros and cons
There are many things to consider when deciding which retirement savings category – or preferably, which combination of categories – is right for you.
First and foremost, don’t pass up the opportunity to participate in a workplace or group retirement plan, such as those offered through Sun Life Financial. First, through such plans your employer offers numerous tools and options to make it easy to contribute, such as automatic withdrawals from your paycheque or helpful retirement planning resources.
By investing in a group plan, you can save thousands of dollars over the long term since group plans often provide lower fees than are traditionally available to an individual investor. Also, if your company plan matches your contributions, then opt to contribute to that product first since your savings will grow instantly.
One big reason for finding the money to make a contribution to an RRSP: you’ll get an immediate pay-back in terms of a tax deduction that can reduce your tax burden and may provide you with extra cash for other goals, such as paying down the mortgage or topping
up your savings.
Another important factor when considering which ‘highway’ is your liquidity needs. That is, how likely is it that you’ll need to get at your cash unexpectedly, to pay for an emergency expense or cover a cash crunch? In those cases, the TFSA can be advantageous because you can save funds in a wide range of investment choices tax-free, and withdraw them without penalty if you need.
Similarly, non-registered savings, or specific non-registered savings plans, can be cashed in at any time. However, you do not enjoy the benefit of tax-free savings growth while your funds are within a
non-registered plan. For that reason, many persons only allocate ‘excess’ funds to non-registered investments after all their registered contribution limits are maximized.
Choosing the right investing lane
Once you’ve chosen your retirement savings highway(s), the next step is steering into the right lane – the underlying investments that you hold within each type of retirement plan. This takes a bit of time since there are so many options today, including mutual funds with different investment styles (such as growth, income or balanced funds) and areas of concentration (such as Canadian or international equities). And every day there are new investment alternatives that sound like express lanes, short cuts, or peaceful scenic routes.
Don’t worry, you can make wise choices by using the retirement planning and asset allocation tools at your disposal at mysunlife.ca. Some individuals may also want to consult a qualified financial advisor to help them work through these decisions. These resources help you decide your target retirement age, your tolerance for risk and other considerations, in order to devise an investing plan to meet your goals.
The important next step is following your plan. Don’t be tempted by complicated investments that don’t match the principles you selected when you created your plan. And equally important, don’t become frustrated by short-term ups and downs, or become distracted from saving within your plan.
Remember that, for most of us, retirement is a long-term goal that takes time and patience to see results. You should review your plan and your investments occasionally to make sure they still reflect your priorities, but the fewer sudden course corrections you make, the better.
Chart your course and keep your eyes on the road
So while the possible routes may at first seem overwhelming, the reward of reaching your end destination – a comfortable retirement – is worth the time spent charting your course. With the right tools, advice and a bit of thoughtful planning you’ll be cruising to your financial goals.
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 firstname.lastname@example.org 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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