On behalf of Sun Life, welcome to our Save for retirement now session. The focus of this topic is to introduce you to retirement planning.
Times have changed. In the past, people had one job for life and few financial options. Now, we switch careers, face many financial choices, and have diverse family structures. We're also living longer than our parents and grandparents did. This means we must make more decisions about money. It’s important to think about how you want to live in retirement. And to give consideration to protect your savings against unexpected events. Planning ahead can help you maintain your lifestyle and ensure a secure and enjoyable retirement.
Canadians are living longer than prior generations, but we're not planning for it. Most of us underestimate our lifespan by five years. Think about that - five years without income, at a time where you could have higher health care and housing costs. A recent Sun Life Barometer study shows Canadians expect to retire at 64. With longer life expectancies, where many will reach age 90 and beyond, we need to save more than prior generations did in order to cover a longer retirement.
<On the slide>
- Probability at age 65 of living to the following ages:
- Female has a 76% probability of living to age 80. Male has a 65% probability.
- Female has a 59% probability of living to age 85. Male has a 45% probability.
- Female has a 38% probability of living to age 90. Male has a 24% probability.
- Female has a 17% probability of living to age 95. Male has a 9% probability.
- Source: The Canadian Pensioners’ Mortality Table published by the Canadian Institute of Actuaries, 2014. Based on assigned sex at birth.
<End of slide>
Inflation poses a significant risk to wealth building, eroding purchasing power over time.
The Bank of Canada targets a 2% inflation rate, but recent years have seen dramatic increases. At just 2% annual inflation, prices would rise substantially over 20 years: a $100 grocery bill becomes $149, a $3.50 coffee jumps to $5.20, a $50,000 car inflates to $74,300, and a $675,000 house skyrockets to $1,000,000.
As investors, we must ensure our returns at least match, and ideally exceed, inflation rates. If we fail to do so, especially during high inflation periods, we'll experience a decline in our standard of living. To truly grow our savings, we need to outpace inflation consistently over the long term.
Retirement can span many years – 25, 30, or even more. As we age, spending will often shift from leisure to health care. And, over time, needs and wants often change due to age, health, and unforeseen events such as illness or death of a spouse, needs of children, grandchildren, or elderly parents.
When planning for retirement, one of the first steps is to think about what you see yourself doing in retirement. Your desired lifestyle has a major influence on your retirement planning. Some people want to work part time in retirement. Others don’t. Some people want to stick close to home, while others want to travel the world. It’s essential for you to think about your needs, wants and dreams. What makes up your retirement vision? This isn’t anybody else’s retirement – it’s yours. So, what do you want it to look like?
Some expenses will most likely stay the same (keeping in line with inflation), while others will decrease, and some will increase.
Basic needs of living such as groceries and utility bills may stay the same, only increasing as they do today with inflation. Work related expenses will decrease, such as commuting and saving for retirement. Lifestyle expenses such as hobbies and travel may increase, as may health-care and other living expenses as you age.
In Canada there are typically three sources of income at retirement. There are government sources, such as Canada Pension Plan and Old Age Security. There are primary sources, such as company sponsored retirement programs and personal RRSPs. And there are secondary sources such as properties and other savings.
Canada offers three main government-sponsored retirement programs:
1. The Canada Pension Plan or Quebec Pension Plan which provides benefits based on your employment earnings and contributions to the program. You can start receiving it at age 65, or as early as age 60 with reduced benefits. Delaying until age 70 increases your benefit by 42%.
2. Old Age Security is Canada's largest pension program. You qualify at 65 if you're a citizen or legal resident who's lived in Canada for at least 10 years after turning 18. Your benefit depends on your years in Canada, your age when you start receiving the benefit, and your net retirement income. Delaying until age 70 increases your benefit by 36%.
3. The Guaranteed Income Supplement offers tax-free benefits to low-income seniors who receive OAS and live in Canada. Marital status and income determine the actual amount received.
You must apply for these benefits about six months before you want them to start. Carefully timing your CPP/QPP and OAS payments can help you maximize your retirement income.
Canada offers various investment accounts to help you save on taxes and plan for your future. To choose the right account, ask yourself why you're saving and whether it's a short or long-term goal.
Tax-deductible investments reduce your taxable income in the year you contribute. This means you pay less income tax now.
Tax-deferred investments delay taxes until later. You don't pay tax on earnings like interest, dividends, and capital gains until you withdraw money.
Registered products, such as Registered Retirement Savings Plans and Defined Contribution pension plans, offer both tax-deduction and tax-deferral benefits.
Tax-free investments, like Tax-Free Savings Accounts or TFSAs, grow tax-free. You pay no tax on earnings during the investment period or when you withdraw.
Non-registered investments use after-tax money. They don't offer tax deductions or deferrals. While withdrawals aren't taxable income, they may result in capital gains or losses. You'll pay yearly taxes on investment income and capital gains, but you can use capital losses to offset gains.
Many Canadians use RRSPs to save on taxes and for their retirement. RRSPs can also be used to save for a house.
To contribute to an RRSP in Canada, you must be under 72 years old. You must also be a Canadian resident for tax purposes and have earned income. RRSP room becomes available after filing your first tax return once you have earned income.
Contributions, within your personal limit, are tax-deductible. This means you pay less income tax now. Plus, contribution and investment earnings are tax deferred until you withdraw them. In the year of a withdrawal, the full amount is included in your taxable income.
Watch that you don’t over-contribute. We each have a unique RRSP contribution limit, and it’s up to you to monitor your own limit.
Limits include the current year amount, plus any unused room from prior years, minus any pension adjustments. Pension adjustments come from contributions made on your behalf into pension plans or deferred profit sharing plans. They lower your RRSP limit in the following year. This makes sure that Canadians who have pensions or DPSPs don’t have a tax advantage over those that don’t.
You share your limit with all RRSPs you contribute to, including spousal RRSPs. Find your limit on your most recent Notice of assessment or CRA My Account.
You have three options for RRSP contributions: your own plan, a spousal RRSP, or a combination of both.
Spousal RRSPs offer an excellent opportunity for income splitting, helping couples balance their retirement income and minimize taxes.
A spousal RRSP works like a regular RRSP, but it's registered in your spouse's name.
As the contributor, you receive the tax deduction for eligible contributions, which count towards your personal RRSP limit, not your spouse's.
A withdrawal from a spousal RRSP is taxed back to you if withdrawn before 3 years have passed since the last spousal contribution. The timing of contributions and withdrawals should be considered carefully.
Canadian residents 18 or older with a valid Social Insurance Number can contribute to a TFSA. In provinces or territories where the age of majority is 19, contribution room will start at age 18, but they can’t open a TFSA till age 19.
Contributions to a TFSA are made with after-tax dollars. This means that you’ve already paid tax on the money. Thus, contributions aren’t deductible for income tax purposes.
It’s up to you to know and track your TFSA limit. You share your limit with all TFSAs you contribute to. You can use the CRA’s My Account for Individuals service on Canada.ca to check your limit.
Investment growth in a TFSA is generally tax-free, even when you withdraw it, making them a great way to supplement other forms of retirement savings like government programs and other personal savings. They can provide a way to make major purchases without making large withdrawals from a taxable account. This may be useful for tax planning purposes.
<On the slide>
A picture showing that your TFSA limit is made up of the Current year’s TFSA limit plus unused TFSA room, plus withdrawals from previous years. <End slide>
Secondary sources of income in retirement can include real estate, such as rental property or a vacation home. It can also include selling, or downsizing your principal residence. And it can include borrowing on the equity of your home to invest in non-registered investments.
Other types of secondary sources of retirement income could include:
- Stocks,
- Bonds, and
- Some life insurance policies.
<On the slide>
*Cash surrender value or investments within a life insurance policy. <End slide>
There’s no age limit with a Non-registered Account. You can continue adding money and saving with an NREG during retirement.
Contributions to an NREG are after tax. This means contributions made to the NREG are after income tax deductions. Withdrawals aren’t considered taxable income, but they may result in a taxable capital gain or loss.
NREG’s are a great way to supplement other forms of retirement savings like pension plans and RRSP’s. Just remember, you’ll be taxed each year on any investment income and/or net capital gains. We suggest working with a tax advisor for advice related to capital gains and losses in your specific situation.
We’ve provided you with a lot of information today. You might be wondering about your own situation and how this information may apply to you.
There are many tools at Sun Life to assist you. We encourage you to explore them. This is also a good time to reach out to your advisor if you have one, or to find one if you don’t.
Advisors are trained to help clients stay focused on their objectives and timelines. A 2020 study reveals that clients working with advisors tend to spend less, save more, and manage money less emotionally. A skilled advisor can be your ally in achieving your retirement goals.
<On the slide>
A circle chart showing how working with a financial advisor increases wealth across 3 time frames (4-6 years, 7-14 years and 15+ years). <End slide>
<On the slide>
The information provided is of a general nature and can not be construed as personal financial or legal advice. Neither Sun Life or its affiliates guarantees the accuracy or completeness of any such information. This information should not be acted on without obtaining counsel from your professional advisors, including a lawyer, notary, tax professional, or financial advisor (registered as Financial Security Advisors in Quebec) as may be applicable to your individual situation.
Group Retirement Services are provided by Sun Life Assurance Company of Canada, a member of the Sun Life group of companies. <End slide>