Many Canadian employers see DB plans, where retirees receive a guaranteed payout every month (sometimes indexed to inflation), as too expensive. And while the average time spent working for the same employer has actually risen over the last five decades, according to Statistics Canada data, spending a lifetime at one job—and collecting decades of pensionable earnings in the process—is a rarity these days.
“My dad worked for a bank for 35 years. That was the only job he ever had,” says Kenneth Doll, a fee-only Certified Financial Planner based in Calgary. “Those days are gone.”
Many Canadians must make do on partial pension coverage: either a small pension based on a decade or so of service, a defined (DC) contribution plan—where employers don’t provide backup funding if a plan underperforms—or a group registered retirement savings plan (RRSP), possibly with matching funding from their employer. Some Canadians don’t have a pension at all. “There is a massive decrease over the past 30 years in the number of defined-benefit pensions,” says Adam Chapman, financial planner and founder of YESmoney in London, Ont.
These pensions won’t pay all the bills like a traditional defined-benefit plan. So, what can people with insufficient pension coverage do? Ultimately, the answer lies in balancing the small (or not so small) guaranteed income from a pension and pushing the limits of other income streams.
How to plan your retirement now
Every Canadian’s circumstances are different, and financial planners avoid speaking in generalities. But the earlier you start planning for retirement, the better. This applies whether you have nothing except the Canada Pension Plan (CPP) and Old Age Security (OAS), a DB plan indexed to inflation and guaranteed for life, or something in between.
First of all, sit down and figure out how much you plan to spend on life in retirement. Joseph Curry, a financial planner and president of Matthews Associates in Peterborough, Ont., says that when clients come to him, he maps out these details—as well as their expected income from CPP and OAS. All other income sources, including any pension income, are thrown in there, too.
“We have clients who would spend as little as, you know, $2,000 a month, all-inclusive,” Curry says. “And we have clients who would be spending in excess of $200,000 a year in retirement.”
One trick that works well is to max out any RRSP contribution room, then take the tax savings and throw them into a tax-free savings account (TFSA) for future retirement income. This can be tricky for Canadians with existing pensions, because their own and their employer’s pension contributions are deducted from their RRSP contribution room. For robust defined-benefit plans like the Ontario government’s Public Sector Pension Plan, it can remove thousands of dollars worth of contribution room a year.
Brennan Doherty
Source link
