Retirement Readiness – Steps to Building a Retirement Plan

November 8, 2023

When should I start saving for retirement? How much savings will I need in retirement? Will I have enough to retire? These are common questions for many people and there are differing viewpoints since every person’s expectations for retirement are different. It is important to understand your retirement goals and build a retirement plan to achieve those goals.

A retirement plan includes information that defines your vision for retirement. It involves calculating your cash inflows and outflows and projecting future estimated needs for this specific period. This process can begin with four key considerations:

1. Retirement date: When do you plan to retire? The amount of time in retirement is directly tied to the amount of savings needed. The earlier your retirement age, the less time you’ll have in the workforce to earn money and save.

2. Lifestyle: You will want to define what your preferred retirement lifestyle will be including the types of activities you plan to take part in. This could include spending time with family, volunteering, traveling and enjoying new hobbies that may require additional dollars in your retirement budget.

3. Future residence: Where do you plan to live? Will you remain in your current home? If you change residence, will this move increase or decrease your current living costs?

4. Life Expectancy: Although none of us can ever know exactly what our life expectancy will be, there are some indicators which can be considered such as existing health issues or longevity in your family history and genetics.

Calculating How Much is Needed to Meet Your Retirement Goals

Estimate your retirement expenses based on the lifestyle and future residence goals in today’s dollars, remembering that your expenses in retirement will alter from your current expenses. For example, a couple may decide they can make do with one vehicle instead of two, or a person might modify their wardrobe expenses to no longer include work clothing. Health care costs may increase as a result of the loss of employee health benefits and the possibility of additional health care requirements. Once your retirement expenses are calculated in today’s dollars, then project these expenses to your expected retirement date using the average inflation rate.

The next step is to estimate the amount of before-tax income needed so there is enough after-tax income to support the expected expenses. Typically, retirement income is lower than during a person’s working career and that means average tax rates can be expected to have somewhat decreased. Keep in mind how many years you will have in retirement (based on your expected retirement age and estimated life expectancy) as annual income required will increase year- over-year due to cost of living increases and expected rate of return on the various types of investments you hold.

Where Will Retirement Income Come From

Government Programs

Canada Pension Plan (CPP) - taxable benefit received based on your average earnings throughout your working career.

Old Age Security (OAS) - taxable benefit received at age 65 with the payment based on how long you have lived in Canada or specific countries after the age of 18.

Guaranteed Income Supplement (GIS) - non-taxable benefit available to low-income Old Age Security pensioners with the supplement based on income and marital status.

Employer-Sponsored Retirement Plans

Defined Benefit Pension Plan - pays a certain amount of monthly retirement income for life based on a calculation the employer uses, typically incorporating years of service and salary history.

Defined Contribution Pension Plan - a contractual pension in which the employee and the employer make contributions into the Registered Pension Plan (RPP). The accumulated monies are turned into an income stream upon retirement.

Individual Personal Savings

The remainder of an individual’s retirement income will come from their own personal savings plans which may include: TFSAs, non-registered accounts or real estate property income. An RRSP is a program specifically designed to assist Canadians with saving for their retirement. All these options have specific features, benefits and differing taxation implications, so speak with an advisor to understand the options.

Setting-Up a Retirement Savings Program

Once each individual has identified how much they will need to save from their employment earnings to supplement government and any employer pension plans, it is important to set up a savings program. This includes determining your current budget. After fixed expenses are paid, what is left over and how much of this will be allocated to retirement savings? ‘Pay yourself first’ by setting-up a dedicated amount that will automatically go into retirement savings on payday. Learn which types of investments meet your objectives, risk tolerance and time horizon. Investment types include mutual funds, stocks and bonds and Guaranteed Investment Certificates (GICs).

Planning early will reduce the stress that can be experienced later in life when assessing retirement savings. The earlier in life you begin saving for your retirement income needs, the better. Saving early means your money will have a longer period of time to grow through interest and market growth. If you wait and rely on saving from your earnings later in life, you will have less time to accumulate through growth and that means more of your own capital will need to be saved.

FirstOntario Credit Union in partnership with Credential Securities and Credential Asset Management Inc. has an experienced team of advisors specializing in various areas of wealth management including retirement planning, investment management, estate and succession planning, individual financial risk management and more. These professionals are here to help you plan for the future and reach your financial goals. Visit FirstOntario.com/Investments or call 1-800-616-8878 ext. 1700 to connect with a FirstOntario advisor and start growing your wealth today – your way.

Mutual funds, other securities and securities related financial planning services are offered through Credential Securities, a division of Credential Qtrade Securities Inc. Credential Securities is a registered mark owned by Aviso Wealth Inc. Mutual funds and related financial planning services are offered through Credential Asset Management Inc. Unless otherwise stated, mutual fund securities and cash balances are not covered by the Canada Deposit Insurance Corporation or by any other government deposit insurer that insures deposits in credit unions.