Canadians today face a great deal of uncertainty when it comes to their retirement. Historically low interest rates are squeezing fixed-income investments and forcing investors to consider higher-risk alternatives. At the same time, as our population ages, the country’s governments are tinkering with public pensions, which will have profound effects on when and how comfortably we can retire.
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PUBLIC PENSIONS: UNDERSTANDING THE CHANGES AND IMPLICATIONS
Driven largely by concerns that retiring Boomers will put a strain on public programs, government-provided pensions have changed (or will be changing) in ways that could affect our lives after work. These structures have traditionally supported Canadian retirees, but will now leave them with more factors and options to consider when planning their retirement income strategy.
Please note: After the Federal Budget 2016 announcement, the OAS age of eligibility will revert back to 65.
COMING SOON: NEW PRIVATE AND PUBLIC PENSIONS
Ontario Registered Pension Plan (ORPP): Set to launch in 2017 – starting with the largest employer’s in the province – the ORPP will require Ontario employers and employees to contribute an equal amount on an employee’s annual earnings up to $90,000, with contributions capped at 1.9% each. Benefits paid in retirement will be based on salary and years of contribution.3
While the ORPP promises more money for retirement, mandatory contributions will also mean less money for Ontarians to direct while they’re working. Another disadvantage is that ORPP contributions have little estate value and unlike private savings, apart from a limited benefit, cannot be passed on to heirs. Private Pensions: Canadians can also expect new private pension products in the coming years. Among these is the Personal Registered Pension Plan, which was recently made available to residents of certain provinces.
PROFESSIONAL FINANCIAL ADVICE: CONSTANT BENEFITS IN A CHANGING LANDSCAPE
Even as the retirement income landscape continues to shift, one thing remains constant: the value and benefits of professional financial advice. According to the Conference Board of Canada, the multiple benefits of financial advice include an increase in household savings, reduction of anxiety over retirement readiness, and economic gains for the country over the long term.4 In a 2012 study, Montreal-based research organization CIRANO found that households who have had professional financial advice for 15 years or longer had 173% or 2.73 times more assets than households that received no financial advice.5 The CIRANO researchers contended that seeing a financial picture of their retirement under different rates of savings and allocations makes an individual more inclined to save.
HOW MUCH WILL YOU NEED WHEN YOU RETIRE?
Some experts say Canadians should aim for a retirement income equivalent to 70% of their working income, while others say 50% is plenty. While these may be some recommended rules of thumb, there are several other important factors to consider. For instance:
1) how much will you need to save to ensure there is enough money to fund your retirement; and
2) how do you ensure your strategy will allow you to draw income from all the different sources in the most efficient manner.
To determine this, a professional financial advisor typically looks at a whole host of information and scenarios, including factors such as longevity, market fluctuations, and inflation. This comprehensive analysis allows them to build you a solid retirement strategy that includes the right mix of investment and insurance solutions to effectively align it with your goals, objectives and risk tolerance. Without professional financial advice, determining levels of retirement savings and income can become an exercise in guesswork. Retirement is too important – and fraught with unique risks – to leave to chance.
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1 Service Canada: Changes to the Canada Pension Plan
2 Service Canada: Changes to the Old Age Security Program
3 Government of Ontario: The Ontario Retirement Pension Plan: Discussing a Made-in-Ontario Solution
4 Conference Board of Canada: Boosting Retirement Readiness and the Economy Through Financial Advice
5 CIRANO: Econometric Models on the Value of Advice of a Financial Advisor
This is a general guide only and not intended to replace professional financial and tax advice in any form. Please consult a professional financial advisor on how it relates to your situation. The information provided here is accurate as of the date of publication, October 29, 2015.
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