Canada Can Do More for The Retirement of Its Citizens

Canadian pension system can be improved a lot more to help preparing for the retirement of its people. We must have a positive view toward the future retirement in Canada. Retirement should not be viewed as burden of the society but rather as a way of paving a new road for better contributing to the society, a new force of itself when the percentage of aging Canadian population is increased in the general public.

The pension system in Canada rely on four components:

1. The Canada Pension Plan (CPP) pension benefit is a benefit depending upon the time and the amount of contributing during employment time. The amount of contributing to the plan is set by government and tend to increase to accommodate the aging population. The retirement age will be raised to 67 in 2023. It is a government measure to deal with the increased aging population and it is understandable, but the government could commit to do more for this concern. Extension of pension at the provincial level is worth to consider. Other tax incentives similar to RRSP for mortgage payment also help.

2. The Old Age Security (OAS) is a benefit depending upon residence time in Canada, that includes the Guaranteed Income Supplement (GIS), another benefit received if the income of retiree is below certain threshold. If the spouse is between 60 and 64 and the other received GIS, she or he also eligible to receive Allowance, a benefit to raise the family income to a certain level determined by government. 

3. Employer Pension Plan: many large companies used to have retirement pension program set up for employees. This type of pension is still strong with government sponsored plan but diminishing with companies of the private sector in the recent years. The government can engage in conversation with companies to find way that encourage companies to keep the pension plan or even increase the contribution to the plan through tax incentive etc...

4. Individual registered retirement saving plan (RRSP) is a governmental tax incentive saving. Individual can make yearly contribution up to a limit and get the personal income tax reduced, depending on the tax bracket the tax payer will get the tax refund more or less. In the current law this retirement saving will be converted to a Retirement Income Plan such as Registered Retirement Income Fund (RRIF)at the age of 71. RRSP withdrawal will be added to other income and will be taxed at that tax bracket. Withdrawal after 65 or when your income is low will be taxed much lower. At 71 you must withdraw money from RRIF according to a schedule determined by government, the first year is usually about 10% of the fund and diminished afterward.

Recent polls suggested that people are planning to work past age 65, some are until 70. The economic condition was not favorable for many decades due to globalization and global recession. The employment was uncertain. The stock market is jittery. Still with some saving discipline and commitment of Canada government, Canadians still can be able to retire at 65. The pension system of Canada is one of the strongest in the world according to 2013 Mercer Global Pension Index. Although the housing price in the last twenty years had caused some saving problem for Canadians but with some good budget balancing there is still good saving in the long term for this purpose.

Retirement in Canada

Currently we can apply for Canada Pension at the age of 60 for a permanent reduced amount (for 2012 is 0.52% per month; for 2013 is 0.54%; for 2014 is 0.56%; for 2015 is 0.58% and for 2016 is 0.60%). From 2012 to 2016, the government will gradually change this early pension reduction from 0.5% to 0.6% per month. This means that, by 2016, if you start receiving your CPP pension at the age of 60, your pension amount will be 36% less than it would have been if you had taken it at 65.  If you were born in 1956 (you are now 57 in 2013) and want to retire at 60 (in the year 2016), your pension will be reduced 0.6% per month prior to 65. (http://www.servicecanada.gc.ca/eng/services/pensions/cpp/pdf/ISPB-348-11-10_E.pdf)

The Old Age Security (OAS) is the basic benefit that can only be applied at 65 and if you are not in Canada for 40 years, the amount will be prorated, based on the number of years you have lived in Canada. The full benefit for 2013 is $550.99 per month. If you had worked for the same long period of time and your contribution made to CPP at an average earning, your CPP could be at the maximum or about $1012.50 for 2013 rate.

When applying for OAS you also apply for the Guaranteed Income Supplement (GIS) at the same time in the same application form. It depends on your personal income of prior year (issued by Canada Revenue Agency on your income tax return) your GIS amount will be determined accordingly, this monthly non-taxable benefit can be added to your AOS pension. If you receive GIS and your spouse or your common-law partner is between 60 to 64, he or she also can receive Allowance benefit as well.

http://www.servicecanada.gc.ca/eng/services/pensions/oas/pension/index.shtml

So, if you lived your whole life and worked the same number of years with an average earning in Canada, your pension will be in good shape. The basic benefit that you and your spouse receive from Canada pension system plus some extra saving will make your living standard not far off from the living prior to retirement - it will be in the range from 50 to 70% of it. If you retire early, you only rely on pension income (including company pension benefit if you have one), so you have to use your saving until you are 65. Planning for early retirement that includes the plan for saving is the key. Again your life style will play a big role in your retirement strategy. But the possibility is real to achieve an early retirement in Canada.

Retirement-Life of The Golden Years

Why we want to retire?

There are many reasons why we want to retire. It could be too much stress at work or health is not in good condition... When we approach the retirement age, 60 or over, we often think more about it. Obviously, there is certain pressure from work or from activities we earn a living.

The answer is clear, we want to get out of the miserable situation as quick as possible, otherwise we will still continue with our job. Some people are lucky having the job they love. They will think less or never think about retirement perhaps.

But retirement actually is a joy rather than a situation that we are forced to accept. That is a goal we want to achieve. So we have to prepare ourselves to reach the goal. Retirement is a joy because we want to live our life to the fullest for ourselves, not to work for somebody. In this sense, retirement is not meaning stop working but rather doing or caring for what we love. Life is short and fragile as we all know.  So try to regain our life seems to be a noble thing to do.

Of course, first of all we need to have some kind of confidence in our financial matter. We need a decent house to shelter, to meet friends and to comfort our family...For an average person who lives in this materialistic world, everything must be thought out in a relative term. As we all known, taxes, fees and interests are the main causes of reducing our wealth. There are so many kind of taxes: personal income tax, property tax, sale and services taxes...Interests from the money we borrow such as mortgage, car loan...are large sum of lost money.

In Canada, contribution to RRSP (Registered Retirement Saving Plan) will help you to get back some tax refund. If you can maximize the contribution every year, depending on your tax bracket, the refund could be substantial. You can save this extra money in TFSA (Tax Free Saving Account) and invest this money further for your retirement. You also can use this money to pay down your mortgage. Mortgage is a large amount of money with very big interest to pay. If you already accumulated a sizable sum of money in RRSP you can request bank to set up a Self-Directed RRSP and mortgage your house yourself. This form of investment will help you to pay the interest to yourself instead to the bank. That is a great way to save money. 

Some thoughts about preparing for the retirement: House is a shelter but also good investment if the market is favorable. You can down size at retirement time and have some extra money in your pocket. Owning a bigger house means paying more property tax, higher maintenance cost and larger utility bills. Interest cost could be sheltered in Self-Directed RRSP. Credit card balance must be paid off before due date. Buying should be smart, buy what you need not what you want. Shop around for car insurance or everything with a large ticket. Life style will determine your saving, many things in life can be chosen for your need. Frugal living will help you achieve saving target and live fairly free from societal pressure.

Canada is still ranked fairly high in the Global Pension Index  in the recent year. In 2013 Canada is in the  the same group with  Sweden, Switzerland, UK (Grade B, just behind Denmark, Grade A and Netherlands, Australia Grade B+). So we have a fairly good national safety net to rely on, we just need to have some extra saving by living smarter. Only thing you have to keep in mind that when you get older, your health care cost will go up, although basic health care is covered by all provinces. That's all. Enjoy life.
 (http://www.globalpensionindex.com/)

Sharpen Your Investing Skill Before and After Retirement

Your investment needs to be reviewed and revised frequently. You really have to have time to taking care of your investment. But now you have more time to pay attention to this important subject compared to time you have prior to retirement. The low interest rate environment as we have seen in the past and in the current year will give you very small return. Retirees were forced to take a riskier approach by investing in stocks and mutual funds.

There is always risk when you invest in stock market. Working hard to minimize risk is extremely important. Research the market required long working hours. You need to read lots of report and news. Information from sites such as TD Bank, Royal Bank, Yahoo Finance, Globe Investor and much more are very helpful. We need to stay in touch with the trend of the stocks. We will learn when to get in and when to get out the market. But keep in mind we have to minimize the risk and protect our principal capital.

Yahoo Finance is a good place to start. It gives you overview and headlines of what happening in the markets and warning that will effect your holdings. You can glance at the active stocks of the days along with the gainers and losers. That will give you a feel about the trend in the market, the direction of the flow, the market pulse. You can study certain stock from Yahoo Finance along with the reports or comments. You can look up certain stock and find analyst opinion about this stock. You will familiarize yourself with recommendation like Hold, Buy,Neutral or Sell; more active like from Buy to Hold or from Hold to Buy...

There is one thing for sure: we never know exactly what direction the market or the stock will be heading. Diversification is the key in stock market investing. You cannot time the market so you need a broader horizon. But one thing we can learn: the market is effected by news, good and bad, and uncertainty. So we all hope for the best luck.

In Canada, we only have to withdraw money in Registered Retirement Saving Plan at 71 ( after converting to Registered Retirement Income Fund) at certain rate ( the first year usually about 9 to 10% of the total value). It makes sense that we have to continue to sharpen our investing skill for these years.

Control Our Debt and Retire At The Age of Our Choice

We usually ask ourselves: How much money do I need to retire comfortably?

According to Gordon Pape, unfortunately, there is no easy response and no magic formula. There are a lot of variables. One of these variables is your lifestyle. If you think you can live a frugal lifestyle, the answer for retirement may be easier.

Many people think nowadays that they have to work pass 65. There are many reasons behind it: Debt is one of it. Retirement age at 65 was standard but not any more, many people plan to work until they turn 70.
According to TransUnion, consumer debt-not including mortgage debt-held by the average Canadian is $27,131 for 2013 or 3.47% increase over 2012.

There is a review by Bank of Canada in an article called: What explains trends in household debt in Canada  http://www.bankofcanada.ca/wp-content/uploads/2012/02/boc-review-winter11-12-crawford.pdf

Consumers 65 and older are increasing their debt faster than any other age group in the past year. 6.5% increase in average debt for consumers aged 65 and over, according to Equifax. Seniors, who typically should be drawing on savings in retirement, are instead borrowing to support lifestyles they otherwise can not afford. Some may also be borrowing to support both grown children and elderly parents, according to Barrie McKenna of The Globe and Mail, Aug. 28 2013.

Gordon Pape established what he called "the Retirement Worry Index" as follows to help the to-be-retiree position themselves:

 RETIREMENT WORRY INDEX

1. Worry Index: Very Low You work for a place that has a generous defined benefit pension plan sponsored by a federal or provincial government, the military, the police or a powerful union (e.g., teachers). You also have personal savings, own your own home and have little or no debt.

Strategy: You’re in great shape. Enjoy your retirement years.

2. Worry Index: Low You have a defined benefit pension plan from a corporation or a regional or municipal level of government. You have some personal savings, own your home and have little debt. You are probably in good shape, but there is a chance that your pension could be at risk, even though it is “guaranteed,” if the sponsor runs into financial problems. It happens: Nortel pensioners have been in a protracted battle to get at least some of the benefits they expected and the fight is still going on as this is written. In Hamilton, employees of U.S. Steel Canada were locked out in November 2010 when they refused to accept changes to the pension plan that would, among other things, end indexation for some 9,000 people who have already retired. This loss of pension rights used to be unheard of. But the Great Recession of 2008-09 changed a lot.

Strategy: Protect yourself by adding to your savings.

3. Worry Index: Medium You have a defined contribution pension plan, some personal savings, own your home and have little debt. A defined contribution plan does not guarantee a specific level of pension at retirement, but it is better than nothing, especially if the employer is matching your contributions. These plans are structured in such a way that you have your own personal pool of cash to invest in the many options that are offered.

Strategy: The amount of your pension will ultimately depend on how well your investments perform, so it is essential to pay close attention to that money and manage it carefully.

4. Worry Index: High You have no pension plan. You have some RRSP/TFSA savings but not as much as you think you need. You own your home and have modest debt.

Strategy: This is not a hopeless situation by any means, but it requires some immediate action. You need to pay off the debts and begin to boost your savings rate. The more years you have left until your planned retirement, the less of a financial strain this will be as long as you don’t procrastinate.

5. Worry Index: Very High You have no pension plan and limited RRSP/TFSA savings. You still have a mortgage and are carrying credit card debt. You’re probably thinking that a combination of the Canada Pension Plan and Old Age Security will provide for your needs. These will certainly help but unless you plan to scale back your lifestyle considerably, they won’t be enough.

Strategy: You need to pay off your credit card debt as fast as possible and then cut up the card so you don’t incur any more. Once that is done, direct all the money that went to the monthly card payments to an RRSP and use the refund to pay down the mortgage. Depending on your age now, you may have to postpone your target retirement date for a few years.

6. Worry Index: Extreme You have no pension plan, hardly any savings, a big mortgage, other debts and you’re supporting other family members such as an aged parent. This is a scenario that demands immediate attention.

Strategy: You should seek the help of a financial planner to get your affairs on track, but if you are within 10 years of your planned retirement age, your options may be limited. You may be forced to depend on federal income-tested programs such as the Guaranteed Income Supplement (GIS) to make ends meet after you stop work. If that appears to be a possibility, don’t put any savings into an RRSP because withdrawals count as income and will reduce your GIS payments. If you are able to save anything, use a TFSA instead. (http://www.everythingzoomer.com/whats-your-worry-index/3/#.UlIR-lCURGk)