How Many Years Would You Like to Live? If I had answered this question when I was 10 years old, I would most likely have said forever or at least a hundred years. Should I have the option today, my answer will be very different because in the world weÂ´ve created, along to being alive it takes money to live. Many people are afraid of the rough reality of become elder, that time when we lose the ability to produce the amount of income we use in the present to live comfortably. Anyhow, ignoring the subject will not prevent the uncertain future to catch us someday. In the past, our grandparents worked since they were very young. They used to have at least a 40 years career before they reach 65 and retire with a life expectancy of 70 years. Therefore, they worked 40 years and they needed five years of pension income. Nowadays, in order to compete in the labor market, we need around 22 years of academic preparation. Then, if lucky, we will need two years to find a job in our field. In addition, we will face some unemployment periods in our 30 years career before being displaced by new generations or simply fall victim of the great stress associated with our duties. The previous idea is complicated enough to make us all worry. To this situation we have to add the fact that life expectancy is increasing (10 years in the last 20) and we now anticipate living an average of 82 years. This means that we likely need to generate enough income to provide during the 30 working years and for an extra 27 years of retirement.
Fortunately, in Canada we are not alone in this fight. The government has created a number of programs that help us mitigate the risk of outliving our money. Among them we find the followings: Old Age Security (OAS) This is a program fully funded by the federal government and provides you with a modest pension at the age of 65 if you have lived in Canada for at least 10 years after your 18 birthday. Currently, the average monthly benefit is $514. Guarantee Income Supplement (GIS) This is an additional amount for those OAS recipients whose annual income is less than $39,696. Currently, the average monthly benefit is $499. Canadian Pension Plan (CPP) This program is funded by employers and employees; it provides a monthly retirement pension to contributors based on how much and for how long they contribute. Currently, the average monthly benefit is $528 Registered Retirement Savings Plan (RRSP) Is a special status given by Canada Revenue to savings or investments accounts which mean that contributions are tax deductible and your money will grow tax-free until you withdraw it from the plan. This tax treatment help you accumulate more and faster. The monthly benefit will depend on contributions and rate of return of the financial vehicle chosen.
Suppose now that you are a 65 years-old employee with a $45,000 income and you want to retire today. Below is the scenery you will face. Current Monthly Income: Income Tax: Net Monthly Income:
$3,750 $600 $3,150
OAS Income: $514 GIS Income: $499 CPP Income: $528 Income Tax: $131 TOTAL: $1,410 (Equal 45% of your pre-retirement income) To live a comfortable retirement your will need an income supplement from your RRSP savings. Remember that your financial needs during retirement are related to your present lifestyle. If you increase your lifestyle today, chances are that you will need more assets to fund your retirement income.
Your financial advisor could help you determine how much you will need, what are your income sources and how much you need to save today to accomplish your goal. Start today will allow you to accumulate more while taking less risk.