Tuesday, January 27, 2015

To retire comfortably, can you rely solely on public plans?

If you go through my old blog posts you’ll notice a few comments by readers stating that saving for retirement decreases the Guaranteed Income Supplement (GIS). The GIS is a benefit that is added to your Old Age Security pension. Its amount is determined according to your taxable family income in retirement.

If you use RRSPs or if you receive a pension under the Québec Pension Plan (QPP), those amounts are taxable, and you must declare them on your income tax return. The amount of the GIS is then calculated based on the income you declared.  

Of course, the higher your income, the less you will receive. So, is it worth it to save for retirement if saving decreases your government benefit? Let me show you the advantages of saving for retirement.

Telling examples

Imagine Catherine, 35 years old, with an income of 25 000 $. She will retire at age 67 and will rely on the following sources of income from public plans:

Source of income If Catherine is single and her current salary is 25 000 $ If Catherine is in a relationship and her current family income is 50 000 $

Pension under the Québec Pension Plan (QPP) (pension starting at age 67)

6 962$ 6 962 $
Old Age Security (OAS) pension 6 765 $ 6 765 $
Guaranteed Income Supplement (GIS) 5 087 $ 2 184 $
Total : 18 814 $ 15 911 $

If Catherine is single in retirement, she will receive 18 814 $ a year from public plans (75% of her current salary). However, if Catherine has a spouse with the same salary, she will receive 15 911 $ and public plans will replace only 64% of her current salary.  

Now, imagine Veronica, also age 35, with an income of 40 000 $. She will also retire at age 67 and will rely on the following sources of income from public plans:

Source of income If Veronica is single and her current salary is 40 000 $ If Veronica is in a  relationship and her current family income is 80 000 $

Pension under the Québec Pension Plan (QPP) (pension starting at age 67)

11 140 $ 11 140 $
Old Age Security (OAS) pension 6 765 $ 6 765 $
Guaranteed Income Supplement (GIS) 2 998 $ 89 $
Total : 20 903 $ 17 994 $

If Veronica is single in retirement, she will receive 20 903 $ a year from public plans (52% of her current income). However, if she has a spouse who earns the same salary, she will receive 17 994 $ and the public plans will replace only 45% of her current salary. 

Findings

We can draw three conclusions from the examples above:

  1. The higher your salary, the lower the percentage that public plans replace.
  2. If you are in a relationship, the amount of the GIS is considerably lower.
  3. The GIS was created to help people with low incomes.

Do the amounts paid by public plans seem sufficient to maintain your standard of living in retirement?

If not, you should start saving right away so that your savings can boost your available income in retirement.

Is it possible to save without decreasing the amount that you could receive from the GIS?

Yes. You could choose to invest in savings vehicles that don’t increase your taxable income when used. The most well known savings vehicle is the tax-free savings account (TFSA). A meeting with a financial planner could help you decide on the best savings vehicles for you.

One thing is for sure: for many of us, the amounts paid by public plans will not be sufficient to maintain our standard of living in retirement. When it comes to financial planning for retirement, you have very little control over life expectancy, interest rates and universal government benefits. However, setting aside a few dollars per week can help you safeguard your future.

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Wednesday, January 21, 2015

Putting an end to the 70% rule

I am often asked how much money it takes to live comfortably in retirement. Obviously, it depends on what you plan on doing. However, for those who want to maintain more or less the same lifestyle in retirement, one of the suggested financial planning strategies is to replace your current salary by an amount equal to 70% of that salary (and any other income if you have sources of income other than your salary).

There is no consensus regarding the percentage of income you should replace to maintain your lifestyle in retirement. For several years, the Régie des rentes du Québec has suggested that you replace 70% of your current income. However, that rule is contested and some experts have suggested other strategies. Let’s review the 70% rule.

Why does the 70% rule exist? 

The rule’s objective is to guide people who want to maintain the same lifestyle as they have now in retirement. In retirement, some expenses decrease and others increase. For example, you will eliminate or decrease your contributions to the Québec Pension Plan and your pension fund.

Is 70% enough or not? 

Some specialists will tell you that maintaining 70% of your current employment earnings is too much. I would say that it depends on each person. Consider the case of Catherine, who has an annual income of 30 000 $. If she maintains 70% of that income, she will have 21 000 $ when she retires. Would you like to live off of less than 21 000 $ if you were in her shoes?

In an ideal world… 

The best way to plan for retirement is to determine what you would like to do. Then, you must save according to the expenses related to realizing your dreams. However, I understand that most of you have yet to make specific plans for your retirement, especially my younger readers. It is not easy to know exactly what we will want to do 20 or 30 years from now, and it is even harder to know whether we will be healthy at that time. Do not get caught off guard!

So, is the 70% rule perfect? Certainly not! However, it is useful for people who do not have specific plans for retirement yet because it can be used as a guide. Would you prefer to save a certain percentage every year? If it allows you to make your retirement dreams a reality, why not? The important thing is that you have a financial goal and that you work towards fulfilling it.

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Tuesday, January 13, 2015

Stop being your own worst enemy!

It is often said that time is on our side when we save for retirement. It’s true: the earlier we start saving for retirement, the higher our retirement income. However, the opposite is also true. Time can be our worst enemy. If you wait too long, you will put your financial security in retirement at risk.

You think you have good reasons to put off saving? Personally, I believe that it’s a good idea to change your lifestyle and start saving now. It’s all a question of perspective.

You want to repay your debts first 
That is THE main reason that is stopping you from saving for retirement.I agree with you. You must repay your debts first. However, when you don’t have any money for savings, that’s the sign of a problem.

If that is your case, you should talk to a financial planner who can help you make a budget to stop your debts from increasing and help you establish a savings strategy.

Financial planning is not on your to-do list
Really? Whether you want to admit it or not, we all retire. Eventually, you will too. So why not consider retirement as an important step, especially knowing that it will represent about one third of your lifetime?

I think that you should reconsider saving for retirement and start putting it on your list of priorities. If you don’t, 10, 20 or 30 years from now, your priority will be finding ways to finance it.

You prefer to live without thinking about the future because too many uncontrollable events come into play in financial planning for retirement 
I agree that we have very little control over our life expectancy, our health, stock market yields, etc. But one thing is for sure, you can plan for retirement now. Incidentally, our SimulR retirement income simulator tool was created to help you.

I can already hear certain people telling me that they may die before being able to benefit from their savings. Perhaps, but what will you do if you live to be 90 and have not saved a penny?

For the New Year, I challenge you to change your financial habits and make room for retirement savings. If you don’t think you have enough money now, you risk having even less in retirement. Stop waiting. Make the changes now, because nobody else can do it for you!

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