Forget withdrawals, favour saving!

Last week, I received a comment from a reader that got me thinking. He told me that with a salary of 80 000 $, if he replaces 70%, he will receive an income of 56 000 $ in retirement. He told me that with 56 000 $ he will pay a lot of income tax since most of his earnings will come from amounts accrued in RRSPs.

My reader first thought of the 70% rule, then the income tax rate and lastly, the returns. His conclusion: why save so much? His comment made me realize that we have a lot of work to do to simplify the process of financial planning for retirement. Does he understand less than other readers? Absolutely not! Actually, I think his analysis shows that he knows a lot about finance.

I decided to talk about his comment to the Régie’s actuaries. One of my colleagues said: "People think about withdrawals too early instead of thinking about saving funds. The withdrawal of retirement savings should be a concern especially when we get closer to age 55."

I have therefore come to the conclusion that it is of the utmost importance to propose a simple method that groups essential information and prioritizes planning. I suggest the following 5-step method, inspired by an already existing one, that will surely help:

1. Determine how much money you will receive from public plans in retirement
   You could receive about 7 000 $ from the federal Old Age Security program (maybe more if you are eligible for the Guaranteed Income Supplement). To find out how much you could receive from the Québec Pension Plan, consult your Statement of Participation.
2. Choose the age at which you would like to retire
   You will notice that age has a significant impact on your income from public plans AND your savings.
    
3. Detemine the income you would like to have in retirement
   We often say that you have to replace 70% of your employment earnings to maintain your standard of living in retirement. Too much or not enough? You have to choose. A good indicator is to calculate the percentage in dollars (for example, 70% of 50 000 $ is 35 000 $). Then decide whether the amount is sufficient.
    
4. Find out using SimulR
   Our tool will specify the amount of money to save each week to reach your goal.
    
5. Save!
   At this step, a financial planner can come in handy. Too many people rely only on RRSPs to save for retirement. Obviously, RRSPs have a real fiscal advantage for workers. However, don’t forget that RRSPs involve deferral and the amounts that are withdrawn are taxable. There are many types of savings vehicles. It’s hard to know them all, so ask for help. Financial planners have a long-term view, therefore they will think about the withdrawal of your savings, and their goal is to help you save as much as possible for retirement.
   

In other words, the key to good financial planning for retirement does not rely on our knowledge and financial skills. The important thing is to know what you want and take concrete steps to reach your goals, whether alone or with the help of a financial planner.

Post a Comment