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Here’s the good news: Thanks to advances in medicine and our greater awareness of healthier lifestyles, you could spend two, or even three, decades in an active retirement. Here’s the less-good news: You’ll have to pay for all those years. And that’s why it’s never too soon to start saving and investing.
Of course, in meeting your retirement income needs, you may receive some help from programs such as Old Age Security (OAS), Guaranteed Income Supplement (GIS) and the Canada Pension Plan/Quebec Pension Plan (CPP/QPP). And you may also qualify for workplace-based pension coverage and other company retirement plans. But the fact remains that, even counting these sources of income, you will likely face a “retirement gap” that must be filled if you’re going to enjoy the retirement lifestyle you’ve envisioned.
The size of this gap depends on your individual situation. You may have heard that your annual retirement income should be between 70% and 80% of your earnings during your working years. Yet this formula is extremely general and doesn’t take into account your individual lifestyle factors. It’s entirely possible that you may end up needing close to 100% of your pre-retirement income.
You may want to work with a professional financial advisor to determine how large your pending retirement gap may be. But one thing is for certain: To close the gap, you’ll need to put time on your side and you’ll need to make good use of the tax-advantaged accounts available to you.
For example, consider your Registered Retirement Savings Plan (RRSP). Suppose, starting at age 45, you contribute $2,780 — which is slightly above the median RRSP contribution in 2008 — each year to your RRSP for 20 years, and your investments within your RRSP account earn an average annual 7% return. When you reach 65, your account will have grown to more than $121,000. If you were then to start withdrawing, say, 4% per year from your plan, you’d have annual income of $4,878. But if you had started contributing to your RRSP when you were 25, and you put in the same $2,780 and earned the same 7% annual return for 40 years, your account would have grown to more than $593,000. If you then withdrew the same 4% a year, you’d have $23,753 in annual income — more than four times the amount you’d have if you waited until you were 45 before starting your RRSP contributions.
And keep in mind that the $2,780 figure is far less than the annual RRSP contribution limit, which, in 2010, is $22,000. Consequently, if you were able to even approach the maximum each year, the numbers above would look vastly different — and you could have far more retirement income available.
If you do reach the point where you have made the maximum contribution to your RRSP, you’re not out of retirement savings options, because you can contribute up to $5,000 per year to a Tax-Free Savings Account (TFSA). As its name suggests, this account offers tax-free earnings, and it can be funded with a variety of investments, such as stocks, bonds and mutual funds.
Retirement can be a rewarding time for you. And the sooner you take steps to close your retirement savings gap, the more you will be able to enjoy your retirement years when they finally arrive.
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