1. Start early.
2. Don’t be (too) greedy.
3. Be patient.
4. Set realistic goals.
5. Have a plan.
6. Get advice.

Read the full article here.

From Great-West Life and Mackenzie Investments:

These days, some Canadians want to retire early, while others want to keep working past 65. Many more wish to ease into retirement by continuing to work part-time. Regardless of individual circumstances the following changes will impact most Canadians.

On May 25, 2009, The Minister of Finance outlined proposed changes to the Canada Pension Plan (CPP). The goal, according to a Department of Finance paper released to coincide with the announcement is to “better reflect the many paths people take to retirement” and to “provide greater flexibility for older workers to combine pension and work income if they so wish; modestly expand pension coverage; and improve fairness in the plan’s flexible retirement provisions.” These changes were included in Bill C-51, which received Royal Assent on December 15, 2009.

These changes, which will become effective between 2011 and 2014, will benefit workers to differing degrees depending on their age, history of earnings and their ability or desire to work past age 60.

If you are currently collecting CPP retirement, disability or survivor benefits or will begin collecting your pension prior to 2012, you will not be impacted by these changes unless you are a CPP recipient who continues to work.

How it works:

1) Pension Adjustments for early and late CPP pensions

Possibly the biggest change is an increased incentive to wait to collect until you are 65, or at the latest, age 70. Currently, the age for Canadians to begin receiving CPP benefits is age 65, as with Old Age Security. It is possible to opt to receive early CPP, as early as age 60, even if you continue to work.

There is a catch: a reduction of benefits. The early pension reduction will be increased, over a period of 5 years starting in 2012 to 0.6% per month for each month that the pension is taken before age 65. The late pension augmentation will be gradually increased to 0.7% per month for each month that the pension is taken after age 65, up to age 70. This will be phased in over a period of 3 years, starting in 2011.

2) Continued CPP participation while receiving benefits

Currently, CPP contributions are no longer paid once you begin receiving a CPP retirement pension, or once you reach age 70, whichever is earlier. With the changes enacted, a person under 65 who chooses to receive CPP benefits may continue working and thus continue to earn CPP benefits, but will be required to continue contributing to CPP to age 65. Your employer will also be obligated to continue contributing as well.

Currently, employees over age 65 who work while receiving a CPP pension can no longer contribute to the CPP. These employees, as of 2012, will be able to voluntarily elect to make CPP contributions until age 70. If a pensioner elects to contribute, his or her employer will also be required to contribute.

Although this could cost working retirees hundreds of dollars more a year in payroll deductions, these contributions will result in increased retirement benefits, even for persons already receiving the maximum pension amounts. Employees will receive an additional CPP pension benefit of up to 2.5% of the maximum CPP pension. This could represent, in current dollars, 2.5% of $10,905 or $273 for
those at existing maximums. The exact amount depends on the earnings level of the contributor. Additional CPP pension ‘purchased’ in any one year will commence in the following year, subject to any applicable early retirement reduction. The effective date of this measure is 2011.

3) Change in calculating average career earnings

CPP uses a career average calculation which allows for certain years of low or no earnings to be disregarded in arriving at average earnings. If you take the CPP at age 65, the span of your career is considered to be 47 years. If the CPP is taken at age 60, the span of your career is considered to be 42 years. Currently, 15% of an employee’s potential working career may be disregarded. Under the proposed rules, the drop-out percentage will be increased as follows:

• to 16%, in 2012. This would allow a maximum of 7.5 years to be dropped, based on a working career of 47 years (age 18 to 65)
• to 17% in 2014. This would allow a maximum of eight years to be dropped.

This provision will help more Canadians come closer to the maximum CPP pension, especially those for whom 2008 and 2009 were not the best years. This change will also increase the average CPP disability and survivor pensions, which are based on the retirement benefit calculation.

4) Removal of the Work Cessation Test

Under current rules, in order to qualify for a CPP benefit before age 65, you must not earn more than a certain amount in the month the CPP pension commences or the month before. Currently this amount is approximately $900. This earnings test is referred to by the government as the “Work Cessation Test”.

Under the new rules, the Work Cessation Test will be removed for employees who commence their CPP pension in 2012 and later. However, as discussed earlier, employees under the age of 65 will be required to continue to contribute while working in return for an
increased benefit.

Summary – What all this means

Some analysts interpret the changes as a disincentive to early retirement. Others see these changes as an attempt on the part of the Government to gradually alter behavior and encourage Canadians to remain at work longer.

The nature of the changes may shift the advantage to retiring later if you need more years to qualify for a maximum benefit, but not if you need extra income right away.

We can help you work through the process of deciding when to begin receiving your CPP benefits. During this discussion please keep these topics in mind:

• Your earnings history under the CPP, the dropout provisions and phase-in reductions.
• Total sources of income in retirement beyond the CPP. The early retirement decision for many Canadians involves much more than just considering CPP. If you are a member of a Defined Benefit plan there may be an incentive to defer retirement. If, as an increasing number of Canadians, you are a member of a Defined Contribution plan, or are funding your retirement with RRSPs, you could have an incentive to delay retirement to grow your portfolio to your desired level.
• Your goals regarding retirement, and the amount of retirement income which will be needed to make those dreams reality.
• Whether you need to live on CPP income, or whether you can afford to invest it. If you have the ability to invest your CPP income, that would actually encourage you to start your CPP early and not wait until 65. Using a Tax-Free Savings Account (TFSA) can help you maximize your CPP benefits.

Contribution rates remain at 9.9% but changes may be in the wings. Federal and provincial policymakers are expected to make
recommendations for changes in the near future.

For more information, go to the CPP website at:

http://www.servicecanada.gc.ca/eng/isp/cpp/cpptoc.shtml

or call our office to arrange an appointment with a financial advisor.

Photo credit: “Ottawa, Canada – Changing of the Guards” by ajk2n

That’s exactly what many Canadians are doing every year.

How much money would you give me if I told you I could double it instantly? Probably as much as you could get your hands on. You put 5% of your paycheque into your own personal RRSP, and your company just gives you the same amount… I’m not a math whiz, but I think I know a good deal when I see it!

There isn’t a lot of financial advice one can give that applies as nearly universally as this: if your company is offering you free money, you should take it. For some younger workers, it’s hard to think of the benefits of putting money away today that you won’t use for 30 or 40 years, but believe me when I say that you will be very happy you did. If you are just entering the workforce now, odds are good that you will be retired for nearly as long as you will be working full time. Decisions you make today will have a huge impact on what kind of life you’ll have.

More and more companies have stopped offering their own internally managed pension funds for their employees. They have seen the consequences of massive financial liabilities of their aging workforce; a 2007 report by the UAW showed General Motors had nearly 270,000 retired members collecting pensions and health benefits, and only 74,000 active employees working to generate the money needed to fund those commitments. Some estimates say that every car GM makes has to add $1,600 to the cost just to pay for their current retired employees. People are living, and collecting benefits, longer than ever before, and these “legacy benefits” are becoming a major issue for companies.

In Canada, it is becoming far more common for businesses to offer “defined contributions” to an employee’s RRSP, instead of a “defined benefit” guaranteeing a certain income level in retirement. Not only does this remove the risk of market performance from the employer (“We gave you the money, you picked the investments!”), but in many cases if the employee chooses not to contribute to his own retirement savings, the company doesn’t have to either! Now the employee has lost out twice.

Canadians are being left in charge of far more of their own retirement savings and lifestyle than ever before, and this rejection of the most effective method of planning for retirement is a serious cause for concern. Perhaps it is a lingering belief of “the company/government will take care of me,” perhaps it’s the feeling of needing to hold on to every penny on the paycheque, that makes employees turn down these offered contributions. Some people only listen as far as “you contribute 5% of your salary…” and they don’t think about what they are giving up in return for that little bit of extra cash in their pocket right now.

If you are working for a company that offers RRSP contributions, and for some reason you aren’t taking every penny available, then I implore you: right now, call your boss/manager/HR department or whomever you need to contact, and get it started. If you don’t understand how it works, then ask them to explain, or give us a call. If you run or manage a company that is considering starting an employee contribution plan (or having problems with your current one), then give us a call. It can be set up and managed very easily, and one of our advisors would be happy to show you.

Photo credit: “Money Hand” by Neubie