Bridges allow us to get from one place to another by crossing a difficult barrier like a river or deep canyon. Without that bridge, it would be very difficult or even impossible to cross over. The journey from the working world to retirement also requires crossing a difficult obstacle: no longer collecting a paycheck. How does the average person get from working land to retirement land? They spend an entire working lifetime building a bridge.
The Pillars of Your Retirement Bridge
Most bridges have columns to support the structure, and these columns are usually massive concrete pillars securely anchored to solid ground. Your retirement bridge will have two massive concrete columns that take years to build and are based on government pension plans.
Canada Pension Plan (CPP)
One column is the Canada Pension Plan (CPP). The CPP is a government program that provides retirement, disability, and survivor benefits to Canadians. You contribute to the CPP through your paycheck, and these contributions help build your retirement bridge.
Old Age Security (OAS)
The other column is the Old Age Security (OAS). OAS is another government program that provides a monthly payment to eligible seniors aged 65 and older. Just as pillars take time to be built and the concrete must cure and harden, our government pension plans don’t provide for us until we turn age 65.
Building the Roadway: Your Savings
Having two solid concrete columns is a good start, but we can’t get to retirement land by jumping from pillar to pillar. We need a roadway. How do you build that roadway? The roadway is built using savings. These include:
Registered Retirement Savings Plan (RRSP)
An RRSP is a type of savings plan that helps you save for retirement. Contributions to an RRSP are tax-deductible, and the investments within the plan grow tax-free until withdrawal, when hopefully your tax rate will be lower.
Tax-Free Savings Account (TFSA)
A TFSA is another type of savings plan where the investments grow tax-free. Unlike an RRSP, contributions to a TFSA are not tax-deductible, but withdrawals are tax-free. Currently you can contribute $7,000 a year, plus any prior years unused contribution room.
Non-Registered Investments
These are investments that are not held within an RRSP or TFSA. They can include stocks, bonds, mutual funds, and other types of investments. Only the gains are taxable, and frequently at a reduced rate.
Company Pension Plans
Many employers offer pension plans that help you save for retirement. Currently, if you work for one employer for over ten years, these plans can be a valuable part of your retirement savings.
The Importance of Strong Savings
Obviously, the more savings you have, the stronger your road is, and the greater the load your bridge can support. That load equates to your standard of living in retirement. We all have more wants than we can afford, and putting too much strain on our retirement savings can result in our bridge collapsing. What does a collapsed retirement bridge look like? People are often forced to return to work from retirement since they run out of money. For those who can no longer work, they face the possibility of outliving their money and drastically reducing their standard of living.
The Challenge of Early Retirement
What if you are one of the many people who dream of retiring early, or even the magical “Freedom 55”? It’s a very difficult road indeed.
Reduced Government Pension Plans
Your two main pillars, the government pension plans, will either not be available or greatly reduced. You can’t collect the OAS until you turn age 65, and if you choose to collect your CPP at age 60, you’ll be penalized a whopping 7.2% less per year (36% less at age 60).
Company Pension Plans
Most company pension plans will also force you to wait until age 65 or penalize you with a reduced pension if you begin earlier. Retiring early also means the span of your bridge will be much longer. You’ll need more savings to get you to age 65 when your pensions begin and still have enough savings left to maintain your standard of living beyond that point. Most experts will advise you that an early retirement at age 55 would easily require savings of over one million dollars. What they don’t tell you is that since you are retiring early, you have less time to acquire that amount.
Designing Your Retirement Bridge with a Safety Factor
All bridges are designed with a safety factor. Since nobody wants to face the liability of a bridge collapse, typically bridges are designed to handle up to ten times the posted load limits. Over-designing your retirement bridge is also a great strategy since you have no idea what expenses may arise as you age in retirement. Don’t forget to include inflation in your calculations.
Managing Your Withdrawals
Typically, in retirement, you’ll be advised about how much of your savings you can withdraw each year to maintain your lifestyle and not deplete your savings. That is your bridge load limit. A typical rule of thumb is to never draw down more than 4% of your savings in retirement. You must keep your bridge strong by not allowing excessive loads which weaken the structure and create the possibility of future collapse.
The Consequences of Not Saving
Those who choose not to save for retirement will find themselves at a chasm with no ability to cross over. They dream of easy solutions to get to retirement land, but few exist, and there are no magic rockets to propel you across that chasm. Building your bridge to retirement land takes years of saving, planning, and discipline. Unfortunately, many people are speeding along on a highway of reckless spending and crushing debt and fail to see the glaring signs ahead: “Bridge out, you are heading for disaster.”
Steps to Start Building Your Retirement Bridge
Now that you understand the importance of building your retirement bridge, here are some practical steps to start planning and saving for your retirement.
Assess Your Current Financial Situation
Before you can start building your bridge, you need to know where you are starting from. Take a look at your current financial situation. How much do you have saved for retirement? What are your sources of income? What are your expenses?
Set Retirement Goals
Decide when you want to retire and what kind of lifestyle you want to have in retirement. This will help you determine how much you need to save.
Create a Savings Plan
Based on your goals, create a savings plan. This plan should include how much you need to save each month, what types of savings accounts you will use, and how you will invest your money.
Reduce Debt
High levels of debt can make it difficult to save for retirement. Make a plan to pay off your debts as quickly as possible.
Increase Your Income
Look for ways to increase your income. This could include asking for a raise, taking on a part-time job, or starting a side business.
Monitor Your Progress
Regularly check your progress towards your retirement goals. Don’t be afraid to adjust your savings plan to ensure that you stay on track to the retirement you want.
Seek Professional Advice
Consider working with a financial advisor. They can help you create a savings plan, choose investments, and make sure you are on track to meet your retirement goals.
Conclusion
Building a bridge to retirement takes time, effort, and discipline. By understanding the importance of government pension plans, saving, and planning, you can create a strong bridge that will support you through your retirement years. Start today, and take the first steps towards a secure and comfortable retirement.
In my E-books (“Water Barrel” and “The Balance”) I discuss simple methods to live sensibly for today, take charge of your financial affairs, and invest safely for the long term. For more information please visit David Penna Amazon.
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, we are not a qualified financial advisors. We just relate financial management to our own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of ours came from expensive experiences.
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