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COVID-19 has been a life-altering experience for a bulk of the Canadian workforce. As we enter the second wave of the pandemic, what were temporary measures appear to be coming more permanent.
For many, that means working from home, but for older workers it could mean early retirement; whether it’s voluntary or forced. Here are a few things to think about if you are considering a retirement plan B.
- Good advisors prove their worth when the unexpected happens. Even if your advisor only manages a portion of your big financial picture, they probably have other clients in the same situation and could present options you never considered.
- If you pay into a defined benefit (DB) pension plan with your employer, consider keeping it even after you quit. They generally provide steady income and are usually indexed to inflation. If you are in a defined contribution (DC) plan you probably have the option of keeping it with your employer’s administrator but consider rolling it in with your existing registered retirement savings plan (RRSP) so you can manage it as one portfolio. Either way you should speak with your plan administrator.
- Speak with an advisor or tax expert about the most tax efficient way to withdraw your savings. Income splitting with a spouse is a great strategy but is limited for Canadians under 65 years. If you are not yet 65, it’s best to withdraw from your RRSP at the lowest possible tax rate and top up any additional funds required through a tax-free savings account (TFSA).
- Don’t panic and sell potentially lucrative or income generating investments, or become too conservative. You still need your savings to grow for the future and resorting to bonds that pay one per cent each year won’t get you there. It won’t even keep up with inflation. You will, however, need to keep a portion of your portfolio in cash, or near cash, to meet short-term living expenses.
- Canadians cannot collect Old Age Security (OAS) or supplemental benefits until they turn 65 but they do have the option to draw from the Canada Pension Plan (CPP) when they hit 60. In any case, the amount depends on how much and how long you contribute during your working life. For 2020, the maximum payment for collecting CPP at age 65 is $13,855. Payouts as early as age 60 are reduced 0.6 per cent for each month before 65. The maximum amount would be lowered to $8,867 in 2020 if you elect to take CPP at 60. Either way, CPP payments are adjusted to the cost of living and that makes it a great hedge against inflation.
If you want to work through various scenarios, the Canada Pension Plan provides a retirement income calculator on its website. To find where you stand individually with CPP, the Canada Revenue Agency (CRA) keeps annual tabs on its website if you have set up an individual account.
Payback Time is a weekly column by personal finance columnist Dale Jackson about how to prepare your finances for retirement. Have a question you want answered? Email firstname.lastname@example.org.