You can't afford not to plan for future.
Everyone looks forward to the day when they are no longer working and can enjoy "the fruits of their labors". However, for many Canadians, retirement years are not as golden as they had imagined. Instead, they scramble just to get by.
Statistics show that almost 60 per cent of retired Canadians rely solely on government support, simply to meet their basic needs. For Canadian Aboriginals, this situation is even more concerning. Why? These people did not plan to fail. They failed to plan. Traditionally as we all know, Indian people live for today. This must change. Even a basic plan can put you well on your way to achieving your number one retirement goal - financial security.
Why don't people plan?
One of the main reasons people don't save for retirement is that they think they can't afford it, without taking into account the fact that perhaps they can't afford not to.
Two factors come into play - future and a current benefit. The effects of compounding returns can make small contributions grow significantly - this is a future benefit. The current benefit is that retirement savings are tax deductible. For status Indians it's a way to secure higher interest rates.
Lesson 1: You can afford it. Take advantage of the current and future benefit of retirement savings. It's better to put away a small amount than nothing at all.
Lesson 2: It is never too early to begin planning for retirement. A lot of people assume the government will take care of them, but government plans are usually not sufficient to give most retirees the financial security they need. Also, the further you are form retirement, the less predictable becomes the level of government support you may receive. Even more concerning is the fact that most status Indians do not pay into Canada Pension Plan.
Lesson 3: Taking control of the future today is the most effective way to ensure financial security tomorrow.
There are four basic steps to creating a successful retirement savings plan:
* Set your goals.
* Assess your current savings and identify potential shortfalls.
* Create a plan to make up for any shortfalls.
* Implement the plan.
Goal setting is the most important step, since everything else grows out of it. Think about what kind of lifestyle you want when you retire. Ask yourself questions such as:
* Do you plan to travel?
* Do you plan on owning a house or a property in the country?
* Will you be wintering "down south"?
The point is, each of these scenarios will involve different costs. When setting goals, be imaginative and realistic. There is nothing wrong with travel as a number one goal, but remember that you need to pay your basic expenses first.
Many financial planners suggest you will need between 60 per cent and 80 per cent of your present annual income to maintain your current lifestyle. As with any financial plan, personal circumstances and unforeseen expenses should be taken into consideration. Using 75 per cent of your income provides a good base on which to plan and can be adjusted as you get closer to retirement.
Once you've determined what income you want, look at the retirement savings you already have and assess whether they will meet your goals. The three basic sources of retirement income are: government plans; company plans; and personal savings.
What will the government do?
* Canada Pension Plan: All working Canadians are entitled to benefits under these plans. Specific benefits depend on the amount of contributions made. Keep in mind you must have paid in, to receive.
* Old Abe Security: Eligible residents of Canada aged 65 and over may receive a fixed monthly old age security pension.
What will my company plan do?
* Defined Benefit Pension Plan: Income received is fixed and based on a formula relating to years of service and your salary or a fixed benefit. Your latest benefit statement should give you a figure for your accumulated pension benefit.
* Defined Contribution Pension Plan: Retirement income depends on total contributions made and the investment performance of those funds. (Most Status Indians who are in Registered Pension Plans, pay into this type of a plan)
What are personal savings?
* Personal savings include any savings you may have for retirement purposes, such as personal RRSPs or non-registered savings.
So where does this leave you? At this stage, add up your existing retirement assets and determine whether they will be sufficient to meet your lifestyle goals.
If it doesn't look like they will, then you must make one of two choices: either change your goals; or create and implement a plan to achieve them.
Example: William Eagle: Eagle First Nation, Age 35, Desired Retirement: Age 65: Years to retirement: 30; Desired Retirement Income-75%. How much do I need to save? 1. Current annual income before taxes $35,000 2. Annual income desired after leaving work $26,250 (60 - 80 per cent of pre-tax annual income) 3. Anticipated annual income from government programs a) Estimated C.P.P. $8,558 b) Old Age Security $4,653 Total anticipated gov't pension $13,211 4. Defined benefit pension plan $9,000 5. Annual retirement income shortfall which must be made up by personal savings (line-2-line 3&4) $4,039 6. Amount one must save to provide this shortfall (line 5 X Annuity factor) $45,561 7. Accumulated retirement savings a) Defined Contributions Assets $0 b) Personal Savings $0 TOTAL (a+b) $0 Multiply by Savings Multiplier (table B)--X--= $0 8. Amount still needed (line 6 minus line 7) $45,641 9. Amount to save each year $45,641 X 0.020 = $913 10.a) Line 9 as a percentage of my annual salary (Line 9 divided by Line 1 times 100) =2.6 per cent b) Less Defined Contribution annual percentage 0.0 per cent
11. Additional contribution needed each year 2.6 per cent
Reference Tables Table A Retirement Age Annuity Factor 55 13.3 60 12.6 65 11.3
Reference Tables Table B - Savings Multiplers (1) Years to Save Savings Multiplier Annual Multiplier 5 years 1.159 0.183 10 years 1.344 0.085 15 years 1.558 0.052 20 years 1.806 0.036 25 years 2.094 0.027 30 years 2.427 0.020 35 years 2.814 0.016 40 years 3.262 0.013 (1) Based on annual rate of return of eight per cent inflation of five per
Now William knows he'll need to create a savings program to achieve his goals. In the majority of situations the most effective way to attain financial security in retirement is additional RRSP contributions. For Status Indians, higher interest rates can be obtained by investing in registered funds.
IMI Brokerage Company Ltd. provides a complete insurance brokerage service uniquely designed to meet the needs of Aboriginal clients.
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|Date:||Feb 1, 1996|
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