Pre Retirees: Don’t Rely Solely on CPP for Financial Security
Financial planning is an essential part of everyone’s life, especially for those nearing retirement. In the current economic environment, it’s crucial that Canadians in particular do not rely solely on the Canada Pension Plan (CPP) to fund their retirement.
Understanding the Current Economic Climate
In today’s world, economic uncertainties are more prevalent than ever. For most Canadians, especially millennials, long-term investments or savings are not the primary focus when setting financial objectives. The immediate financial obligations like monthly bills or saving for immediate purchases often take precedence.
This is perhaps because many are dealing with short-term financial goals, such as becoming first-time homeowners. However, strategic financial planning that takes long-term retirement objectives into consideration is exactly what Canadians should be focusing on during an economic crisis.
Developing a customized plan that takes your unique financial situation and monthly expenses into consideration will provide you with a secure future and financial freedom when you need it most.
If you’re struggling with debt while trying to plan for your future, you probably feel stuck between a rock and a hard place. But, there are solutions available to help you achieve a fresh financial start.
The Three-Legged Stool of Retirement Income
When it comes to retirement planning, financial experts often refer to it as a three-legged stool. Each leg represents a different source of income:
- Government benefits;
- Defined pension;
- Personal savings.
If one of these legs is missing, the other two have to compensate. For someone without a company pension plan, they would have to increase their registered retirement savings plan (RRSP) or tax-free savings account (TFSA) to make up the difference.
However, what often happens is people heading into retirement sometimes rely too heavily on government benefits to pay for everything from housing to utilities and even debt. This is a dangerous game to play.
Misconceptions about CPP and OAS
The Canada Pension Plan (CPP) and Old Age Security (OAS) were never meant to form someone’s entire retirement plan. They were designed to supplement it. Relying heavily on these benefits to make up for low savings can lead to financial instability in retirement.
A 2014 study by the Bank of Montreal revealed that 89% of Canadians expected CPP or the Quebec Pension Plan to fund part of their retirement, with 31% saying they expected to rely heavily on their CPP/QPP.
Signs of Over-Reliance on Government Pensions
Here are five signs that your retirement plan may be too dependent on government pensions:
Lack of Knowledge about Eligibility: Many Canadians are unaware of how much money CPP pays out monthly. In 2013, a survey found that seven out of 10 non-retired Canadians were oblivious about this.
Over-optimism: It’s a mistake to count on receiving the maximum payout. The average CPP payment is about $550, which depends on how much you contributed over the years.
No Clear Picture of Retirement: Many people fail to visualize what they want their retirement to look like. This is crucial in determining how much money you’ll need.
Misuse of RRSP: Withdrawing money from your RRSP or TFSA for an emergency or bills can lead to long-term financial repercussions.
Ignoring Debt: Many seniors are adding to their debt load, making it even harder to live on CPP.
Planning for a Secure Retirement
The key to a secure retirement is diversifying your sources of income. Don’t rely solely on CPP or OAS. Instead, aim to have a balance of government benefits, a company pension or personal savings.
Moreover, always keep an emergency fund and let your savings grow. This way, you’re less likely to dip into your retirement savings for unexpected expenses.
Lastly, always keep a clear picture of what you want your retirement to look like. This will help you determine how much you need to save and avoid financial surprises down the road.
Remember, financial planning is not a one-size-fits-all process. Everyone’s situation is unique, and what works for one person may not work for another. It’s always best to seek advice from a financial advisor to create a plan that suits your needs and goals.
In the end, the key takeaway is: “Pre Retirees, Don’t Count On CPP To Save You”. It’s important to have a diversified retirement plan that doesn’t rely solely on government benefits. Be proactive and start planning today to ensure a comfortable and secure retirement.
