Retirement may seem impossible to some pharmacists working today, but as we’ve seen in a previous post, a number of pharmacists have recently hung up their white jackets and retired. How did they do it? Did these new retirees benefit from an environment that no longer exists? Can today’s pharmacists ever hope of retiring anytime soon?
Like we’ve said before, retirement is absolutely possible for today’s pharmacists, but the road to retirement has definitely changed. For example, a major part of retirement planning is figuring out where your income will come from in your golden years. Today there are countless options available to convert your savings into a retirement income stream, and new choices are being developed everyday. Also, many Canadians will retire with multiple income sources, some of which did not even exist 10 years ago. All of this adds to the complexity of creating and managing a retirement income strategy.
But retirement income planning doesn’t have to be complicated, so here is some help. To give pharmacists a greater understanding of where their retirement income will come from, we will spend the next two articles talking about the different sources of retirement income and the pros and cons of each. So whether you work closely with a trusted advisor, or manage your finances on your own, this series will hopefully boost your knowledge and give you the confidence to choose a retirement income strategy that is right for you.
Retirement income planning has two simple steps:
Let’s begin by simplifying things. Retirement income planning has two basic parts (the rest of this article will focus on Step 1):
- Determining where your income will come from: This step looks at all the income sources that will be available to you during retirement, like personal savings, employer pensions, government benefits, part-time work etc.
- Examining the pros and cons of your different income sources: This step looks at the sustainability of each income source to answer questions like: Will this income source run out? Will it keep up with inflation?
The following are the most common types of retirement income sources. Most pharmacists will receive at least one of these income sources; many will receive several of these. As we will see in Retirement Income Planning for Pharmacists – Part 2, the more sources of income you have, the less exposed you are to certain risks.
Canada Pension Plan (CPP):
Most pharmacists can expect to receive the Canada Pension Plan (CPP) in retirement. Almost all working individuals in Canada contribute to the CPP. The main purpose of the CPP is to provide you with a very modest income stream during retirement. The standard start age for your CPP is the month after your 65th birthday. However, you can take a reduced pension as early as age 60, or begin receiving an increased pension after age 65 (see example below). The average monthly CPP payment in 2014 was $607 (starting at age 65). The maximum payment was $1,038 (starting at age 65). CPP pension amounts are also adjusted yearly for inflation.
Yearly CPP Benefit Amounts by Age You Decide to Start Receiving Benefits
This example assumes a contributor who turns 65 in 2021
* Average and maximum CPP payments are 2014 amounts adjusted for inflation. Source: Service Canada
Old Age Security (OAS):
The Old Age Security (OAS) program is another pension available to retirees. The OAS benefit is a monthly payment available to most Canadians aged 65 or older. The benefit is based primarily on years of residency.
Unlike the CPP, the OAS program is funded out of tax revenues. The OAS is geared towards supporting low income retirees, so benefits are “income tested” which means a portion or all benefits are “clawed-back” if a retiree’s income exceeds certain thresholds. For example, in 2014 a yearly income of approximately $71,000 and above would resulted in the payback of some of the OAS benefit. An yearly income of approximately $115,000 would have resulted in a 100% claw-back.
Employer Sponsored Pension Plans:
Although some pension plans are being phased out, many pharmacists do have access to some sort of employer pension plan. The two types of employee pension plans are defined benefit (DB) and defined contribution (DC). Hospital pharmacists generally have a DB pension, while retail pharmacists mostly have DC pension plans. DB pension plans are basically a promise by an employer to pay a retired employee a certain amount of money during retirement.
Due to low interest rates and high market volatility, these DB “promises” have become exceedingly expensive for employers to keep. As a result, DC pensions have become much more popular in recent years, especially on the retail side. DC pension plans only require an employer to make a contribution each year to an employee’s retirement account. The employee is then responsible to make all the investment choices related to the account.
Generally, the amount you can contribute to your RRSP for a given tax year is determined by your RRSP deduction limit (see below for more information on RRSPs). Contributions to a employer sponsored pension plan are subject to the same rules as RRSP contributions, so any contributions to an employer pension plan will reduce your RRSP contribution room (known as a “Pension Adjustment” or “PA”).
Registered Retirement Savings Plan (RRSPs):
For many pharmacists today, especially retail pharmacists, the CPP and OAS will likely not be enough to fully support you in retirement. Therefore, personal savings will become an increasingly important source of income in retirement. One way to save is using a registered retirement savings plan (RRSP).
As mentioned, the amount you can contribute to an RRSP each year is determined by your RRSP deduction limit (your contribution limit is found on the Notice of Assessment your receive after filing your tax return.) RRSPs are incredibly flexible and can hold a wide variety of investments like GICs, mutual funds, stocks and bonds.
Contributions to an RRSP create a tax deduction, which can be used in high income years to save taxes. However, the deduction is only a deferral because it has to be paid back in the future. Eventually an RRSP converts into an Registered Retirement Income Fund (RRIF) or an annuity to create an income stream in retirement.
Non-RRSP investments:
Pharmacist can also use other types of accounts to hold their retirement savings. Tax free savings accounts (TFSAs) are flexible, multi-purpose accounts that where introduced in 2009. Any investment income earned inside a TFSA is tax-free, which makes them an excellent complement to RRSPs when saving for retirement. The maximum yearly amount you can contribute to a TFSA is $5,500 in 2013. The yearly contribution amount is indexed to inflation, and unused contributions build up for future use.
Non-registered accounts (also know as taxable, or open accounts) are also available for retirement savings. These accounts are the most flexible when it comes to investment choices, but any returns that are interest, dividends or capital gains are taxable.
Employment income:
For an increasing number of retirees, part-time work is becoming a significant source of retirement income. There are a variety of reasons for working in retirement. Some retirees are starting their own businesses, consulting for their previous employers or working part time to keep active.
Other assets:
Usually not the first source of retirement income, but the equity in your home can be converted into retirement income if needed. Reverse mortgages and downsizing are the most common ways to covert your house into cash. A fully paid off home can provide an excellent hedge to assisted living later on in life (i.e. retirement home, long-term care). Another common income producing asset is a rental property.
Retirement income planning is often a balancing act between several different sources. Each income source has its pros and cons, which we explore in the next article in this series.
