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How to Plan for Retirement if you Don’t Have a Pension Plan

Planning for retirement is tough. It’s hard to look into the future and try to figure out how much money you will need when you retire. This task becomes even more difficult if you don’t have a work pension plan. These days, fewer and fewer workplaces are providing their teams with defined benefit pension plans, especially when compared to those that were once offered many years ago.

Another issue is that a many people change jobs much more often than they once did. Years ago, a person would get a job, stay there for 40 or 50 years, and retire with a generous employee pension. However, today, people are much more likely to switch jobs every few years, which can complicate retirement plans and pensions.

There are also an increasing number of people who do contract or freelance work. These positions usually don’t include employee benefits, so an employee pension is certainly not included.

All of these changes in the workplace have created a situation where a large number of people find themselves retiring without an employee pension plan. While government pension plans help make retirement possible, the money these plans provide is often not enough. Statistics show that only about 15-20 percent of middle-income Canadians retiring without an employee pension have saved enough to retire.

So how do you retire comfortably if you don’t have an employee pension plan?

Have a Budget

You simply cannot plan for your retirement if you do not have a budget. No matter your age, you should put some money aside each month for retirement. Look at your budget and see where you can make cuts so that you can put some extra money aside for retirement. The more you can save now, the easier it will be to have a comfortable retirement.

Start Early

How much should you be saving? That depends on how much you expect to spend in retirement and when you start saving.

Assume you want to save a million dollars for retirement. That sounds like a lot of money and it is. However, if you’re going to be retired for 20 years, a million dollars works out to about $50,000 a year, which would be a comfortable retirement for most people. So how do you get there?

The earlier you start saving, the less you’ll have to put aside to each month to reach your million-dollar goal. This is because the sooner you put money into a savings plan, the more time it has to grow.

For instance, if you start saving for retirement at age 25, you’ll need to put about $450 a month aside to have a million dollars in retirement savings by the time you reach age 65. However, if you start at 35, you’ll need to put about $865 each month to reach the same goal.

That said, having any retirement savings at all is better than having none, so even if you can’t put aside $865 each month when you’re 35, it’s still a very good idea to put something into a retirement savings plan.

Pay Off Your Debt

The last ten years of your working life should be the time where you put a significant focus on saving for retirement. However, these days, more and more people are reaching this time in their life with significant debt. Make it your goal to aggressively pay down your debt before you reach retirement age. Otherwise, you could end up struggling once you’re no longer employed.

How to Save for Retirement

The most common place to put the money you are saving for retirement is into an RRSP (Registered Retirement Savings Plan). In fact, some employers match RRSP contributions for their employees, so you should take advantage if your employer provides this option.

RRSP Benefits

A major benefit of an RRSP is that you get a tax deduction when you put the money in. This means you can avoid paying tax on what you put into the RRSP until you take it out during your retirement. This can be a big benefit if you expect to earn much more during your career than you will when you’re retired (which is the case for most people). However, there is a limit to how much you can contribute to an RRSP. This is determined by your income and how much you have contributed to date. You can find out how much contribution space you have left by looking the Notice of Assessment you receive from the Canada Revenue Agency after you file your income taxes.

Another possible option for retirement savings is a Tax Free Savings Account (TFSA).

TFSA Benefits

The money that you place in a TFSA grows tax free. This means you do not pay taxes when you take the money out of the account. There is also a limit to how much you can contribute to a TFSA. The amount has changed several times since this type of account was introduced in 2009, and it currently stands at $5500 a year. Unused contribution room is carried forward.