The Complete Guide to Retirement Planning in Alberta

If you’re thinking how should I start saving for retirement? The answer is to start right now with the amount you can — even if it’s $25 per paycheque. If you’re already saving, consider the 50/30/20 rule from our Financial Management Fundamentals Guide, where 50% of your income goes towards necessities, 30% goes to wants and 20% goes to saving for financial goals, including your retirement savings. Try ATB’s early investing calculator to see the impact on your savings habits.

So, how do you start retirement planning? The first thing to do is understand your current financial situation. Creating a comprehensive financial plan will provide the foundation for reaching all your financial and lifestyle goals, not just those in retirement.

Creating a financial plan can sound intimidating, but we promise when you take it step-by-step you'll feel confident knowing you are on the right path to turning your financial aspirations and retirement dreams into goals you can achieve. In fact, according to a three year study of 15,000 Canadians commissioned by FP Canada, 81% of survey participants with a comprehensive financial plan said they are on track with their financial affairs, compared to only 44% of those with no financial plan. Participants that engage in comprehensive financial planning also report significantly higher levels of financial and emotional well-being and are more confident that they can deal with financial challenges in life.

What exactly is financial planning? It’s the process of reviewing your current financial situation, setting short, medium and long-term goals—including retirement—and developing strategies and steps to achieve your goals. Implementation and ongoing review of your plan and progress is also key. As we go through the process of creating a personal financial plan, we’ll show you how making small changes will add up for your retirement savings plan. Here’s checklist to help you get started:

With your current financial situation in order, it’s time to focus on your retirement planning. When people think about retirement planning, the essential question is—“Will I have enough?” 

To answer that question you need to envision what you want your life in retirement to look like and understand where your retirement income will come from. This will help you determine:

• how much money you will need in retirement
• if you are on track or if there is a shortfall
• how much additional saving you have to do to reach your retirement goals.

Imagine what you want from retirement 

Take some time to think about your life once you stop working. What does your retirement look like? Maybe you want to spend more time with friends and family. Perhaps you’re considering downsizing and moving away from the hustle and bustle. Or, maybe you’ve got your eyes locked on jet setting twice a year. It’s important to consider the following:

• When would you like to retire?
  • Do you have a specific date in mind or is your timeline flexible?
  • Do you intend to stop working completely?
  • Do you plan on working part-time? Or in a different industry?
• Where will you be living?
  • Will you keep your current home?
  • Will you live in your current home or rent it out?
  • Will you sell your home and relocate, if so where?
  • Will you have a vacation property?
  • Will you have mortgage payments?
  • Do you have a plan if you require supportive living or long-term care?
  • Will you be driving more or less?
• What will you be doing with your time?
  • How much traveling do you want to do? Where will you go?
  • What hobbies will you have?
  • Will you volunteer?
  • Will you keep that gym membership? Will you get a gym membership?
  • Will you eat out more or have time to cook at home more?

You may not have all of the answers to these questions right now, but this exercise will help you picture what your life may look like in retirement.

Take a deeper dive into thinking about your post-work life by reading How to test drive your retirement plans.

How much will I need for my retirement? 

With your dream retirement and costs clearer in your mind, now it’s time to start writing it all down. Here’s what to do: 

• Make a list of all of your expected expenses. Be as detailed as you can. Start with your daily expenses, such as groceries, gasoline, pet food and lattes. Think about your monthly expenses such as loan payments, clothing, gym memberships, insurance payments and your children's or grandchildren’s extracurricular activities. Then add in occasional or annual expenses, such as birthday and holiday gifts, vacations, car maintenance and veterinary bills.
• If you anticipate that you'll have debt, like a mortgage, bank loan, car loan or credit cards, write down what you expect the monthly obligations to be. 

Once you know how much your retirement lifestyle will cost, you can figure out how much income you need every year to make your retirement dream a reality. Don't forget to consider the rate of inflation on your income requirements. Assume a two or three percent inflation rate to protect your purchasing power over time. 

Learn more about how to create a retirement savings plan.

Where will my retirement income come from? 

Once you’ve mapped out approximately how much money you need each year, it’s time to consider where it will come from—also known as sources of retirement income. These are some of the most common sources of retirement income:

Government benefits

The government of Canada has two main programs that provide retirement income to Canadians. 

• The Canada Pension Plan (CPP) provides workers and their families with a basic level of income at retirement. CPP benefits are financed by compulsory contributions made through deductions from your pay cheque, or if you are self-employed, through direct payments to the Canada Revenue Agency. The amount you will receive is based on both your contribution history and the age at which you elect to start receiving your payments. Learn more about the basics of CPP and the new changes to increase the benefit.
  
  
• Old Age Security (OAS) is a government retirement benefit that is funded from general tax revenues, not contributions. OAS benefits are determined based on your residency in Canada after age 18. The amount you qualify for will depend on how long you resided in Canada after age 18. Learn more about OAS eligibility.
  • The Guaranteed Income Supplement (GIS) is a non-taxable pension provided through the OAS program to low income OAS recipients that are living in Canada. Your GIS amount will depend upon your marital status and your previous year’s income (or combined annual income in the case of couples). Read more about GIS.

Try out the Government of Canada’s retirement income calculator to estimate how much you may receive. 

Employer pension plan

If you’re a member of an employer sponsored pension plan, you’re entitled to pension benefits once you retire. Review the details of your plan to determine what type of pension you have, either a defined benefit plan or a defined contribution plan and how much you can expect to receive when you retire. Don’t forget any pension income from previous employers as well as your current employer. 

Now is a good time to consider maximizing any investing and savings options that may be available through your employer’s savings plans — especially if your employer offers matching contributions.

Personal savings and investments

Your employer pension and government benefits alone are likely not enough to fund your retirement goals. That’s why your retirement savings plan is key. And it’s why everyone is always telling you to contribute the maximum you can to your RRSP and TFSA. Your investments will also provide you with flexibility. The amounts you receive from the government or your pension are fixed, whereas having a sufficient level of savings and investments gives you the opportunity to spend more on wants, not just needs.

Less common sources of retirement income may also be available to you including, but not limited to:

• compensation from part-time employment
• rental income
• income from a family business
• a possible inheritance 

Now that you have a good idea of where your retirement income will come from you have to determine how much is available from each income source. 

• Determine how much you will be entitled to through CPP & OAS. Your CPP estimate can be obtained through your MyServiceCanada Account.
• If you are a member of an employer pension plan refer to your statement for an estimate of what you will be entitled to at retirement
• Obtain current balances in your personal investment accounts

You’ve determined your desired level of annual income in retirement and where that income will come from, now you have to determine how much you will receive from each income source and if your current investments and savings amounts are sufficient to reach your goal. 

Am I on track with my retirement savings?

There are many estimates out there with regards to how much you will need in retirement (70% of your income), or how much you should be saving for retirement (10% - 20% of your income), or even what percentage of your assets you will be able to withdraw each year (the 4% rule, which is now the 3% rule by most accounts). However, retirement is not what it used to be and these rules of thumb are no longer a substitute for holistic retirement planning.  As a simple example, depending on the taxation of the investment vehicle you are invested in, knowing how much you can withdraw does not equate to how much income you will have. 

In addition, people are retiring sooner, being more active, living longer, there is more flexibility with regards to taking government benefits, there are more types of savings plans available for Canadians (TFSA vs. RRSP) and less people with defined benefit pension plans, or even pension plans at all. As a result these one size fits all rules of thumb are no longer appropriate. With all these complexities, applying evidence based financial planning practices based on your specific situation is key to a successful retirement plan. 

As there are many calculations, tax considerations and assumptions involved, financial planning software or, better yet, working with a financial advisor is recommended when completing your retirement plan.

A retirement plan will illustrate what your assets will grow to by the time you retire, the total amount of income that will be provided each year by your government benefits, pension and other revenue sources, and calculate the withdrawals required from your investments to top up that income to provide you with the desired level of after tax income each year. It will determine if there is a shortfall or surplus and can calculate the amount of additional savings required each year to reach your desired income level in retirement.

What can impact my retirement income?

Before you estimate how much personal savings you’ll need to reach your retirement income goal, there is one more set of circumstances to consider: The risks to your income sources. 

• Inflation: Consider the rate of inflation on your income requirements. Assume a two or three percent indexing rate to protect your purchasing power over time.
• Health risks: You might know or anticipate health issues in retirement that you need to prepare for financially. Create an emergency fund and build in estimated costs to your budget.
• Longevity risks: This refers to outliving your retirement savings. It’s important to create a plan that includes a prudent estimate for how long you need your funds to last.  If there is no reason to anticipate a shorter than average life expectancy it is recommended that your retirement plan project to at least age 95.
• Market volatility: This one is impossible to predict, so instead focus on protecting against it by diversifying your retirement savings.
• Unprecedented events: The global pandemic is an example of a scenario you may not have considered while building out your retirement plan. Again, an emergency fund is a key part of protecting against such events.

How much should I have saved for retirement?

Your personal retirement savings will bridge the gap between what you’ve estimated for your yearly retirement income and what you can expect from government benefits, employer pension plans and other sources of income. 

By reviewing how much retirement savings you already have plus the amount you’re regularly saving and investing, you can see how much more you might need to save for retirement. This can be calculated with financial planning software or working with a financial advisor, who can also recommend which type of investment account you should be investing in.

Don’t be alarmed if you have a shortfall. The majority of Canadians rely on personal retirement savings to achieve their goals. The good news is you now know approximately how much savings you need to reach your retirement income target. 

What’s your saving style? Are you a Savvy Saver, a So-So Saver or a Slacker Saver?

Three easy ways to save more for retirement 

Whether you’ve discovered that you’re ahead in saving for your retirement or you’re looking to boost how much you save every year, here are three ways to start saving more right away: 

1. Forced savings plan

Good saving habits make building your retirement savings a lot easier. Automating the process with a Pre-Authorized Contribution (PAC) allows your savings to grow even when life gets busy. A PAC is a recurring automatic withdrawal that transfers a pre-specified amount of money from your chosen bank account and contributes the funds to the investment account of your choice. You can schedule a PAC for any frequency and set the amount of money you want to deposit each payment period.

Setting up a PAC also allows you to take advantage of dollar cost averaging. This is when you buy a fixed dollar amount of a particular investment on a regular schedule, regardless of the share or unit price. The goal is to purchase more shares when the prices are low and buy fewer shares when the prices are high, averaging out the price of your total investment.

2. Employer benefit plan

If your workplace has a retirement savings plan, like a defined benefit or defined contribution plan, be sure to sign up for it. Many employers will offer to match your retirement plan contributions, so contribute at least enough to take full advantage of that—it’s basically free money. For example, an employer may offer to match 100% of employee contributions up to 3% of your salary. If you earn $50,000 a year and contribute $1,500 to your retirement plan, your employer would add in another $1,500. 

3. Spousal RRSP

Okay, this one is a bit more advanced but worth considering if you’re married or in a common law relationship. Spousal RRSPs allow the higher-earning spouse to invest for the benefit of the lower-income spouse and claim the tax deduction. With the introduction of Pension Income Splitting in 2007, there is a reduced need for spousal RRSPs. However, since RRIF income cannot be split until age 65, contributing to a spousal RRSP provides an opportunity for a more even allocation of retirement income before age 65.

With your retirement savings target in place and your shortfalls identified, it’s time to put your hard-earned dollars to work in the most efficient investment vehicles you can. You might be asking: Where should I be investing for my retirement? That’s where RRSPs, TFSAs and cash accounts come into play. 

Up next, we’ll explore common questions about investing for retirement such as: 

• What are registered retirement savings plans (RRSPs) and what are the benefits?
• What are tax-free savings accounts (TFSAs) and what are the benefits?
• What is the difference between RRSPs and TFSAs?

What are registered retirement savings plans (RRSPs)?

The RRSP was introduced by the government of Canada in 1957 as a way to encourage greater retirement savings among Canadians. RRSPs are “tax-deferred” investment vehicles. You don’t pay income tax on the money you contribute to your RRSP in the year you make the contribution, but you do pay tax on your withdrawals. Your money grows in your RRSP tax-deferred, giving you enhanced earnings potential and tax savings if you’re in a lower income tax bracket in retirement than when you made the contribution.

Sound too good to be true? The government does limit the amount you can contribute to your RRSP each year. That limit is your available RRSP contribution room and is determined by several factors, including:

• Unused contribution room carried forward from the previous year
  The lesser of 18% of previous year’s income and the current year RRSP dollar limit
• Pension adjustments
• Pension adjustment reversals
• Amounts contributed but not yet deducted

Got room? Learn about your RRSP contribution limits

If you have a spouse or common-law partner, one of the most common and effective methods of income splitting is with the use of a spousal or common-law partner RRSP. A spousal or common-law partner RRSP provides retirement savings for one spouse or common-law partner with the income deduction for the contribution being claimed by the other. The purpose of this strategy is to provide both individuals with similar incomes and similar tax rates in retirement.

Even if you’ve started saving for retirement a little later, know that tax deductible contributions can be made to your RRSP until age 71, and the assets continue to grow tax deferred throughout retirement until withdrawn. 

What are the benefits of RRSPs?

There are tax advantages available when investing in an RRSP: 

Immediate tax savings

Your contributions are tax deductible. Every dollar you contribute to your RRSP, up to your available contribution room, can be deducted from your taxable income. The amount of tax savings depends on your marginal tax rate — the higher your marginal tax rate the greater the benefit of an RRSP contribution.

based on an investment of $1000. (source: RRSP guide)

Taxes are deferred

Investments in your RRSP increase in value on a tax-deferred basis as any earnings (interest, dividends, capital gains) are not taxed at the time they are earned. The contributions and growth in your RRSP are only taxed at the time the funds are withdrawn, which can result in a significantly larger retirement income stream when compared to saving in a non-registered account.

An additional benefit is that there are deterrents in place that discourage early withdrawals, ensuring your savings are there when you need them. Since withdrawals are taxable and contribution room is lost when you make a withdrawal, you’re less likely to access these funds prematurely and more likely to leave your investments growing in the plan until retirement.

Four tips for getting the most out of your RRSP.

What is a tax-free savings account (TFSA)?

A tax-free savings account (TFSA) is an investment vehicle that provides tax free savings and growth. A TFSA offers greater flexibility than an RRSP as it allows you to save money tax efficiently for any purpose, not just retirement. Every Canadian resident that is 18 years of age or older is eligible to contribute to a TFSA. 

You pay regular income tax on your TFSA contributions in the year that you make them, but those contributions then grow tax-free. You don’t pay tax on your withdrawals, even if you’ve earned significant investment returns on your contributions.

Similar to RRSPs, the amount that you can contribute to your TFSA is limited by your individual contribution room. Each year your room is increased by the TFSA dollar limit for that year. And if you haven't made contributions in the past few years, any unused contribution room carries over. 

Have you never contributed to a TFSA? If you have been a resident of Canada, over the age of 18 since 2009 and never contributed, you will have at least $81,500 of TFSA contribution room available.

What are the benefits of TFSAs?

There are several advantages to investing in a TFSA:

• Tax free investing: Being able to grow your investments and make withdrawals without any future tax consequences is a significant benefit.
• Flexibility: Since you don’t have to pay tax when you withdraw from your TFSA and the amount you withdraw is added back to your contribution room in the following year, it’s easy to access these funds at any time, for any reason. As such, TFSAs are a great option if you are unsure when you will need to use your savings or you are saving for something other than retirement.
• No impact on government benefits and credits: Most provincial and federal income-tested tax credits and benefits, like the Canada Child Benefit (CCB), GST credit, age credit, GIS benefit and Employment Income (EI) benefits will NOT be impacted by withdrawals made or income earned in your TFSA. Withdrawals will also not generate any OAS clawback.

Retirement savings accounts: RRSP vs TFSA

TFSAs and RRSPs have many similarities but also have many differences. Both offer tax benefits and are designed to encourage personal saving and investing:

If you are saving for something other than retirement, you would most likely contribute to a TFSA. If you are saving for retirement, there are some factors to consider to help you decide between the RRSP and TFSA.

Since TFSAs & RRSPs are taxed differently, your tax rate when you make the contribution compared to your tax rate when you make the withdrawal should direct your decision. Follow these general guidelines:

• If your tax rate is likely to be higher when you make withdrawals, contribute to a TFSA.
• If your tax rate is the same at contribution date and withdrawal date, it doesn’t matter; the vehicles were designed to be tax equal.
• If your tax rate is likely to be lower when you make withdrawals (i.e. when you’re retired), then contribute to an RRSP.

Another way to think about it is to invest based on your career stage and work earnings:

• Early in your career, when your income and your marginal tax rate are likely to be lower, consider investing in a TFSA rather than an RRSP.
• In your mid-career, when your income is higher, investing in both a TFSA and RRSP can be beneficial, allowing for tax-free withdrawals at any time from your TFSA if you should need them.
• As you reach the late stages of your career your earnings will likely peak and be higher than your anticipated retirement income. Since your tax rate will be at its highest, it’s advisable to invest in an RRSP at this time in order to defer taxes. If your RRSP contribution room has been used up, any excess savings can be invested in a TFSA.

You’ve done the hard work of building a retirement savings plan and putting it into motion. As you diligently follow your plan, it’s necessary to check in on the progress every year. Life will change and so can your dreams and goals, which will impact your long-term savings plan.  

3 tips for reaching your retirement goals

1. Keep saving in your retirement accounts

Life can bring unexpected—and sometimes unwanted—disruptions that risk interrupting your retirement savings plans. An all too common one is a period of unemployment. During these moments, aim to keep investing in your RRSP or TFSA. Even if you have to reduce the amount you're contributing, try to keep up the habit. If you stop, it can be difficult to start up again and you don’t want to risk losing the impact compound growth can have on your savings. 

2. Aim to increase how much you save

Whether it’s a lump sum payment to your RRSP or increasing your automatic savings amount by $25, set a goal to increase how much you save each year. One goal can be to increase your regular contributions any time you get a raise. Remember, even small changes—like cutting every day expenses — can have a big impact over long periods of time.

3. Review your plan every year

Set aside time every year to review your retirement savings plan and celebrate your success in getting one step closer to your dreams. Consider the following:

• Check your goals: Are your retirement goals still in line with what you want? Has your lifestyle needs or health changed in a way that will impact the money you will need in retirement?
• Review your returns: Set aside time to review how your employer benefit plan and personal retirement investments are doing. Are you saving as much as you planned? Are your investments making the kind of return you planned for?
• Keep an eyes on fees: Review your quarterly investment statements to ensure management fees have not increased significantly enough to impact your returns.
• Make adjustments: If you’ve noticed any major changes that impact your retirement savings plan make any necessary changes — like reducing expenses or increasing savings — to ensure you stay on target.  

Are you getting closer to retirement? Five things to know

As you inch closer to your retirement date, you’re likely asking how all these savings transform into money you withdraw and live on. Here are some basics you’ll want to understand:

1. What is decumulation?

Decumulation is the term used for withdrawing and living on your retirement savings. When you’re saving for retirement, you’re in the accumulation phase. When you’re living in retirement, you’re in the decumulation phase. There are factors to consider for your decumulation phase when retirement planning, such as which retirement accounts to draw from first and when to start withdrawing. These decisions will impact taxation, values of your various investments and the efficiency of your retirement plan. 

2. What is a RRIF?

A Registered Retirement Income Fund (RRIF) is established with a transfer of funds from your RRSP and works like an RRSP in reverse. Instead of putting money into an RRSP to save for retirement, withdrawals are made from your RRIF to provide you with income in retirement. There is no maximum amount you can withdraw, but there are minimum withdrawals required each year. The income provided through a RRIF withdrawal is fully taxable, however, the funds that remain in the plan continue to grow on a tax-deferred basis until they are withdrawn.

3. What is an annuity?

An annuity will pay you a set amount of annual income over your lifetime or a specified period of time. The annuity is purchased from an insurance company and the amount of income you will be entitled to is based on a variety of factors, including the current interest rate, your age, health and life expectancy. The taxation of the payments will depend on if the annuity was purchased with a transfer from an RRSP/RRIF or with your non-registered investments.

An annuity provides a guaranteed amount of income for a defined time period, however, annuities are not flexible. When you purchase an annuity, you’re giving up control over your capital in exchange for a guaranteed income. This loss of control makes some people uncomfortable as you can no longer access the capital if an unexpected expense arises. Guaranteed income, however, may appeal to others. If an annuity is purchased without indexing, inflation will also be a factor as the purchasing power of the annuity payments will decrease over time.

4. What is a LIRA?

When you retire or terminate employment, you may have the option to transfer the proceeds from your pension plan on a tax-deferred basis into a Locked-in Retirement Account (LIRA). Although similar to an RRSP, the proceeds have come from an employer pension and are meant to provide lifetime income. As a result, LIRA accounts include an addendum which contains rules limiting access to these funds and also includes spousal protections. If you have an Alberta LIRA and are at least 50 years old, you can initiate annual retirement income with either the purchase of a life annuity or a transfer to a Life Income Fund (LIF).  

5. What is a LIF?

A LIF is the locked-in version of a RRIF and similar to a RRIF, provides the account holder with income in retirement. More specifically, a LIF is a RRIF that is subject to additional rules for withdrawals and provides for spousal protections. However, unlike a RRIF, which only has regulated minimum withdrawal amounts, a LIF also has maximum withdrawal amounts. Since these funds originated from a pension plan and were meant to provide the pension plan member with a lifetime retirement income, pension legislation imposes a maximum amount on the withdrawal each year to ensure the proceeds cannot be spent before a certain age. Generally the maximum withdrawal percentage ensures that there is ongoing income to at least age 90.

One size does not fit all when it comes to retirement planning. Although most individuals will have similar assets and income sources in retirement, there are those that will find themselves with unique retirement situations that require alternative retirement planning options.

Retirement planning for business owners

ATB conducted a survey on retirement and succession planning. Almost one third (32%) of the small and mid-sized business owners we surveyed are planning to retire within the next five years, and just under half (47%) are planning on selling all or part of their business to help finance their retirement. Despite this, only 27% have a formal personal financial plan for retirement and only 30% have identified a successor for the business.

As a business owner, you actually have more options when it comes to retirement planning compared to someone who is an employee. You can take a salary and make RRSP contributions. If you find you don’t have a lot of RRSP room, you can maximize your tax free savings account (TFSA). Some business owners choose to pay themselves in dividends, allowing any surplus to stay in the company where it can be invested back in stocks, bonds or growing the business. Then, when you stop working, you can use those investments to fund your retirement. Read more about Retirement planning for business owners.

There are also non-financial nuances for business owners when it comes to transitioning from their business. Taking care of employees, clients, partners or suppliers and ensuring your business continues to thrive after you’ve left is part of successful succession planning for your business. 

Retirement planning for those with a disability

A Registered Disability Savings Plan (RDSP) is a long term savings plan for individuals with a disability, essentially a retirement savings plan. Often individuals with a disability wouldn't have the same opportunity to save for retirement as others; they may not have access to a pension plan, may not be earning income that would generate RRSP room, etc. As a result, the RDSP was established to give those with a disability the opportunity to save tax-deferred into a plan that provides lifetime income to the holder starting at age 60. 

In addition to your own RDSP contributions, government incentives are also available in the form of: 

• Canada Disability Savings Bond
• Canada Disability Savings Grant 

Any grants and bonds paid into the plan, as well as the RDSP earnings and contributions, grow on a tax-deferred basis until withdrawn from the plan. If you are an individual receiving Alberta’s Assured Income for the Severely Handicapped (AISH), unlike other investment options, neither RDSP assets nor the income from an RDSP will impact your eligibility for AISH. 

To learn more about RDSPs, or to determine if you or someone you know would be eligible to open an RDSP download the ATB Wealth RDSP Guide. 

When it comes to retirement planning, remember that regardless of your age, right now is the best time to take action. This complete guide to retirement planning in Alberta provides you a step-by-step process to start creating your retirement saving goals. If you’re looking for an even deeper dive into retirement planning, download our free guide.