RETIREMENT PLANNING

Why a secure future means paddling your own canoe

With the passing of each federal budget, it's becoming clearer that Canadians will need to make their own way

Would you consider yourself well off if you and your spouse had $78,000 a year coming in? Under the government's latest pension reform proposals, if your combined income reaches that amount, you're too prosperous to qualify for any part of the new Seniors Benefit. For singles, the cut-off point is $52,000 annually.

In fact, there is just one way you'll qualify for the full Seniors Benefit of $11,420 ($18,400 for couples): Be sure to have no income whatsoever from other sources. With income of only $5,000 a year, your Seniors Benefit will be chopped by $2,500.

Clearly, if you're looking forward to a financially secure retirement, you'll need a solid financial plan. Then you'll have to rely more on your own financial resources -- and resourcefulness.

Part of a trend

The Seniors Benefit is scheduled to come into effect in 2001, to replace the existing programs of Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). It makes the latest stage in a series of government changes to assistance for retirees.

For several years now OAS has been "clawed back" by the government if your tax return shows an annual income of more than $53,215. Starting in July this year, OAS will be cut off completely for seniors with income above this level. In other words, instead of having to pay back some or all of your OAS, you won't receive any payments in the first place.

As an aging population increases the pressure on our social safety net, look for an even lower income threshold above which OAS is unavailable.

Pressure on CPP

Even the Canada Pension Plan, to which anyone who earns income contributes, is under review by the government. The result could be an increase in premiums, or a reduction or delay in benefits, or both. The bottom line? Universal benefits for seniors are a thing of the past.

With government programs running into difficulties, what can you do now to ensure the type of retirement lifestyle you've dreamed of?

How to take charge

Personal savings plans, such as Registered Retirement Savings Plans (RRSPs) and company pension plans, are the two biggest sources of retirement income for most middle-income Canadians, after government-funded plans. However, employer-sponsored pension plans are declining in relative importance, and probably will continue to do so. The reasons:

· Pressure on pensions. The most generous pension plans are usually found in the public sector. Fewer and fewer people are working for these types of organizations. Governments and large companies are hiring many more part-time or contract workers who do not qualify for their pension plans.

In addition, pension plans are most advantageous for people who spend their entire career with one employer. However, employees today are more likely to change companies in order to advance their careers, rather than waiting for promotions with the organization they first joined.

· The RRSP dilemma. That leaves RRSPs as the most viable retirement savings program for most middle-income Canadians.

Even here, though, the government is cutting back. Last spring's federal budget, for example, froze RRSP contribution limits at $13,500 until 2003. And RRSPs now must mature by the end of the year the plan-holder turns 69, instead of 71. That means two years' less tax-sheltered compounding.

These restrictions follow hard on the heels of last year's changes that reduced overcontributions to $2,000 from $8,000 and disallowed the transfer of retiring allowances into an RRSP after 1996.

In spite of these changes, the RRSP system remains the best way to defer taxes today and build up a retirement fund for tomorrow. To make sure your retirement is everything you hoped it would be, however, you have to work a little harder to get the best value from your RRSP, and augment it with personally held investments.

In our previous pages, we discussed investment strategies in the article "How to weather choppy market seas." In future issues, we'll look at some of the more sophisticated techniques you can use to increase your retirement income.

Guideposts to a secure retirement

Whether your retirement is around the corner or 20 years away, here are some guideposts to help you meet your goals.

• Don't count on the government. The demographic profile of Canada's population and its large accumulation debt mean that the government simply cannot afford to look after you in your retirement. Start making plans now to do it yourself.
• Start early. Funds saved and invested at an early age multiply to vastly greater amounts by the time you retire than funds saved during the years just prior to retirement.
• Boost your RRSP. Make the maximum allowable contributions to your RRSP every year, and catch up on prior years' contribution shortfalls as soon as you can. Revenue Canada's Notice of Assessment for 1995 tells you the maximum amount you can contribute for 1996.
• Take charge of your retirement. Ensure that the funds in your RRSP are invested so that you'll be able to achieve your retirement objectives. Be sure to have the appropriate level of diversification, with at least some investment in equities and some investment in international markets.