Tuesday, December 4, 2012

Life Changes: Re-writing A Retirement Plan

When life happens you either adapt to the changes or risk a lifetime of headaches. That’s why it’s important to remain flexable when making any plan in life, whether it be financial or not.

I’ll be honest, I’ve never had a real plan for retirement until my late twenties. Once I developed a realistic plan, it never really occured to me that it would ever change. Now that I have a new career with different retirement options, I had to re-write my retirement plan to integrate some important changes.

RRSP Overhaul

My previous employer had an RRSP matching program where they would match a certain amount of my contribution. Even though the RRSP is my least favourite savings vehicle, I would have been a fool not to enroll in this program and get free money from my employer. After almost 9 years of matching, a majority of my investments are in my RRSP account. I didn’t have a pension and I would be relying heavily on my RRSP to fund my retirement.

Most people like the RRSP because of the refund cheques they receive in the mail from the government during tax time. What they nearly always forget is that it’s their money and they will have to pay it back eventually. Since I won’t be contributing any more money into an RRSP ever again (if I can help it), I will continue to re-invest any deposited dividends. My RRSP will now be sitting on the pine as a back-up, thanks to my new retirement all-star: my defined benefit pension!

Defined Benefit Pension Plan

A defined benefit pension (DBP) lets me know roughly how much money I will be paid from the plan during my retirement. Depending on my age and years of service, I can also calculate when I can retire with a full pension or what the penalty will be if I choose to retire early.

I am incredibly happy having a defined benefit pension in my retirement arsenal. It will allow me to focus my money in other areas; perhaps allow me to invest some land or pay down my mortgage even faster. Even though a pension can give you some peace of mind for the future, it’s always important not to put all your eggs in one basket. That’s why I’ll still be investing in my TFSA to build a passive, tax-free income to supplement my retirement income.

TFSA Top Up

It’s no secret that I LOVE the TFSA and I still plan on contributing the maximum amount each year. By investing in dividend paying common shares in my TFSA, I’ll be able to withdraw the dividend income tax-free in my retirement. I can even withdraw the dividends for emergencies or perhaps help pay for our future children’s education. The sky is the limit to what a TFSA can do for you compared to registered investments.

The only thing better then a TFSA, in my mind, is two TFSAs! Having my wife’s TFSA in addition to mine will make a great combination in our retirement arsenal. We need to play catch up with my wife’s tfsa but it will be a lot easier thanks to my new pension.

I’m sure my retirement plan will be constantly changing through out my life. The changes will be both good and bad, but having a game plan will make it easier dealing with the ups and downs in my journey to financial freedom.

This article was written by The Loonie Bin. If you enjoyed this article, please consider subscribing to his feed.

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