The idea of saving for retirement can be confusing and overwhelming, as you’re saving for a future event, years in advance, and with so many unknown variables. People are also living longer, and some Canadians even spend the same number of years in retirement as they did at work). 

With the nature of pension plans changing and the possibility of CPP payments fluctuating, you may wonder whether your retirement is secured.

With various ways Canadians can save, such as through an employer-sponsored plan or a Registered Retirement Savings Plan (RRSP), you may wonder: Is one better than the other? Or, if I already have one, is that good enough? Let’s break down everything you need to know about retirement and pension savings.

How can Canadians save for retirement?

Canadians can save for retirement in three ways: through Government pension plans, employer-sponsored pension plans, and individual retirement savings plans.

1. Government pension plans

In Canada, we have a federally regulated pension program (excluding Quebec who has its own) called the Canada Pension Plan (CPP), funded through contributions from Canadians and their employers over their working careers. The program is mandatory as a way to make sure that Canadians are saving for retirement.

At retirement, the amount you receive depends on how many years you’ve worked in Canada and how much you earned while working. It’s very uncommon to obtain the total amount of CPP each month, with the average Canadian receiving $613, around half of the maximum of $1,204.

In addition to CPP, Canadians can also receive Old Age Security (OAS) or the Guaranteed Income Supplement (GIS). These programs do not rely on your past work history; however, they are subject to various eligibility rules and may be reduced based on your income. In other words, they exist to help low-to-middle income Canadians.

Unfortunately, these programs were not meant to replace your income and do not provide for a safe retirement, even though many Canadian seniors in poverty currently live off these programs. On average, a Canadian will receive $8,500 per year from CPP and $7,400 from OAS, while average annual household expenditures total $62,183. Given these only support 25% of the average yearly expenses, Canadians must save in other ways.

2. Employer-sponsored pension plans (or Registered Pension Plans)

Historically, saving for retirement was primarily out of our hands here in Canada. Most Canadians had pension plans through their employers and would use the CPP and OAS as a supplement. But, as of the 1980s, employers started to reduce their pension programs or cut them all together because of inflation.

In 1977, the number of Canadian workers with Registered Pension Plans (RPP) was around 46.1% or nearly half, with the number now sitting at 37.1% of paid workers. This is in part due to the changing nature of work – with more people working contract jobs, working several part-time jobs at once, or being self-employed. As such, you’re one of the lucky ones if you currently have an employer-sponsored pension plan here in Canada.

Another ongoing change in the pension plan landscape has been the shift from Defined Benefit (DB) plans to Defined Contribution (DC) plans and how saving for retirement is even more unpredictable.

With both plans, you and your employer make contributions at varying rates, depending on the company. Contributions get pooled and invested within the plan. The difference lies with who takes on the market risk and who is responsible for managing the money.

With a DB plan, your retirement benefit is guaranteed, no matter how the market performs. If the money doesn’t grow as projected, your employer absorbs the loss as the manager of these funds. With a DC plan, your retirement benefit is not guaranteed and is subject to market risk. You are in charge of managing your money and may suffer from volatility in the markets before your retirement date. While employer-sponsored plans (DB or DC) are incredibly valuable and can produce three times the income than if you had invested the same amount in an individual plan, it may not be enough.

Why an employer-sponsored plan is not enough

Have you heard the saying, “don’t put all your eggs in one basket?” While your benefits aren’t subject to market risk with a DB plan compared to a DC plan, there is still business risk involved with both. What if your company goes bankrupt and can no longer meet its pension obligations? 

It’s not likely, but it can happen. Retired Sears employees are still trying to recuperate the $730 million in pension funds owed to them.

Other risks include changes to pension policies. For example, during COVID-19, there was a discussion of employers being legally able to halt contributions to pension plans. Other things that may pressure company pension plans include many baby boomers entering retirement and historically low interest rates.

Essentially, nothing is guaranteed, even with a DB plan. And again, people are living longer, spending less time in the workforce than years in retirement, and have more debt, LOTS of it. With all of these factors taken into account, Canadians need to take on greater personal responsibility when it comes to saving for their retirement, outside of just their pension plan.

3. Individual retirement savings plans

Individual retirement savings plans can help you save for retirement on your own. Unlike employer-sponsored plans, all Canadians have access. These include the Registered Retirement Savings Plan (RRSP), and the Tax-Free Savings Account (TFSA), which you may not have realized could be used to save for retirement.

Since the government wants to give citizens equal access to tax-deferred retirement savings, your RRSP room will be reduced if you have an RPP with your employer. Your annual RRSP room will be reduced by your Pension Adjustment (PA), which reflects the value of the benefits

you earned under your pension plan. If you have an RPP, it’s worth checking if you have any RRSP room left through the CRA website.

The TFSA is another excellent way to save for retirement, as it’s more flexible, your contribution room isn’t diminished if you already have a pension plan, and you’ll owe no tax at all when you withdraw in retirement.

Remember, the difference between investing individually for retirement compared to a pension plan is that the responsibility of growing the money is in your hands. Make sure you do your research or speak to a professional about an investment strategy that fits your risk tolerance and retirement time horizon.

You got this.

Maybe you don’t have a pension plan, or maybe you do. Maybe you’ve opened up an RRSP, or maybe you haven’t. I know all this talk about saving for retirement can be overwhelming, but don’t get discouraged. 

You’re doing yourself an amazing favour simply by educating yourself and learning more. But, remember, there is no one path to retirement. Find what works for you and your budget.