In most cases, you no longer can. Since the first edition of Chilton’s book appeared in 1989, the wages of typical Canadian workers (barbers or otherwise) have not kept up with the rising cost of houses, especially in larger cities. In my view, the slow and steady 10% savings rule just isn’t realistic for most young homeowners these days. So what should you do instead?

Consider an alternative strategy devised by Malcolm Hamilton, partner at Mercer, a human resources consultancy. You might call it the 20% strategy. He suggests earmarking 20% of your income for either housing payments or retirement savings throughout your life: “The entire 20% goes to the mortgage until the mortgage is gone, then the whole 20% goes to the RRSP,” says Hamilton.

I agree this strategy should help a lot of young Canadians afford a home and save for retirement. But Hamilton and Chilton agree it’s not for everyone. Will it work for you?

Different ways to build wealth. The beauty of the 20% strategy is that it allows you to successfully achieve two of life’s biggest financial goals. Early in life you can focus on buying as nice a house as you can afford, and you’ll pay off the mortgage as quickly as possible as your salary grows. Next you save for retirement in an intense, concentrated period. In my experience, this approach fits well with how most people naturally set their priorities.

Saving for retirement just isn’t important to most Canadians in their 20s and 30s, who are often desperately eager to buy a comfortable home in a good neighbourhood. But after buying that home, they chafe under the mortgage and want to get it off their backs as soon as possible. Then finally they turn their focus to building their retirement nest egg at a stage of life when that becomes increasingly important. It can all work out perfectly well, since paying off your mortgage and building up your investment balance are just different ways to build wealth.

To show how the 20% strategy could work in practice, I have developed a fictional scenario for a typical middle-class Canadian couple we’ll call Eric and Jennifer. Starting in their mid-20s, Eric and Jennifer set aside 20% of their income in order to accumulate a down payment on a home. Then in their early 30s they’re able to buy a $325,000 house with a mortgage of $260,000 (in today’s dollars). Each year they increase their mortgage payments in proportion to their growing salaries in order to pay it off in 17 years, just before they turn 50.

With the mortgage gone, they turn to building up their nest egg by applying 20% of their income (plus RRSP tax rebates) to savings. That allows them to save $525,000 (again, in today’s dollars) by the end of the year they turn 65. That’s more than adequate to provide a comfortable retirement.

Customize the strategy. Adopting this mortgage and savings plan at the 20% level should suit Canadians in average circumstances, says Hamilton. But to sustain their lifestyle in retirement, affluent Canadians should save more, while low-income Canadians will need less, he says.

Other circumstances may force you to tweak the strategy. Many young people are hobbled with enormous student debt and can’t start saving for a down payment immediately after graduating, although a good education might help earn bigger salaries later on. The plan also assumes you will have virtually no savings until you’re in your late 40s or early 50s, which isn’t the case for many people. Few Canadians outside the public sector enjoy good defined benefit pensions anymore, but many will by then have significant amounts in more modest employer-sponsored plans, or RRSPs and TFSAs. For better or worse, you’ll probably need to adjust the numbers accordingly.

Do you have the discipline? While Hamilton’s strategy should ease the path to home ownership and retirement savings for many Canadians, that doesn’t mean it’s easy. Like the slow and steady 10% savings approach, it too requires discipline. To do it properly, you first need to increase your mortgage payments as your salary increases in order to pay off the mortgage quickly. As a rule of thumb, if you have no other substantial savings or pension, you need to pay off your mortgage 15 to 20 years ahead of your retirement date, says Hamilton.

Then when you’re mortgage-free, you need to have the discipline to change gears: after decades of putting it off, you will need to suddenly embrace investing. That means socking away the full 20%, and avoiding the temptation to buy a larger house with a new mortgage, or ramp up your lifestyle expenses. (In my view, most people should also save their RRSP tax rebates on top of the 20% to make the most of the strategy.)

This is harder than it may sound. Chilton talks to a lot of people about their finances, and he says that while many Canadians are good at paying off their mortgages, he finds a large proportion don’t subsequently save enough when the mortgage is gone. After all, unless you’re willing to let the bank foreclose, you don’t have any choice when it comes to your mortgage payments. But you can come up with a dozen reasons not to invest regularly.

“I have no issue with people doing Malcolm’s approach as long as they avoid the behavioural issues,” says Chilton. Hamilton himself agrees that if you think you may lack the discipline to save large amounts late in your career, you’re probably better off sticking with the traditional approach.

Slow and steady wins some races. Indeed, while the 20% mortgage and savings rule should work well in many cases, it’s not for everybody. If you can start early and save a steady 10% of your income without jeopardizing your dreams of home ownership, then do it. The 10% rule recommended by Chilton is a proven strategy. Consider the fictional example of Hannah, a single woman who earns $50,000 a year (in today’s dollars) throughout her career. By saving 10% plus RRSP tax rebates over 40 years, she’d accumulate $450,000 nest egg in today’s dollars (assuming a conservative 5% return with inflation of 2.5%). That should provide her with a comfortable retirement if she also owns her home mortgage-free.

But the slow and steady strategy has potential pitfalls of its own. In particular, you’ll need to save more if you start late. “If you start at 46—or even 35—you have to save more than 10%,” says Chilton. “This is something we haven’t driven home as well as we should.”

Consider the example of Sergei, who has the same income as Hannah, but only starts saving at around age 40, leaving him just 25 years before retirement. Sergei has to save about 20% of his income to accumulate about the same nest egg as Hannah did by saving 10% for a longer period. In addition, if you’re a renter, you should probably save more than 10% to compensate for the fact that a paid-for home is a valuable asset that reduces your accommodation costs in retirement compared to equivalent rental properties.

Plan for the unexpected. No matter how good your plan, you never know how things will work out. With luck, the pleasant surprises (bigger salary increases, better investment returns, an unexpected inheritance) will at least offset the bad (maybe rising mortgage rates or falling housing prices after you purchase, or personal misfortune such as divorce, business failure or job loss). As Hamilton says, all you can do is “steer up the middle” and adjust when necessary.

That’s easy if the good surprises exceed the bad. But what if events turn out unfavourably? One thing to realize is that saving 20% of your income after your mortgage is paid off often leaves room to save more if you need to catch up. My sense is that saving 20% represents a moderate level of frugality for Canadians who are mortgage-free (see “How much can you save?”) If need be, you can probably save about 25% of your income, or more if you set your mind to it, especially late in your working life if you have no children, or if your kids are financially self-sufficient. And that’s not counting RRSP tax rebates. If you save those as well, that could bring your overall savings rate to 30% or more. So even if things don’t work out as you hoped, there’s a lot you can do to catch up.

While Chilton and Hamilton recommend different saving strategies, they hold each other in great regard. They also wholeheartedly agree that the best general advice you can follow is live within your means, pay down your mortgage and other debt as quickly as you can, and steadily build up your savings for retirement as soon as you can manage it. Do that diligently and you should enjoy a comfortable retirement—whatever strategy you use.

Starting July 1, 2013, you’ll be able to delay the start of your OAS for up to five years. In return, your payouts get bumped up by 7.2% for every year you defer. That means that you’ll get fewer payouts over your lifetime, but they will be bigger. Seniors currently receive a maximum OAS payout of $6,481 a year starting at age 65, so deferring OAS by one year can increase that by $467 annually (plus inflation adjustments). Deferring five years will give you a hefty $2,333 annual boost in current dollars.

Deferral tends to make sense if you expect to live particularly long. Of course that’s hard to predict, but it’s more likely if you’re in good health and your older relatives lived exceptionally long lives. Waiting to start OAS may also make sense if you work past 65 and you’re in a high tax bracket. In that case, waiting to take OAS could result in considerable tax savings.

PRPPs are meant to help Canadians save for retirement, filling in the growing gap left by the elimination of many employer pension plans. But unbeknownst to many Canadians the Saskatchewan Pension Plan (SPP) has been operating very much like a PRPP for the past 25 years.

Despite its name, the SPP is open to all Canadians. It’s a voluntary plan that allows members to contribute up to $2,500 annually, or transfer up to $10,000 a year from an existing RRSP. Regular contributions into the plan receive the same tax rebate as would for RSPs. Some see it as the template for the government’s planned rollout of PRPPs.

The plan caters to people who work for small or mid-sized businesses that don’t run their own pensions. According to Katherine Strutt, general manager of the SPP, Canadians are drawn to the plan because of its low fees, its competitive returns and its simple structure. Emphasis on simple. Plan members have only two investments to pick from, either a balanced fund (60% stocks, 40% bonds) or a money market fund.

“One of the secrets to our success is that we haven’t made it complex to be in the plan,” says Strutt. “A lack of choice isn’t a bad thing.”

Dave Makarchuk, a partner with Mercer, agrees that the SPP’s structure has a niche. “There’s no broker relationship that you have to deal with, there’s no bank relationship. You just put your money in, it’s pretty easy,” he says. It’s the sort of structure that caters to lower income Canadians that are having a hard time connecting to financial institutions or advisers.

Although the SPP isn’t marketed as a supplemental pension plan, that’s precisely what it is. And that’s where some of the criticisms of the SPP start to come in. “No Canadian could sustain a pension on the contribution limits that this plan allows,” says Makarchuk. “At best it’s a little extra something to supplement what you already have.”

The SPP’s small size is another issue. Currently the plan has about $300 million in assets under management, $200 million of which is in the plan’s balanced fund. As far as mutual funds go that’s tiny; as a pension it’s minuscule. Despite its size, the SPP’s done a good job containing its costs, operating with a management expense ratio of just 1.1%. The SPP, which is professionally managed, has produced an average return of 8%. Year to date the SPP’s balanced fund is up 1%, although the same fund shed 1% in 2011.

The fee is competitive when compared to financial advisors, says Makarchuk, but they’re nothing special when you compare the fee to other pension plans or Group RSPs. “It’s kind of an in-between option,” he says. Until it grows and can take advantage of economies of scale, the SPP likely won’t be able to lower its fees. But with its low contribution limits that’s still some time away.

Perhaps the biggest criticism of the SPP is over its limited flexibility. This is a key issue for Anthony Windeyer, a financial planner at Coast Capital Insurance Services in Vancouver. The SPP locks in your assets until you’re 55, he says. “Why would you take money from an RRSP, where you can take it out if you need to, and transfer it to a locked-in account that is highly restrictive?”

For this reason Windeyer suggests the SPP is best suited to someone who already has locked-in assets, like a pension from a former employer, and who is looking for a low-cost, turnkey solution. He adds this is a one-size-fits-all plan, which doesn’t offer any advice or accommodate its members should their investment goals or needs change.

Windeyer also isn’t overly impressed with the performance of the two investment options either. “From an investment perspective it’s what you’re going to get from everywhere else in the marketplace,” he says.

Still, the SPP’s structure is attracting interest. As of the end of 2011, 11% of the plan’s membership came from outside of Saskatchewan and membership continues to grow. “It speaks to people’s need for something that’s simple and easy to use and has a really good expense ratio so people aren’t losing so much of their assets to fees,” says Strutt. “I think that resonates to a lot of people.”

Makarchuk, however, sees it a different way. “For people who are scared of banks and scared of financial planners and don’t trust anyone and want to save that’s where things like the SPP and PRPPs maybe have a home.”

McKinsey and Company studied the balance sheets of more than 10,000 Canadian working-age households in 2011 and found 23% of them aren’t building the kind of nest egg that will allow them to maintain their current lifestyle in retirement.

This group will have to “significantly adjust their standard of living or delay their retirement if they continue on the same savings path,” said the report entitled Are Canadians Ready for Retirement?

What’s more, higher-income Canadians appear to be in the worst shape. Thirty-eight per cent of younger high-income workers are ill-prepared for retirement and 41% in the older high-income category aren’t on the right track.

“In this cohort, unprepared households have failed to save sufficiently or have accumulated too much debt,” the report said.

That compares to just 4% in similar households earning much less.

That’s because lower income workers typically live more modest lifestyles and won’t notice much difference once their universal and workplace benefits such as the Guaranteed Income Supplement, Old Age Security and the Canada Pension Plan kick in.

But, as the report points out, this group is not out the woods either. OAS and GIS don’t typically keep up with real wage growth meaning there will be a significant erosion of retirement readiness over time.

As far as middle-aged, middle-income households are concerned, some 21% aren’t on track for a comfortable retirement.

“The primary challenge facing these households is the clawback of (universal) benefits,” the report said. Last month, the federal government announced plans to raise the OAS program eligibility age from 65 to 67 for anyone under the age of 54.

The consequence of all this is that even middle-income Canadians will have to rely more heavily on workplace and personal retirement savings to pay for expenses once they leave the working world.

For every $0.50 reduction in benefits, this group is expected to draw $1 from their registered accounts, including RRSPs, the McKinsey report estimates.

The graph below illustrates how higher-income Canadians will be left to their own devices come retirement, whereas lower-income earners will rely more heavily on universal benefits:

Overall, the study found that households with an employer-sponsored retirement plan, property or a financial adviser are better prepared for retirement.

The data also shows that non-homeowners, single-person households and single parents are more likely to “fall short” in retirement.

Perhaps most troubling however are the study’s findings suggesting many Canadians don’t have a clue what they are in for come retirement. McKinsey surveyed households and found no co-relation between confidence for retirement and actual readiness.

–Updated at 5:15 p.m.

–Last updated at 5:25 p.m.

Ontario Premier Dalton McGuinty has agreed to a key NDP budget demand to temporarily hike taxes for the rich, according to reports.

The minority Liberals need NDP MPPs to vote in favour of the austerity budget Tuesday to avoid a snap election.

In exchange for her support, NDP Leader Andrea Horwath had been pushing McGuinty to include a new surtax on anyone earning more than $500,000 a year and succeeded, the Canadian Press is reporting.

In a statement issued late Sunday, Horwath said the surtax would help fund services like healthcare.

“Budget cutbacks will erode health care services in communities across the province. It’s only fair that those most able to help fund our public health care system be asked to do a little more,” she said.

The surtax affects an estimated 23,000 Ontarians. Under the plan, anyone making $600,000 for instance would have to cough up an extra $3,120 annually. The surtax would raise an additional $440 million to $570 million a year for Queen’s Park , according to NDP estimates.

McGuinty said Monday that money raised by the surtax will go towards paying down the province’s $15.2-billion deficit and will end once the budget is balanced in 2017, reports said.

Canadian Taxpayers Federation director Gregory Thomas said the surtax unfairly targets those who already pay more than the bottom 5 million tax filers combined.

“This is just herding a tiny minority of taxpayers into a small room and extracting money from them.”

“Essentially, McGuinty is telling high-income earners that they are not wanted in Ontario,” Thomas said adding that both the Liberals and NDP have violated the Taxpayer Protection Act since they did not file the tax-raising plan with the Chief Electoral Officer.

Either way it’s a first for Canada, said Bruce Ball national tax partner at BDO.

It’s still unclear exactly how the surtax will affect a person with a more modest salary but who has seen a one-time gain and reinvested that money. Of those who consistently bring in $500,000 or more per year, many own their own corporations, Ball said. “They can control how much income they take by changing their financial plan and leaving more money within the corporation.”

A study of a now defunct U.K. surtax on the richest 1% found high-income earners used legal means to reduce their taxable income including, increasing pension contributions, delaying receipt of income, converting income to capital gains, splitting incomes with spouses, reducing taxable income by working less, retiring early and by moving to countries with lower tax rates.

Still, Ontario’s surtax could give other struggling provinces ammunition to do the same.

Similar ideas are already being floated south of the border, including U.S. President Barack Obama’s “Buffett Rule” which would see anyone making more than $1 million taxed at a rate of 30%. Closer to home, a group of Canadian doctors is calling on all levels of government to raise income taxes on high-income earners. Doctors for Fair Taxation have proposed an additional 1% tax for anyone bringing in more than $100,000 per year with incrementally higher taxes on individuals making even more.

Ontario’s impact on pensions

The future of Canada’s pension system also hinges on the final draft of the budget.

The original document contained an ultimatum for the federal Conservatives hoping to launch Pooled Retirement Pension Plans. PRPPs have been touted as a low-cost alternative to company pension plans for small businesses. PRPPs would be mandatory for all employers to offer, though contributions by employees would be voluntary.

“Ontario will continue to work collaboratively with other provinces and the federal government to develop this model. However, Ontario believes the implementation of pension innovation should be tied to CPP enhancement as part of a comprehensive approach,” the province’s budget stated.

Federal Minister of State (Finance) Ted Menzies has responsibility for PRPPs at the federal level.

“The federal government cannot unilaterally change the CPP, and many provinces and small business are opposed to CPP premium hikes. But we can and are moving forward with PRPPs to give a low-cost pension option to the 60% of Canadians without a workplace pension plan. I would hope Dwight Duncan would not deny this viable low-cost option to hard working Ontario families,” a spokesperson for Menzies said in an emailed statement to MoneySense.ca on Monday.

“Ontario certainly tossed a wrench in the works. I don’t think anyone was expecting Ontario to take this position,” said Oma Sharma, a partner at human resources consulting firm Mercer and an expert on pensions.

Quebec on the other hand has already moved forward with its own version of PRPPs. The province’s Voluntary Retirement Savings Plan, or VRSP, is mandatory for bosses with five or more employees with at least one year of uninterrupted service to offer starting January 2015. Employees on the other hand, can decide whether or not to participate.

Eventually, the default contribution rate for workers will ramp up to 4% “which seems a little bit high for low income earners,” Sharma said.

There are other drawbacks. Employers will be charged with a number of new tasks including choosing a VRSP provider, deciding whether or not to top-up employee savings and facilitate VRSP contributions with payroll deductions.

“They are certain administrative duties that employers will not be able to escape and that is going to be onerous for small businesses, I’m sure.”

None of the other provinces have made clear statements for or against PRPPs, Sharma said. She expects another meeting on the issue later this summer but without Ontario’s support it will be an uphill battle for federal Finance Minister Jim Flaherty to get PRPPs off the ground.

Either way Canadians have their work cut out for them on the savings front, Sharma said, especially those that just missed the cutoff for existing OAS benefits.

“Clearly Canadians are going to have to work hard to make up the difference. They’ll have to save more,” she said.

“The bottom line is we are all living longer and I think we are going to be strained at every turn when we retire.”

Lise and her brothers realized their mother was facing a hard road. How could they ensure their mother was safe? How could they honour their mother’s wish to remain in her home “until she was carried out feet first?” And how much would it all cost?

Chances are you or a loved one will one day be in a situation much like the Hafners, where you’re making arrangements for an aging parent who needs help with daily activities. And like Priscilla, most people probably prefer to get that care in their own home, at least while it remains a viable choice. Unfortunately, just understanding the patchwork system of private and public senior care is no small feat.

To help, we’ll describe what you can expect from in-home care. Then we’ll advise what help governments typically provide, and what you’ll need to pay for yourself. We’ll help you understand when in-home care makes the most sense, and describe when a retirement residence or a nursing home are better alternatives. You may be surprised to learn these options are more attractive than you think.

Get by with a little help. When a parent or other relative starts to get frail, daily tasks often start to slip. Perhaps housework and yard work start to build up, and it is hard to keep fresh food in the fridge. The parent may no longer drive, and may have trouble managing basic activities like bathing, changing, preparing meals, or keeping track of their medications. The children often get more involved at this stage, but they are probably busy with their own families and jobs, and may not even live close by. It’s easy to feel overwhelmed.

“Get help before you’re totally exhausted,” suggests Peter Silin, a care manager and principal with Diamond Geriatrics, Inc. of Vancouver. (Care managers are typically hired by families to oversee care for a loved one.) There’s a whole industry of in-home caregivers devoted to helping frail seniors with daily activities. While you may feel guilty about off-loading these tasks, you’ll find that it frees you up to spend more meaningful time with your parent.

When you think of in-home care, you might picture it being done by a nurse. But most paid care in the home is provided by legions of hardworking paraprofessionals with job titles like “personal support worker” or “personal care worker.” They don’t have medical training, but they know all about helping with mundane activities like bathing, changing clothes, toileting, grooming, getting groceries, preparing meals, helping frail seniors eat, doing housework, driving to appointments, and helping your loved one get around the house. You can hire these personal care workers yourself, go through an agency, or sometimes get these services assigned and supported by governments. Providers range from non-profits like the Victorian Order of Nurses, to small local businesses, to large national companies.

If your loved one is mobile and needs just a bit of help, a personal care worker might come twice a week for two hours each to help with bathing and grooming. If your parent needs more help, the worker might come once a day to help with changing, toileting and preparing a hot meal as well.

Other home care needs may arise on a shorter-term basis, such as after an operation. (And here nurses are more likely to directly provide care.) Or if an elderly person is near the end of life, the hospital may send him or her home to be with family but have a nurse stop by periodically to provide pain medication. That’s what’s known as “palliative” care.

When Diane Speirs’s aunt came home from the hospital in Vancouver after falling and breaking her arm, a personal care worker visited for up to 1½ hours every day to help her change clothes and sanitary garments, clean the bathroom and kitchen, help her bathe and do laundry. But Diane and her husband Brian also visited four or five times a week to bring groceries, help with housework and yard work, pay bills and take her to doctor’s appointments. “We did whatever else needed to be done,” says Diane.

Who picks up the bill? At this point you’re probably wondering who pays for all this care. The good news is provincial governments will help out—but only so much. Short-term post-operative or palliative care are frequently covered, but beyond that, governments keep a tight hand on their wallets.

Typically provincial governments provide in-home care through a regional health agency. (They’re called local “health authorities” in B.C. and “community care access centres” in Ontario.) If you’re looking for government help, you can get a referral from the family doctor or contact your local health agency directly. On request, they’ll generally send a case manager to assess your loved one’s needs. They allocate their support based on need, and in some provinces, also on your ability to afford care yourself. The maximum you can generally expect government to pay for is two hours a day, says John Schram, president of the Canadian Home Care Association. Unfortunately, “that quite often isn’t enough. There’s a huge gap between what people need and what they typically get,” says Schram, who is also CEO of We Care Home Health Services LP.

Nothing is automatic, even for basic forms of government-paid help: you need to make your case persuasively. For example, in Ontario, “the government realizes that if the risk of falls can be minimized, there’s a better chance of keeping that senior safe and in the home,” says Audrey Miller, care manager and managing director of Elder Caring Inc. in Toronto. “What I’ve learned in my time is the way to get some help with bathing is to say something like ‘My mother had a fall. I’m concerned she’s at risk while bathing because she lives alone.’”

For what government or family members aren’t able to provide, you’ll need to pay for yourself—and the costs quickly escalate. Personal care workers hired through an agency typically cost $20 to $28 per hour, often with a minimum of two hours or more per visit. A full-time, live-in personal care worker can cost $1,800 to $3,000 a month, plus room and board. (Add another $1,500 to $2,000 a month if room and board is not provided.) If you need round-the-clock care, that may require two or three full-time caregivers. (Even live-in caregivers can only be asked to work one shift a day, and they require time off.) While most middle-class seniors can afford to pay for a little bit of help, you can quickly get to the point where only the very rich can afford it. “If money is not an issue, you can always make in-home care work, but it might mean making your home into a hospital,” says Miller.

Better than you think. Eventually you’re likely to go beyond the point when in-home care makes sense. Just where that point lies is different for everyone. It depends on your loved ones specific needs, personal preferences, finances, and the practical difficulties of providing extensive care in a family home. Fortunately, the other options are probably better than you think—and they are often within financial reach for middle-class Canadians.

A retirement home may be a good choice for seniors who want their own apartments but also want common meals, housekeeping and social activities in a home-like setting. They often have “independent living” sections for mobile residents who require little or no personal care, as well as “assisted living” for those who need moderate help with bathing, changing, or taking medicine. While retirement homes are not cheap, middle-class Canadians can usually afford them with the proceeds from selling their home.

If your loved one needs a lot of care—say he or she has advanced dementia or requires help with the most basic activities like transferring from a bed to a chair or toilet—it may be time for a publicly supported and regulated nursing home. We know what you’re thinking. The idea evokes images of dreary Victorian-era wards, but nursing homes these days are much homier and less institutional than you may think. (Confusingly, nursing homes go by many other names these days, such as “long-term care” in Ontario and “residential care” in B.C. )

Even if you can afford the most elaborate and expensive in-home care possible, your parent may prefer the social interaction of a retirement residence or nursing home to isolation. “You can buy all the services you need at home, but you can’t buy a community, a peer group, which you can get in assisted living, independent living or a nursing home,” says care manager Silin, who is also author of Nursing Homes and Assisted Living.

The Hafners’ journey. The right care option for your parent or loved one is ultimately a personal decision. Consider the journey the Hafners went through after Priscilla was diagnosed with Alzheimer’s. Lise and her brothers, Eric and Gordon, realized they needed help to keep her as safe and happy as possible.

The three siblings lived many miles away with families of their own in separate U.S. cities. As a result, they were limited in how much time they could spend directly caring for their mom in Toronto. Priscilla was an energetic, no-nonsense woman who had lived on her own since her husband died in 1994. But the combination of an independent spirit and the symptoms of the disease made their mother difficult to help. She turned down pleas from her children to move closer to one of them. That’s not surprising: seniors with Alzheimer’s tend to cherish familiar surroundings and get along best with people they know.

Lise and her brothers started off hiring a driver to take their mother to her daily appointments and other outings. That was enough for a while, but as the disease progressed they found Priscilla needed more. The next step was finding a live-in caregiver and making a few changes to the townhouse, like removing the knobs from the gas stove. Eventually they needed three live-in caregivers providing round-the-clock support. The siblings realized they were unable to coordinate all of this from afar. “Don’t underestimate the logistics,” Lise advises. “It’s expensive. It’s exhausting. It’s emotionally draining.”

The Hafners hired Audrey Miller of Elder Caring Inc. as care manager to handle the staff, monitor their mom’s condition, and take her to doctor’s appointments.

Gradually the elaborate system of in-home care became unworkable. As Priscilla’s Alzheimer’s got worse and other medical issues developed, they realized her home was no longer safe. And although they felt conflicted, they realized the need for safety trumped their desire to fulfill their mother’s wishes to stay in her home. “The time came when we just could not keep her in her home any longer,” Lise says.

So recently the three kids moved Priscilla to a facility that provides long-term specialized care for seniors with dementia. Now they’re working to make life as rich as possible in this new setting. “Is it ideal?” Lise asks. “No. But I think we all have a sense of relief, because we know we’re over the first major hurdle, because she is safe.”

Employer-sponsored pensions come in two flavours. Defined benefit (DB) plans promise to provide you with a predetermined amount of money in retirement. If there’s a shortfall, it’s the employer’s responsibility to make up the difference. With defined contribution (DC) plans, your income in retirement is not known in advance: it will depend on the performance of your investments. We’ll help you understand both types.

Along your journey toward retirement, you’ll face some daunting decisions about how to manage your plan. We’ll help you answer all of the most important questions so you can get the most out of your pension. It’s worth the effort: with proper planning, your pension can become the cornerstone of your retirement plan, providing you with steady income that will last a lifetime.

Should I join the plan?

If your boss asked you tomorrow if you’d like a raise of several thousand dollars, would you say no? Of course not. Yet that’s what people are effectively doing when they decide not to join their company pension plan. “These plans have an employer contribution that you won’t get unless you sign up,” says Malcolm Hamilton, a pension expert with Mercer. Signing up for a defined benefit or defined contribution plan is a no-brainer, and if you didn’t do it when you started with the company, ask your human resources department if you can join now.

With DB plans, private sector employees typically contribute up to 5% of their salary, while public sector workers may put in as much as 10%. This money is deducted automatically from your paycheque, so you’re always saving without having to think about it. Your employer also puts money into the plan, and they’re on the hook to provide you with a fixed income in retirement, based on your salary and years of service.

With DC plans, the employer puts in money every year, usually matching a percentage of your earnings. A typical plan might allow you to contribute 3% or 5% of your salary, which would then be matched by the employer. As a result, you double your money once you’re vested.

Another advantage of DC plans is that they help you take advantage of dollar-cost averaging. By contributing a fixed dollar amount to your funds every week or month, you’re buying more shares when prices are low and fewer when they’re high. “It’s worked to our benefit because we’re literally purchasing every month,” says Wendy Harrison Bannister, a professional stock trader in East Gwillimbury, Ont., who manages her husband’s defined-contribution pension investments.

If you feel too squeezed for cash to contribute, it helps to know that the money you put into the plan is tax-deductible, just like an RRSP contribution. Both your contribution and your employer’s contribution will reduce your RRSP room, but you won’t need to wait for a tax refund like you do with an RRSP. “If you’re putting in $100 a month, it’s not going to cost you $100 off your paycheque,” explains Hamilton. “It will only cost you $60 or $70 because it will reduce your withholding tax.”

How should I invest the money?

One of the great things about DB pension plans is you don’t need to make decisions about how to invest: that job is handled by a professional money manager.

With a defined contribution plan, however, you’ll have to make the investing decisions yourself. Your company works with an investment firm that gives you a choice of funds and provides you with a questionnaire to help assess your risk tolerance. The rule of thumb is you should invest more of your money in equity mutual funds when you’re young and can afford to wait out a market crash, and shift towards lower-risk investments, such as bond funds and GICs, when you’re closer to retirement. By your mid-50s you should have around half of your money in low-risk investments. However, don’t be too conservative—if you put all your money in bonds or GICs, your portfolio will likely lose purchasing power due to inflation.

Make sure you choose low-fee mutual funds if they’re available. In general, investors should look for equity funds with MERs (management expense ratios) of 1.5% or less, and bond funds with MERs of 1% or less. Fortunately, many pension plans offer funds with fees lower than those available to the general public. “The mutual fund we invest in has a fee that is 0.25% higher if you buy it outside the pension plan,” says Wendy Harrison Bannister. “This has a big effect on your returns over time.”

Is my pension safe?

In recent years the media has buzzed about the apparent pension crisis. Should you be worried that after decades of paying into your defined benefit plan it won’t have any money left when you retire?

“The bad news is most pensions today are not well funded, because we’re coming off of a string of years when investments did surprisingly badly,” says Hamilton. “The good news is it doesn’t make any difference whether the plan is badly funded or not, as long as the employer sponsoring the plan is financially healthy. If you work for a bank and you have an underfunded pension plan, it’s the bank’s problem, not yours. If you work for the government, it’s the government’s problem.”

Pension money is held in trust, so the employer can’t raid your retirement savings to pay other bills. As long as the employer is operating, it is legally obligated to make up for any shortfalls needed to pay retirees. However, if your company goes bankrupt while the plan is underfunded—a situation that Nortel workers faced—you might get less than expected. “Even in those cases, it doesn’t mean that people get zero,” says Brian FitzGerald, an actuary at Capital G Consulting and author of The Pension Puzzle. “They get 80% to 90% of what they were promised, so it isn’t as disastrous as people think.”

Pension plan members also face the risk of having their employer close the plan while they are still working. “A sponsor has a choice to continue to offer a pension plan or not, so there is always a possibility of changes,” says Martine Sohier, account director and actuary with human resources consultant Towers Watson. Many employers are opting to close down expensive defined benefit plans and are offering defined contribution plans instead. If that happens, you’ll be credited with the amount you’ve earned so far.

Members of DC plans are less dependent on their employer’s situation, as their investments are held in separate accounts earmarked for each employee. The amount you’re owed is clear—it’s simply the current value of the investments in your account. The main risk for these employees is that a market crash could wipe out a big chunk of their savings.

Should I save outside the plan?

If you are a member of a pension plan, do you also need to save in RRSPs? That depends on what type of plan you have, says Hamilton. “If you’re a government worker in a plan that says you can work for 30 years and then retire for 30 years and the state will give you better standard of living than you had when you were working, there’s very little reason to save more.”

However, private-sector plans aren’t as generous, so those employees should supplement their pensions with additional savings. Remember that your pension contributions reduce your RRSP room, so take care not to exceed your limit. (You can find your RRSP contribution limit on the Notice of Assessment you receive from the Canada Revenue Agency at tax time.)

Wendy Harrison Bannister makes sure she looks at her family’s DC pension and non-pension investments as a whole, so she can avoid the risk of having too much in one sector or asset class. “I try not to double dip,” she says. “We have a mutual fund that focuses on Canadian banks in our pension plan, so I never buy Canadian bank stocks in our other accounts.”

What happens if I leave the company?

If you leave your job before passing your company’s vesting period, you’ll simply get your own contributions back, plus interest. You can transfer that money to your RRSP or take it in cash, in which case it will be subject to income tax.

If your pension has vested, then you will have some choices to make. DB plan members can leave their credits in the current plan, and when they reach retirement age they’ll collect monthly income. This is the best option for most people, as it offers professional money management as well as guaranteed income for life.

If you’re under 55 when you leave your company, you’ll be offered the option of taking your pension benefit as a lump-sum payment. If you take the lump sum, it will go into a Locked-in RRSP or Locked-in Retirement Account (LIRA), depending on your province. These accounts are tax-sheltered, but you can’t withdraw the money before a specified age.

In theory, it makes no difference if DB plan members take a lump sum or leave it in the plan—the lump sum is calculated to have the same value as the future income stream of the pension. Taking a lump sum makes sense if you’re financially savvy enough to invest more successfully than the pension plan managers, but few people are in this camp. It’s also a good idea if you fear your company might go bankrupt. However, you need to make sure that if you leave the plan you aren’t inadvertently giving up any health benefits or early retirement incentives. Also, be wary of financial planners who advise you to take your pension as a lump sum: sometimes they’re swayed by the idea of receiving hefty commissions for reinvesting your savings.

DC plan members may also have the option to keep their funds invested in the plan when they leave the company. If they take the lump sum, it will be put into a locked-in retirement account.

Just to make things more complicated, you may have the opportunity to bring your pension credits to your new employer’s pension plan. “Some people want to do this if they’ve had six jobs and six different pension plans,” says FitzGerald. “It’s more convenient to have it all in one place.” You may also be offered the choice of buying an annuity, a product sold by life insurance companies that provides guaranteed income for life in exchange for a lump sum.

If you’re not sure which option is best for you, talk it over with your financial planner or pay for a consultation with a fee-for-service actuary. A list of actuaries who take new clients is available at www.actuaries.ca.

How much will I get in retirement?

If you have a DB plan, read your pension booklet to see the formula for how your benefits are calculated. A “final average” plan bases your retirement income on the last few years of your career. For example, it might provide 1% of your average income in your last three working years, multiplied by your years of service with the company. Other plans base the calculations on your career average earnings, or pay a flat dollar amount for each year of service. The best plans—typically those for government workers—provide income that is indexed, meaning your monthly payments will gradually increase in retirement to partially or fully offset inflation. Every year, your employer will send you an estimate of your projected pension income in retirement.

If you have a DC plan, it’s harder to predict what you’ll end up with at retirement. Use a retirement calculator such as the RRSP savings tool at getsmarteraboutmoney.ca to figure out how much you are likely to save and how much annual income it would provide. Remember to include your employer contributions in your calculations.

What happens if I retire early?

Megan Barker, a 53-year-old nurse and single mom in Peterborough, Ont., is keen to retire at 55. “I’ve been an operating room nurse for 28 years and it’s heavy work some days,” says Barker (we’ve changed her name to protect her privacy). But she’s not sure if her pension and other investments will be enough to live on.

People with DB plans who are considering early retirement should read their pension booklet to find out how much their monthly income will be reduced as a result. You could lose 6% or more for each year you retire early. “If you retire five years early, you could reduce your pension by 35% to 40%,” says FitzGerald. “It’s quite severe, because the benefit is going to be paid to you for an extra five years.” You may be eligible for bridging benefits, which will top up your income in the time period before you’re eligible for full Canada Pension Plan and Old Age Security at age 65. If not, you may need to dip into your RRSPs to bridge the gap.

If you have a DC plan, retiring early is even harder. “Not only do you need to live off your money for an extra 10 years, but you also need to save much more,” says Hamilton. “If you do the projections you may find out that you need twice as much money to retire at 55 rather than 65.”

In Megan Barker’s case, she’ll get $3,250 a month from her pension if she retires at age 55, instead of $4,330 at age 65. However, she’ll also get a bridging benefit of $580 a month until age 65, plus she has around $400,000 in her RRSP and non-registered accounts. FitzGerald says that since her mortgage is paid off and she’ll get around $15,000 a year in government benefits at age 65, she will be able to retire at 55 without experiencing a significant drop in lifestyle. “I think she’s in pretty good shape,” he says.

What decisions do I need to make when I retire?

Judy and Peter Walsh of Nanaimo, B.C. are overwhelmed by the decisions they need to make as they approach retirement. “It’s making our heads spin,” says Judy (the couple’s names have been changed to protect their privacy). Both are government workers and they are struggling to decide if they should take a reduction in Peter’s pension in order to provide survivor benefits for Judy. Another option is to take a reduced monthly sum in order to get a guaranteed number of payments, regardless of when Peter dies.

Pension law requires that you and your spouse are offered a joint-and-survivor pension that makes payouts until both partners die, but you can opt out if your spouse agrees. FitzGerald says Judy and Peter are probably better off taking the higher monthly pension instead of any spousal benefits or guarantees. Judy will experience a drop in household income if Peter passes away first, but she will likely have enough money from her own pension to cover her needs. “If they are in roughly the same salary range and they both have good pensions, they have no need for the joint pension.”

However, if your spouse would suffer a huge drop in living standards with the loss of your pension, you’re better off choosing an option that provides payouts to your spouse after your death. You might also opt for a survivor pension or guarantee if the pension member is in poor health.

Some plans give you the option of converting some of your pension money into an annuity. If you have a DB plan, it’s probably not necessary, unless you think your company is likely to go bankrupt. If you’re in a defined contribution plan, you might want to consider buying an annuity as a way of ensuring regular income. However, check annuity prices at several insurers before you purchase anything.

If you need help making these decisions, don’t be afraid to hire a professional. An hour-long consultation with an actuary may be all you need to feel confident about your pension and retirement choices, and it could set you back as little as a few hundred dollars. For a few thousand dollars, you can find a fee-only planner who will do a complete financial plan that will start you off on the right path for the next phase of your life.

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