Financial literacy is a hot topic, particularly for younger people who aren’t seen to be as knowledgeable. So… are you financially literate? Did your parents teach you the ins and outs of finance? Mine certainly didn’t and let’s be honest, the term financial literacy is a bit nebulous. It boils down to something pretty basic though: do you have a good grasp of your money and how to save and grow it?
For most of us, that answer is no. You likely have basic knowledge about RRSPs (yes, you should be contributing to an employee matching program!), credit card interest rates (keep that balance down!) and maybe some awareness around TFSAs or mutual funds but there’s more you need to know.
Today, we’re chatting CPP and CPPIB. What’s the first thing that comes to mind? If the word retirement pops up, you’re on the right track.
Here’s what you need to know. First, you contribute to CPP (Canada Pension Plan) for your entire working life. You may have noticed it coming off your pay stub and felt the slight sting of the deduction. Relax, it’s good for you. Many mistake it for a tax but in truth, your CPP is a hugely important foundation for your retirement funds. Most people top it up with individual saving plans like RRSPs, TFSAs and workplace pensions but consider your CPP the base layer for cash flow once you’re retired. It’s a long way away, but it’s incredibly important to think about now. I don’t know about you, but I want to be a rich old woman.
Next, you should know that the CPPIB (Canada Pension Plan Investment Board) is the body that manages the investment of the CPP fund for your benefit. Back in the ‘90s, the CPP was reformed to create the CPPIB to help ensure CPP could pay out future generations.
The CPPIB is in the middle of a financial literacy campaign to educate Canadians on how the fund (a whopping $366B) will be managed so it’s there for Canadians for the next 75 years.
Here are some of the basics. You can expect to receive just over $8k a year once you retire (that amount is dependent on how long you’ve worked in Canada as it’s based on how much you have paid into it). That amount is on top of what you’ll receive from Old Age Security in addition to any personal savings you’ve accumulated.
Another important thing to note. Saving for retirement isn’t a one-time or fixed thing. Different stages in your life will provide you with the opportunity to invest differently, so you should pay attention to that. Got a raise? Set aside more funds automatically for your retirement. Financial planners recommend that at least 5% of your income should go towards retirement. That’s $2.5k if you’re making $50k annually or $5k if you’re making $100k. As your income climbs, you should try to increase that amount by 1% a year until you’re at 10. Talk to a financial planner about where to save so you don’t sacrifice unnecessary amounts to tax.
There are many, many more questions that most of us don’t know the answers to. Will CPP really be there for us when we retire? How are the contributions invested? Visit the CPPIB website to learn more. The more educated we are, the more likely we are to invest our money smartly, so we can retire with luxury.