Your Sources of Retirement Income

Whether retirement is on the horizon or still feels light years away, it’s important to have a good grasp on how you’re going to support yourself financially throughout your life span. Here we’re showing you exactly what you can expect in the years ahead — and what you can do now to maximize your retirement income.

1. Government Retirement Benefits

Government retirement benefits replace a portion of the average Canadian's pre-retirement income. They are considered to be a secure source of retirement income that will increase over time to match the rising cost of goods and services. The income you receive can be “topped up” with income from other sources.

The two types of government retirement benefits are Old Age Security (OAS) and the Canada Pension Plan (CPP)/Quebec Pension Plan (QPP). Both are considered taxable income, and you must apply for each one.

Old Age Security (OAS)

Old Age Security (OAS) is a modest monthly benefit available to most Canadians 65 or older who meet Canadian legal status and residence requirements. Your employment history is not a factor and you don't need to be retired to receive the pension. If you are living in Canada, you must have resided in Canada for at least 10 years after turning 18 to be eligible for OAS; if you are living outside of Canada you must have resided in Canada for at least 20 years after turning 18 to be eligible.  You can find the maximum monthly OAS benefit for the current year on the Government of Canada website.

Canada Pension Plan (CPP) and Quebec Pension Plan (QPP)

Canada Pension Plan (CPP) retirement benefits are generally paid to people 65 years of age and over who have contributed to the plan. There is an option to start receiving benefits at age 60 with a reduced monthly payment, or after age 65 with an increased monthly payment. Workers in Quebec contribute to a similar, but not identical, plan called the Quebec Pension Plan (QPP). Information on the current maximum CPP/QPP monthly retirement benefit is available on the Government of Canada website, or the website for Retraite Québec.

Your CPP benefits depend on:

• The number of years you contributed to the plan
• The total amount you contributed

Thanks to reforms in the mid-1990s, the CPP is the envy of government pension programs around the globe. According to the CPP’s website, the fund currently has assets of more than $409.5 billion as of September 2019 and is expected to grow to $545 billion by 2025.¹ You can request a CPP Statement of Contributions from the Service Canada website or a QPP Statement of Contributions from Quebec's Régie des rentes to understand how much your monthly retirement pension could be at age 65.

2. Employer Pension Plans

In addition to your government benefits, employer-sponsored pension plans are another potential source of retirement income. It helps to know the type of pension plan (or plans) you belong to and the amount of income you might expect from each plan when you retire. If you are not sure what kind of employer pension plan you have, contact your plan administrator or human resources departments.

Employer pensions are either "defined benefit" or "defined contribution" plans.

A defined benefit (DB) plan pays you a certain monthly income based on your level of earnings, the length of time you worked and other factors. It's your employer's responsibility to make sure that there's enough money set aside to pay your pension when you retire. The assumptions of calculation for your retirement payments will vary from a company to another. Some may be indexed to inflation, some not. For all plans, the retirement age may also vary.

A defined contribution (DC) plan is a fund to which you and your employer contribute a set amount — usually a percentage of your earnings. These contributions go into an account in your name, and you choose where to invest the money. The value of the account will fluctuate based on the performance of the investments you choose. When you retire, you will generate income by withdrawing assets from the account. The percentage of contribution the employer will match varies from plan to plan. The available investment choices (stocks, mutual funds, etc.) will also be different depending on where the funds are administered.

As a self-directed investor, you may be interested to know that, as part of an employer-sponsored pension plan, you may have the opportunity to take a lump-sum payment and put those assets into a Locked-in Retirement Savings Plan (LRSP) or a Locked-in Retirement Account (LIRA). Depending on the province where you earned the income and legislation that governs the plan, you will have different options for converting this lump sum into a monthly income stream.

3. Registered Plans (RRSPs, TFSAs and RRIFs)

A Registered Retirement Savings Plan (RRSP) is a popular way to save for retirement, especially if your employer does not offer a pension plan. RRSPs are relatively easy to use. After opening an RRSP account at a financial institution, you can contribute up to 18% of your previous year's earned income or a set annual amount, whichever is lesser.  You can find your RRSP contribution room on your latest Notice of Assessment. You decide how much to contribute and how to invest the money — in stocks, bonds, exchange-traded funds (ETFs), mutual funds, GICs or other qualified investments.

RRSPs give you two kinds of tax relief. Your contributions are tax-deductible and there is no tax on income earned in the account. Withdrawals from an RRSP, however, are fully taxed as income.

By the end of the year you turn 71, you must convert your RRSP to a Registered Retirement Income Fund (RRIF), purchase an annuity (not available at RBC Direct Investing) or withdraw the funds in a lump sum. A RRIF delivers a regular stream of income based on a minimum annual withdrawal amount. You also have control over the kinds of investments you hold in a RRIF.

Ultimately, the amount of retirement income you can expect from your registered retirement plans depends on how much you contribute, the length of time those contributions have to grow and how well your investments do.

In 2009, the Canadian government introduced Tax-Free Savings Accounts (TFSAs). Canadians 18* years or older with a valid social insurance number (SIN) are eligible to open a TFSA. It is a flexible, registered account that allows you to save for the future without incurring tax on investment income such as interest, dividends or capital gains. Similar to an RRSP, you can hold a variety of qualified investments in a TFSA, including stocks, ETFs and mutual funds. You don’t have to close your TFSA at a certain age and savings can be used to supplement retirement savings or for any type of purchase. Unlike contributions to an RRSP, contributions to a TFSA are not tax-deductible. However, withdrawals from a TFSA are not taxable. Annual contribution limits are available on the Government of Canada website.

4. Personal Savings and Investments

In addition to government, employer and registered savings plans, you can set aside money for retirement in many ways. Outside your RRSP, TFSA or RRIF, you may hold investments such as:

• Government savings bonds
• GICs
• Mutual funds
• Stocks and bonds
• Employee stock savings plans
• Equity in a business
• Real estate rental property

And although they are often considered separately, it's worth thinking about your other assets, such as life insurance policies or the equity in your home or cottage, and how they might fit into your plan either as a source of income or a part of your plan to leave income for your surviving spouse or beneficiaries.

* The age of majority is 19 for residents of Newfoundland and Labrador, New Brunswick, Nova Scotia, British Columbia, Northwest Territories, Yukon and Nunavut which may delay the opening of a TFSA. However, the accumulation of contribution room will start at age 18.

The information provided in this article is for general purposes only and does not constitute personal financial or tax advice. Please consult with your own professional advisor to discuss your specific financial and tax needs.

 

 

¹ CPP Investment Board website. “Scale.” http://www.cppib.com/en/how-we-invest/compare-overview/scale/. Accessed January 10, 2020.