We all have our own dream of retirement. But whether you plan to travel the world or just enjoy the freedom of not having a commute, we all have one thing in common: Figuring out how exactly we’re going to pay for this chapter of our lives.
The good news is that, for most Canadians, retirement income will come from multiple sources, including government programs, workplace pensions and personal savings. Together, they work as the building blocks to a comfortable, sustainable retirement plan.
Let’s break down the sources of retirement income for your average Canadian:
1) The government:
i) The Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
When you were working, you probably noticed a deduction on each paycheck for CPP or QPP.
When you retire those contributions turn into monthly payments. The amount you receive depends on how much and how long you contributed over your working life, your average earnings throughout your working life, and the age you start receiving CPP or QPP. If you retire at 65, the maximum retirement income for 2021 is $1204 and the average is $736 a month.
ii) Old Age Security (OAS)
If you’re over 65 and you live in Canada, you’re eligible for this monthly benefit – even if you’re still working, or never worked at all.
The amount you receive depends on how long you’ve lived in Canada: To receive the minimum amount, you have to have lived in the country for at least 10 years since you turned 18. To receive the maximum amount, you’ll need to have lived here for 40 years or more.
You can defer your OAS until you’re 70, which will increase your monthly payments. It’s also important to be aware of “OAS clawback,” which can happen if your other income exceeds certain thresholds.
iii) Guaranteed Income Supplement (GIS)
This is a non-taxable benefit for low-income Canadians who are older than 65. If you’re single and qualify, it can be $923 a month in 2021 if you receive the maximum. If you’re in a couple and qualify, it will be between $556 and $923, depending on if your partner receives partial or their full OAS pension. The supplement is dependent on income levels and if those increase, you may not be eligible for it as it is assessed annually.
2) Workplace retirement and pension plans:
As part of your benefits package, your employer may offer some kind of retirement savings plan. This might be a pension plan that pays you an income when you retire. Increasingly, it might be a workplace registered retirement savings plan (RRSP), which you can convert to a RRIF in retirement, allowing you flexible income with growth potential.
In most cases, your employer will match your contributions to a pension or workplace RRSP, up to a certain percentage. Do your best to maximize this – otherwise you’re essentially leaving free money on the table.
3) Personal savings:
This is a broad category that can include:
- RRSPs and TFSAs
- Locked-in Retirement accounts or Locked-in RRSP’s (formerly money that was in a pension plan)
- Your home
When you retire, you'll need to turn these savings into income. To do that, you could purchase an annuity – a lump sum payment that guarantees you a certain amount each month – or explore other ways to keep growing your capital, like keeping some money in a tax-deferred RRIF or TFSA. It’s also not uncommon for retirees to keep working on a part-time basis, especially as we continue to live longer.
Here’s how it all comes together:
While no 2 retirements look the same, here are a few hypothetical scenarios for how all these sources work together to fund a retirement.
Example A: Mary is 65 years old and worked for an employer who offered a pension since she moved to Canada at age 30. She has $300,000 in her RRSP and $200,000 in non-RRSP investments. She uses all her RRSP’s to buy a RRIF. (Learn more about RRIF withdrawal rules). She wants to keep an amount in investments and savings for emergencies or future health related costs).
Her monthly income for her might be:
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RRIF (minimum) 5% rate of return
Total monthly income
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Example B: Don recently retired at 70. He’s lived in Canada all his life, and was self-employed, meaning he did not have a workplace pension or RRSP matching. He has $50,000 in a RRSP, which he is going to convert to a RRIF. He recently sold his business and has the proceeds sitting in cash ($1,500,000) awaiting decisions around how to create an income. He also wants to keep some of the cash available for future trips he was unable to take when he was self-employed.
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CPP started at age 70, 42% higher than age 65, contribution stopped at 65)
OAS started at age 70, 36% higher than age 65 || |
RRIF (minimum) 4% rate of return
Annuity (1 million) 10 year guarantee ||
Total monthly income
The above example is for illustrative purposes only. Situations will vary according to specific circumstances.