Insights and advice
Turning personal savings into retirement income
July 2021 – 15 min read
Your personal savings are just one part of a retirement income plan that can include government benefits and a workplace pension
It’s important to know how all of your investments and savings behave when you begin to draw on them for income in retirement
Ensuring your personal savings are part of a sustainable retirement income plan requires planning, discipline and expert advice
Don’t discount creative ways you can supplement your personal savings for income in retirement
Get the most out of your personal retirement savings
You’ve carefully saved money to help fund your retirement, putting it away into personal accounts or assets, maybe in addition to contributing to a workplace pension, and the deductions that come off your paycheck for government benefits like CPP/QPP. Now what?
As you near retirement, you’re probably beginning to wonder how you’ll turn your savings into the retirement you’ve dreamed of. You might also be anxious about making it last the rest of your life, even wondering whether you’ve saved enough.
Let’s look at the ways your personal savings can work for you in retirement – and how you can plan to make them go the distance.
What’s in this article?
Saving enough for retirement
Have you saved enough for retirement? It depends. The amount you’ll need in your personal savings for retirement will depend on a number of factors. Some things to consider include:
Do you have a workplace pension?
Depending on the specifics of your company’s plan, a pension could be a key part of your retirement income
What is the cost of living like where you’re planning to retire?
Daily expenses – food, housing, activities and services – can be significantly lower outside of major city centres, and some retirees even choose to move abroad for this reason.
Will you still be supporting any dependents?
As you head into retirement, you may still have adult children looking to you for financial assistance, or even elderly parents who may need your help.
Is there any debt you’ll be carrying into retirement?
If you have a mortgage or other debt (and most Canadians do) factor in the payments within your budget.
How are you going to fill your time?
Many of us plan to spend our retirement pursuing the passions or interests we didn’t have time for during our working lives. Remember to factor in the cost – like a golf club membership, perhaps, or art supplies and lessons if you’re taking up painting – when you’re budgeting.
Are you planning to travel?
Whether it’s the occasional cruise or spending every winter down south, make sure you factor this added expense into your planning.
Do you own a home that’s appreciated in value since you bought it?
Often your biggest asset, your home can be a source of income during retirement, whether you sell or choose to stay and find creative ways to utilise its value. On the flip side, you might be planning to make some long-awaited renovations, which will be an additional cost.
Do you have a spouse or partner?
If so, do they have a workplace pension? What kind of life insurance do you have? Is it a separate or a combined plan? What are their savings, and will you pool your assets, or just share expenses? This is also an important time to think about estate planning.
How’s your health?
Down the road, you may begin to require extra care – like a home healthcare aide, for example, or accessibility updates to your home – and you may also need to transition to a retirement home or long term care facility. Health insurance can also become more expensive as you age or your health changes.
Are you planning to work in retirement? Which government benefits are you eligible for? And when should you take them?
All of these variables mean that your “ideal” personal retirement income plan will be unique to your circumstances. Working with a financial security advisor can help you figure out what’s right for your retirement, and plan accordingly.
Making retirement savings last
One of the most important variables, of course, is how long you might need your personal savings to last. While no one can predict the future, we’re generally living longer than ever, and some of that time could be spent in assisted living, which can be expensive.
Work with an expert to help you determine what the appropriate level of savings might be.
If you’re trying to calculate how far your current savings could go, consider the “4% rule.” This advice suggests you plan to withdraw 4% of your personal savings in the first year, and then adjust each year for inflation. For example: If you’ve saved $1,000,000, this equates to $40,000 (before taxes) a year for just under 3 decades – without government benefits or a workplace pension factored in. This assumes an inflation rate of 1.9% and an average year return of 3%.
Pacing your spending, budgeting conservatively and exploring ways to continue growing your savings in retirement are steps you can take to make this prospect less daunting.
How the assets you’ve accumulated can become income in retirement
1. Registered retirement savings plan (RRSP)
As you head towards retirement, consider maximising your RRSP contributions: Not only will they lower your taxable income now, when you’re probably in your highest earning years, but you’ll defer tax on that money until after retirement, when you’re probably in a lower tax bracket. Of course, this may not be true for everyone. Your advisor can provide guidance in determining what the best strategy would be for you.
By the time you turn 71, you must either purchase an annuity or convert your RRSP to a registered retirement investment fund (RRIF).
2. Locked-in retirement account (LIRA) or Locked-in Retirement Savings Plan (LRSP)
If you were part of a pension plan but left before retirement, you likely have a locked-in retirement account or locked-in registered retirement savings plan, potentially growing money you aren’t able to access until retirement. When you’re ready to retire, you have a few options, depending on your situation including:
- Buy a life annuity, which can provide you with a set monthly income for life. This must be done before you turn 71.
- Convert to a life income fund (LIF), which allows you the flexibility to choose your investments and your income between a required annual minimum and a maximum withdrawal amount which changes each year. This also has to be done before December 31 of the year you turn 71.
- If you live in Manitoba, Newfoundland, Saskatchewan or had a federally-regulated pension, you’ll need a slightly different account for this.
3. Tax free savings account (TFSA)
Unlike the RRSP, which you must wind down into a RRIF, you can keep your TFSA for life. This means that you can continue to make contributions and to grow your money tax-free for as long as you’d like and any withdrawals are not taxable.
There are also no minimum or maximum withdrawal amounts each year.
Also noteworthy: Any income you might earn in a TFSA doesn’t affect income-tested government benefits like the Guaranteed Income Supplement (GIS.)
4. Your non-registered investment portfolio
Whether you’re invested in the stock market, have mutual funds or segregated fund policy or own bonds and GICs, there is potential for these holdings to provide you with retirement income through dividends, or selling them as necessary. Note: You can hold all of these assets in RRSPS, TFSA and non-registered accounts.
Especially as you prepare to retire and into retirement itself, it’s important to balance maintaining and growing your wealth, with protection from market shifts. As you shift from focusing on both growth and income, a risk managed portfolio can provide a smoother investment journey to help maintain their future savings needs.
Make sure you’re working with an advisor to ensure your asset mix is designed for stability and doesn’t have the volatility you may have been willing to tolerate when you were focussed on growth.
5. Your home
Traditional retirement wisdom tells us: When you retire, you downsize, and you use the proceeds to fund some part of your retirement. In 2021, however, it’s not that straightforward. Many retirees may have adult children living with them, or want to make sure there’s room for grandchildren who they may care for part-time.
Choosing to stay in your home may have certain pros – you hope it will continue to grow in value, you’re not certain you want to buy elsewhere at the current prices – but may also have cons, including higher property taxes, maintenance as the home ages, and the chance that the market will not be as strong as it is now if you choose to wait.
Remember: There are other ways for your home to provide you retirement income. They could include:
- Renting out rooms or a basement suite to tenants
- Renting out other parts of the property – like your driveway if parking is in demand in your area, or your pool - through apps that allow for this
- Short-term rental income, either single rooms or the whole property if you’re in an area where tourists or business travellers might need accommodation
- A reverse mortgage, although this may have estate planning implications
6. Other assets, like art, cars, collectibles or other valuables
They may not be Monets and Maseratis, but you might have acquired items over your lifetime that have value to them – a classic car, jewelry, or a collection of first edition comics. As you near retirement, you might want to get these items properly valued, and consider whether selling them now (or in the future) could be another way to supplement your retirement income. If you don’t need it immediately, considering investing the proceeds or putting them towards purchasing an annuity.
7. Your skills and knowledge
Just because you’re retired, it doesn’t mean the lifetime of expertise you’ve built is worthless. Many retirees continue to work on a part-time or consultant basis, which can be a helpful source of income.
Now that you’ve explored some of the ways that your personal savings can become a part of your retirement income plan, why not:
See how government benefits can help to supplement your income in retirement, and understand what you might be entitled to
If you have a workplace pension, learn more about how they work in retirement
Set aside time to meet with your advisor to create a sustainable plan for the retirement you’ve worked so hard for.