When you think about your retirement, what comes to mind? Maybe it’s the smell of trees by your Muskoka retreat or the taste of only the freshest ingredients while travelling European grounds. But what makes retirement so dreamy?
We all dream about our financial future mostly because it’s a really beautiful picture to paint, but can we picture how it will be funded? Where will your retirement income come from exactly? What is the Canadian Pension Plan anyway? Does everyone qualify? What about your other investments? Not so easy to picture, right?
Let’s address the elephant in the room that is called life to paint the picture of where your retirement money will likely come from. This way, you know exactly what you can do today to keep that dream a reality.
Your retirement pay cheque will likely be made up using a mix of these tools and benefits. So continue reading, it’s about to add up!
When you retire, there are government programs available in Canada that could give you pension payments at retirement. Each of these programs has their own rules for eligibility, so be sure to do your research to understand if you qualify first.
The Canada Pension Plan (CPP) Retirement Pension
This program provides funding to you on a monthly basis. The amount of money received is based on how long you’ve made regular contributions to the plan during your working years. It also factors in how much you’ve paid into the plan as well.
Your age will affect your monthly payment. Since the standard retirement age is 65, you can begin taking payments a month after your 65th birthday. You can also start taking payments as early as 60, but your payments will be reduced so you’ll want to assess your situation to see if it’s the best option for you. If you plan on taking payments at 60, reductions are 7.2% per year or 0.6% per month. What does that translate to?
If you choose to retire at 60, your CPP payments will be 36% less than if you had retired at 65.
You can also choose to take your pension late. For each month you delay after you turn 65, your payments will increase by 8.4% per year or 0.7% for each month.
Those retiring at age 70 will receive 42% more than if they had retired at age 65.
Canada has an agreement between other countries designed to coordinate pensions for people who have lived and worked in both countries. If you have lived or worked in another country, or if you are the survivor of someone who has lived and worked in another country, you could also be eligible for additional benefits as well.
If you’re wondering what the average CPP payment amounts look like, look no further! You can check out the monthly minimums and maximums by visiting the Government of Canada’s website for more information.
Old Age Security (OAS) Pension
Unlike CPP pension, Old Age Security (OAS) pension is not paid into and your employment history doesn’t determine your payments. This program provides monthly payments to those aged 65 and older who meet Canadian residency requirements and it’s common that you’ll need to apply to actually receive this benefit.
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The main benefits of an OAS pension are:
- Guaranteed Income Supplement (GIS)
An extra non-taxable benefit added to your OAS pension available to those with low income and living in Canada.
- Allowance and Allowance for the Survivor
If you’re between the ages of 60 and 64, have a spouse or common-law partner who receives OAS pension and qualifies for GIS, you can likely also receive this benefit. Allowance for the Survivor is an additional benefit that could be available to those between the ages of 60 and 64 and widowed.
To learn more about eligibility and your options with OAS pension, visit Government of Canada’s website to learn more.
If you’re lucky enough, depending on where you work, you may have an employer-sponsored pension plan which is offered as part of their benefits package. These benefits can play a big role in your retirement income.
Plans are often administered in two ways, they can be either a defined contribution plan or a defined benefit plan.
- Defined contribution plans
This plan works by setting an amount that both you and your company contribute to annually which is usually based on your income. These plans require that you close the plan by the end of the year you turn 71. You can either withdraw your money and pay taxes on the income, transfer your funds to a registered retirement income fund (RRIF), or purchase an annuity.
- Defined benefit pensions
This plan pays you a set income at retirement and your payments are usually calculated using your income and the number of years you spent working. It’s as simple (and as beautiful) as that.
Your employer pension plan can have a pretty big influence on your retirement income, especially if you stay with your company for a long period of time. Some of the best employer pension plans, often defined benefit pensions, can replace up to a maximum of 70% of your income at retirement.
Your RRSP Investments
Since there’s such a decline in the number of companies offering a defined benefit pension, your retirement income will likely come from your Registered Retirement Savings Plan (RRSP) investments—that is if you have contributed to your RRSPs over the years!
An RRSP is a tax-effective and savings driven account designed to help you save for retirement. The main advantage of an RRSP is that contributions reduce your taxable income, giving you a better refund when it’s time to file your return, while also providing you stability at retirement.
You can cash in your RRSPs as soon as you retire. However, you’ll need to convert your RRSP to a RRIF by December 31 of the year you turn 71. If you want to cash in your RRSPs before you retire, be prepared to pay penalties. That’s why it’s best to invest for the long haul when it comes to RRSPs.
Your Other Investments
Another factor in your retirement income can come from investments outside of contribution plans and RRSPs.
Whether you’re investing in stocks and bonds or GICs to help you invest your money in mutual funds, you might want to consider if your current strategy is working for you.
Since contributing to registered plans is top of mind when it comes to building a retirement fund for most individuals, finding the resources to contribute to non-RRSP investments can be harder to do. It’s important to understand how your money is invested and what you’re paying in fees in order to maximize your returns. That’s why we’re seeing a general upward trend of investors choosing to diversify their investment strategy to include a low-cost ETF portfolio solution that is professionally managed and costs a fraction of the price of traditional investments like mutual funds.
Your property can also become a source of income at retirement. Depending on your situation, you can create rental income with your current home by renting your basement or spare bedrooms on a short-term or long-term basis. Downsizing and using your property’s proceeds for your retirement can also fuel more income for you at retirement, or serve as a fund for you to tap into during your retirement.
Source 1: Information regarding Canada Pension Plan- https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html
Source 2: Information regarding OAS Pensions – https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security.html
Source 3: Information regarding Employer Pensions – https://www.canada.ca/en/financial-consumer-agency/services/financial-toolkit/retirement-pensions/retirement-pensions-2/7.html