One of the big questions many people have before retirement is whether they’re going to have enough money to get them through their golden years. While determining the right number takes some work with a financial advisor, covering your costs may not be as challenging as you think. That’s because you can tap into several income sources to help keep your coffers full.
Canada Pension Plan (CPP)
Think of the CPP as the safety net that helps fund your retirement. If you were to turn 65 this year and decided to collect CPP, you would be eligible to collect up to $1,364 per month. Several factors can influence that figure. CPP payments are based on your lifetime average earnings, as well as the age you decide to take the pension. You can start collecting CPP as early as age 60, but if you can wait until 70, you’ll get more money. If you wait after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if you start at age 70 (or after).
Old Age Security (OAS)
OAS is a universal retirement pension available to most Canadians once they turn 65. Unlike the CPP, you don’t need to have clocked any time at work to collect the benefit. However, other requirements do apply. The maximum payment starts at $713.34 and rises until it hits a maximum of $784.67 at age 75. If your annual income exceeds $86,912, however, the government will “claw back” part or all of the payout. On the flip side, low-income seniors may also qualify for the Guaranteed Income Supplement, which is added to the monthly OAS payment.
Employer pension plans
If your employer offers a pension plan, it’s often to your advantage to enrol. A pension can significantly improve your financial well-being in retirement by providing you with a steady stream of income that has been created over years of employment. Typically, you can contribute a percentage of your salary to the plan each year, and your employer will match all or part of that amount with its own contribution.
These plans fall into two main types.A defined benefit plan offers a guaranteed source of retirement income for life and, in some cases, additional payments to a surviving spouse. Amounts are calculated using the number of years worked, your retirement age and your salary during your five highest-earning years.
A defined contribution plan shifts more responsibility and risk to the employee, even though the plans are professionally managed. The size of the payout will depend on contributions made and investment returns.
Registered Retirement Savings Plan (RRSP)
An RRSP is a powerful investment tool that offers tax-sheltered compound growth, and it is an essential part of retirement planning. RRSPs reduce your taxable income when you’re working and let you defer tax payments while your investments grow. Withdrawals are taxed as regular income, but most Canadians find themselves in a lower tax bracket when they retire. At age 71, an RRSP must be converted into a Registered Retirement Income Fund, at which point you’ll have to withdraw annual minimum amounts set by the government.
One of the great features of RRSPs is the range of investment products they are allowed to hold, including domestic and foreign mutual funds, exchange-traded funds, stocks and bonds.
Tax-Free Savings Account (TFSA)
A TFSA is similar to an RRSP in that both are tax-sheltered structures that can hold a wide variety of investments. One main difference, however, is that TFSA contributions are not tax-deductible – but there’s also no tax to pay when you withdraw money from one.
So which is the better investment for retirement planning? Both, if you can afford it. If not, it’s important to consider whether your marginal tax rate is higher now than what you expect it to be in retirement. If it is higher, maximize your RRSP contributions first so you can claim the deduction. Otherwise, prioritize your TFSA and enjoy the flexibility it offers.
Non-registered investments
Non-registered accounts offer a valuable revenue stream in retirement through dividends, interest and capital gains, and they don’t come with contribution limits and rules about withdrawals. However, all assets in these accounts are subject to tax. Both interest payments and foreign dividends are taxed as ordinary income, the most expensive classification. Capital gains and eligible dividends receive slightly more advantageous tax rates. Capital gains are treated the most favourably, given the 50% inclusion rate for capital gains.
Clearly, from a tax-efficiency perspective, it makes sense to max out your registered accounts before putting money into non-registered investments. Still, there are ways to minimize your tax bill in your non-registered accounts, such as corporate class mutual funds and tax-efficient withdrawal services like Fidelity’s Tax-Smart CashFlow™.
Annuities
Annuities are financial products that offer a predictable and guaranteed stream of income in exchange for a lump-sum payment. This can be valuable if you don’t have a pension. There are numerous types of annuities, and the size of the payout can be affected by interest rates at the time of purchase, so it’s important to do some research before buying.
Investing and saving are critical if you want to live retirement on your own terms, but you don’t have to fund it entirely yourself. Be sure to take advantage of the many government benefits, taxation strategies, investment products and personal savings options available to you. If you want to understand where you are on the road to retirement, Fidelity’sretirement calculator offers a simple way to gauge how much you’ll need to save today to meet your annual income requirements later on.
If you need help, talk to a financial advisor. For those who haven’t started planning, now is a good time to think about where your income will come from when you one day stop working.
