This article was reviewed by Jay Brecknell, CFP®.
With retirement approaching, you might be dreaming of days lounging on the deck of your boat, travelling Europe, or playing with your grandchildren. With your new abundance of free time, retirement is the perfect space to explore your interests and enjoy your golden years.
To make the most of your retirement, however, it’s important to understand where and how you will receive income after you no longer have a job. We’ve outlined a number of questions you may be asking yourself as retirement draws near.
What are the main sources of income in retirement?
Rather than having your income come from one main source (your job), in retirement, there are a number of places you will draw from to maintain your lifestyle.
Public Pensions
Public pensions are also known as Government Retirement Benefits, and they include the Canadian Pension Plan (CPP) and Old Age Security (OAS).
These two income sources are monthly payments from the government. The amount of money you get is determined by a number of factors, so we’ve written blogs on both of these topics if you’d like to dive deeper.
In summary, OAS benefits are government-funded through a percentage of income tax that all Canadians pay. CPP, on the other hand, is a plan that you have been paying into during your working life as a Canadian. They are two pillars that will help support you during retirement, but there are a number of additional income sources as well.
Private Pensions
Another common source of retirement income is your employer-sponsored pension plans. Your employer can choose to sponsor a retirement plan where you can regularly contribute money during your earning years. Upon retirement, you can either receive a regular income or a lump sum of money from the plan.
These plans can be Registered Retirement Savings Plans (RRSP) or a registered pension plan (RPP). You can learn the specific details of your plan from your plan administrator or human resources department.
Registered Plans
The two main types of registered plans are RRSPs and Tax Free Savings Accounts (TFSA). To benefit from these accounts in retirement, you would have needed to be paying into them for the majority of your working life.
For both RRSPs and TFSAs, the amount of money you can expect to receive in retirement depends on how much you’ve contributed, how long you’ve contributed, whether you’ve been investing your money, and how well your investments have done.
When you begin to withdraw money from your RRSP in retirement, those funds are taxable and will impact the amount of CPP and OAS benefits that you are eligible for. When you turn 71, your RRSP must be converted to a Registered Retirement Income Fund (RRIF).
Independent Savings
Outside of government payments, pensions, and registered plans, you can collect retirement income from personal savings and investments.
This could come from the sale of a company or corporate savings. Consider your assets, such as the value of your home and your life insurance.
Other income sources include:
- Rental properties
- Business equity
- Employee stock savings plans
- Government savings bonds
- Guaranteed Investment Certificates (GIC)
- Mutual funds
- Stocks and bonds
Once you know where your income during retirement will come from, you can plan for how to best use that for happy and fulfilling golden years.
How do I manage my retirement income?
Think of income sources as a water tap. You can turn all of them on, but some have higher levels of control than others. For some sources, once they’re on, they can’t be turned off again, so it’s important to plan ahead.
You will typically want to start with the incomes that you can’t adjust. These will become your reliable base of income during retirement. The key to planning your income is to control taxation.
Canadian Pension Plan (CPP)
This will be a regular, monthly payment. You can start taking CPP as early as age 60, but you’ll take a cut in your total potential earnings. We recommend waiting until at least age 65 if possible, or even later depending on your circumstances. Once you start receiving this, it can’t be stopped.
Old Age Security (OAS)
This will be another regular, monthly payment. You can begin receiving OAS at 65 or start taking it anytime up until age 70 for increased benefits. Once you start receiving OAS, it won’t stop.
Registered Pension Plan (RPP)
When you retire, you can either receive a regular income from your pension plan or a lump sum of money. The type of pension you have will dictate the options you have for income control.
Registered Retirement Savings Plan (RRSP)
RRSPs are typically not a source of income, as most people typically convert them to a RRIF. Once an RRSP is converted to a RRIF, you will need to take out a prescribed amount of income per year. Before turning 71, you can convert part of your RRSP to a RRIF in order to control income.
Tax Free Savings Account (TFSA)
TFSAs are very flexible, and are one of the last sources that you will look to for income as they are very effective for estate transfers. You can turn the income source on and off as you like and as suits your lifestyle.
What are the biggest changes to retirement income?
When planning your retirement, it’s important to know what might change over the years and how to best prepare. Some common changes in retirement that can impact your income level are:
- Getting part time work
- Receiving an inheritance
- Downsizing your home
- Selling a major asset
While you can’t plan for everything that might happen, keeping these points in mind while considering your retirement income will help you have a well-rounded idea of your retirement plan.
How do I create a retirement income plan?
We see two types of people in retirement when they don’t plan. The first type is aware they have limited funds, so they spend as little as possible. They miss out on many potentially great opportunities and experiences simply because they didn’t take the time to know how much money they were working with.
The other type just spends whatever ever they want whenever they want until their money runs out, and then they’re stuck. They typically have to spend their final years in debt or far worse situations than they had hoped.
Either way, it comes down to creating a budget. Knowing how much income you have to work with is essential to having a stress free retirement. You need to know how much you’re spending and will plan to spend to be sure that your income is sufficient.
Fortunately, budgeting is relatively straightforward. The hardest part is tracking and sticking to that budget. Once you have an idea of what your retirement income will be, you can go through your expected costs to make sure you can continue to live comfortably in retirement. For a more in-depth look, check out our guide to budgeting in retirement.
Tax Issues
One of the most common things that people forget to plan for in retirement is taxes. A lot of retirement planning comes down to tax planning and understanding how to manage your income while being tax efficient. You will be taxed on most of your income sources, which will obviously alter the amount of money you can expect to receive.
Navigating taxes is also important to ensure that you’re getting the most money possible. By starting OAS or CPP too early, you may cause tax issues for yourself. Similarly, transferring to a RRIF too early may impact your income plan.
It’s essential to regularly review your income, and we recommend working with a specialist if this isn’t your area of expertise. That way, you can be confident that you’re making all the right choices for your retirement.
When should I start planning for retirement?
The earlier, the better. By starting to plan soon, you will keep your options wide open. There’s no last minute panic or rush to make the best of limited choices.
Little changes over time can make a huge difference to reaching your retirement goals, so starting well ahead of your expected retirement date will help you be as prepared as possible.
If you feel like you’re behind in planning for retirement, start now. We’re available to schedule a meeting and look forward to working with you on your financial goals. In the meantime, go through our retirement guide to learn the steps to having a stress-free retirement!