Retirement, where is the money going to come from?
Brendan Greenwood, CFP, CIM, B.Comm | February 7, 2023
In my last article published, “What if you could spend more now, knowing your retirement income is secure”, we established that most people earning over $100,000 successfully retire on about 50 to 60% of pre-retirement gross income.
Where does this retirement income come from?
Retirement income for most people comes from five sources:
1. Canadian Pension Plan (CPP)
The amount of your monthly CPP income starting at age 65 is based on how much you earn annually in your working years and the number of years you’ve worked in Canada. The maximum CPP an individual could be eligible for in 2023 is $1,306 a month or $15,672 annually if you start collecting CPP at age 65. You can increase this monthly income amount by up to 40% if you delay starting your CPP until age 70. You can start receiving CPP as early as age 60, but there is a penalty, your CPP payout will be reduced by 0.6% for each month before the age of 65. This means a 36% reduction if you started receiving your CPP at age 60. CPP is considered taxable income, is indexed to inflation annually and is paid until death.
2. Old Age Security (OAS)
The amount of your monthly OAS income you’ll receive at age 65 is determined by how long you’ve lived in Canada after turning 18. Everyone is entitled to the full OAS amount if they’ve lived in Canada for 40 years or more after the age of 18, otherwise you’ll receive 1/40th of the full amount for each year you’ve lived in Canada after the age of 18. If you’ve lived in Canada your whole life you can count on being eligible to receive the full OAS amount. In 2023 the full monthly amount is $687 monthly or $8,244 annually. You can increase this monthly income amount by up to 40% if you delay starting your CPP until age 70. OAS is considered taxable income, is indexed to inflation annually and is paid until death. Once your total annual taxable income surpasses $86,912 the OAS amount you receive will start to be clawed back 15 cents for every dollar in taxable income you receive above this threshold until your taxable income reaches $141,672 at which point you would not receive any OAS income.
3. Company Sponsored Retirement Program (RPP, DPSP, RRSP)
Few people have defined benefit company pensions, but if you do this is another reliable source of retirement income that may have some inflation protection built in. These plans pay you a defined income benefit based on the number of years worked at the company and level of earnings. See my article on “What you should know when you have a pension through your employer”.
Most people have a Defined Contribution Plan or Group RRSP. Both of these options are an excellent way to save because companies will usually match contributions up to a certain amount. This is the equivalent of earning 100% return. Defined Contribution Plans differ from Group RRSPs because the employer must contribute at least 1% to the plan and funds are locked until age 55 in Ontario. If you leave an employer, DCPs or Group RRSP funds can be rolled over to personal RRSP savings and invested as desired. See my article, “Don’t leave money on the table…take control of past employer savings plans”. Those that take advantage of full matching can often accumulate substantial savings to provide retirement income. Investment growth in either of these types of plans is tax deferred. When retirement income is eventually drawn it becomes part of your taxable income.
4. Personal Savings - RRSPs, TFSAs, Open Investment Accounts
Personal savings can make up a large component of your retirement income. Usually this is money that’s been saved and invested through an RRSP or a TFSA.
An RRSP contribution reduces your taxable income, resulting in a tax refund that can be contributed to your TFSA to get more dollars invested and growing for you. Investment growth in RRSPs is tax deferred and any money drawn from RRSPs in retirement becomes part of your taxable income.
Money contributed to a TFSA is after tax, but it grows on a tax-free basis and unlike an RRSP, funds come out of a TFSA tax free and can help you manage the OAS claw-back.
If you’re a higher income earner you may have additional savings in an open investment account. Realized capital gains, dividends and interest become part of your taxable income in retirement when it come to these accounts.
5. Continuing to Work
Many people continue to work beyond the age of 65 because it keeps them engaged, gives purpose to their life and extra income to spend. Saving to achieve financial independence gives you options so that you only work because you want to on your terms.
These are the primary sources of retirement income. Some planning can go a long way in providing more certainty with respect to the level of income you receive in retirement. A good advisor can eliminate the work and worry so you can focus on living.
Brendan Greenwood is an Investment Advisor and Financial Planner with Worldsource Securities Inc. focused on improving the lives of his clients and their families through holistic planning. He specializes in tax advantaged personal pension strategies and leveraging technology to provide progressive institutional style investment solutions for professionals, incorporated individuals, business owners, retirees and their families.
For other articles written by Brendan Greenwood visit his Blog | GreenwoodWealth
To book a discovery meeting with Brendan to see if we can help visit www.greenwoodwealth.co
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