That seems like an easy question to answer. Obviously every situation is the same and one answer will help everyone who reads this. Or, more accurately, everyone has a unique situation and what I hope to achieve here is to give you a guide to what sources of income you may have in retirement.
Canadians face a situation where their retirement income will likely come from a variety of different sources, and figuring out how they all work together can be confusing. Your unique situation will be best served by working with a financial advisor who can work with you to put all of the pieces together and show you what you can expect during your golden years. Read on to find out more about the sources of income you can expect during retirement.
In this article:
Retirement Income: Your Government Benefits
Canadians have access to two different types of retirement benefits from the government, and there is a fundamental difference between the two that you need to understand. The first one is the Canada Pension Plan (CPP) which was created in 1966 to help provide retirement income for Canadian workers. The second retirement benefit provided by the Canadian government are the social security benefits. The most commonly known of these is the Old Age Security (OAS) benefit. There is a key difference between the two income streams and you should really understand it to ensure your retirement income is maximized.
- CPP – This is a contributory program which means that over your working life you have put money into the plan each year based on how much money you earn (to a maximum amount each year). You earn credits in the CPP system and how much you receive is based on how much you have put into the plan. No matter how much income you earn in retirement, you are always eligible to receive your CPP entitlement.
- Social security benefits are split into a number of parts. It consists of Old Age Security, the Guaranteed Income Supplement (GIS) and the Allowance. All three parts of this program are funded by the government. Since they are funded this way they are all subject to rules that may affect how much of the benefit you receive. There is a calculation done called a clawback that uses a formula based on how much taxable income you earn to determine how much of each benefit you are entitled to. The GIS and the Allowance are aimed at low income families so the threshold income for these programs are quite low. For OAS in 2025, the clawback starts at $93,454 in taxable income. Once you reach that threshold, you lose 15 cents for every dollar of income you have that exceeds that amount. If you report enough income, you could lose all of the OAS in any given year.
Eligibility for all government plans is based on your age. If you would like, you can draw CPP as early as age 60, but there is a reduction that occurs for starting the income before age 65. That said, OAS begins at age 65. Both plans offer an option to defer the income, with higher income amounts granted for each year of deferral. Individuals can chose to defer the income until the age of 70.
Retirement Income: Your Personal Savings
There are multiple options for your personal savings that you can use in retirement. Each option will have a different tax treatment, so how you piece them all together will potentially make a big difference in your retirement income. One major advantage to having a financial plan in place is the income tax forecast for your retirement years. This can help you determine what the best savings plan is for you to use today based on how your income will be taxed in the future.
- Registered Retirement Savings Plans – The RRSP that you hear so much about during the first few months of each year. Contributions that you make to RRSP’s are tax deductible, with no requirement to pay tax on any growth that happens inside of the account. Withdrawals from an RRSP are fully taxable as income in the year that you make the withdrawal. This is subject to an annual contribution limit. The maximum that you can deposit into an RRSP every year is equal to 18% of your income (up to an annual maximum). If you don’t use all of your contribution room, the amount accumulates. Your lifetime total available room is noted on your Notice of Assessment from Revenue Canada each year.
- Tax-Free Savings Account – The TFSA, launched in 2009, is another account you can deposit funds into with preferred tax treatment. Money you deposit into your TFSA is not tax deductible, but growth in the account and withdrawals from the account do not trigger taxable income. Similar to the RRSP, there is an annual limit of how much you can deposit into your TFSA, and this amount also accumulates if you don’t use the entire space available to you in a year. If you withdraw money from your TFSA, the amount of the withdrawal is added to your contribution space in the subsequent year.
- Non-Registered Savings – This is often the forgotten option when it comes to retirement planning. Non-registered (also known as open accounts) savings aren’t subject to any annual limits for what you can deposit or withdraw, and deposits aren’t tax deductible. Any earnings that you make, are taxable in the year that they occur. So, you will pay income tax on interest, dividends or capital gains in the year that they happen. Since the taxes are paid on the earnings in the account each year, this is money that is considered ‘tax paid’. That said, this can be a valuable tool in the creation of retirement income for you in the future.
We arrive back at the common theme here. That is, the value of having a financial plan. When you sit with a financial advisor to create your plan, one of the things that they should do with you is provide you with different scenarios which show how your income would be taxed in retirement. A great way to maximize your retirement income is to make sure that you have the most tax efficient draw down plan possible for your savings.
Retirement Income: Workplace Savings Plans
If you are lucky enough to work at an employer that provides you with a workplace savings plan, you are able to participate in a payroll deducted savings program that will make your life easier (as a side note, if you own a business and don’t have a workplace savings plan but would like to know how to set one up, contact Strata Wellness & Benefits for some information on how to get a plan in place). Workplace savings plans come in a variety of forms but they often carry a couple of big advantages with them. The first being that you can make contributions via payroll deduction, which is a great way to automate your savings. The second advantage is that these plans often come with employer matching options. Employer matching is where your employer matches your contributions into the savings plan, supercharging your retirement savings. The different forms of workplace savings programs include:
- Pension Plans – There are two types of pension plans. The first is the Defined Benefit Pension Plan. This has a payout at retirement that is calculated using a formula that may include things like your salary and years of service in the plan. These plans are hard to find in the private sector but, still exist in the public sector. The second is the Defined Contribution Pension Plan. This is where a formula is in place that determines how much money goes into the plan, and you invest those funds however you would like based on the various investment options available. The contributions plus the growth are what make up your retirement income. Any money that is contributed to a pension on your behalf is not taxable to you in the year the contribution is made. When you begin to draw income the entire amount of each payment is taxable income.
- Group RRSP – Similar to an individually owned RRSP, these contributions are tax deductible and there is no taxation on growth within the plan. When money is withdrawn from a Group RRSP, the amount withdrawn is taxable in the year of the withdrawal. The main difference with an employer sponsored Group RRSP is that the employer will often contribute a matching portion on your behalf. This increases the amount put away for your future so, if your employer offers a plan like this, make sure that you take advantage of it.
Your employer may also offer things like options to save in a TFSA or RESP via payroll deduction. If these are available to you, it may be something worth considering because studies have shown that contributing via payroll deduction is a very effective way of increasing your savings for your future.
What is my Next Step?
Understanding all of the potential income sources for your future is one thing. What you do with that information is really the key to being successful in achieving your goals. Think about this;
Have you sat down and figured out what your goals even are? Time and again we hear about how people spend more time each year planning their vacation than they do planning for their financial security in the future. This is where talking to an expert comes into play. Book a time to talk to the advisory team at Strata Wealth & Risk Management. They will take the time to understand your goals, and to put together all of these different income sources into a comprehensive financial plan that will act as your roadmap on your way to achieving your goals. Time spent planning for your future is never wasted so take that first step today, you won’t be sorry you did.
