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Wealth management

Where will your income come from when you retire?

July 10, 2023

Are you nearing retirement and wondering how much income you’ll have when you leave the job market? Here’s an overview of the most common sources of income to help you make sense of it all.

Old age security pension

You’ll receive this pension every month after you turn 65, even if you’re still working. It’s your foundation.

A pension for everyone

The old age security pension (OAS) is paid out by the Government of Canada and is taxable. The amount is reviewed every 3 months External link. This link will open in a new window. to ensure that it reflects increases in the cost of living as measured by the Consumer Price Index (CPI).

You can defer this pension until the age of 70 to obtain higher payments, but you should think carefully about the decision. Your health, financial situation and other sources of income may have an impact on the strategy you choose.

To be eligible for the OAS, you must:

  • Be at least 65 years old
  • Be a citizen or legal resident of Canada
  • Have lived in Canada for at least 10 years since turning 18. If you do not currently reside in Canada, you must have lived in Canada for at least 20 years since turning 18

You can request it even if you have never worked.

What resources exist for people with a low income?

If you have a modest income and live in Canada, you can apply for the Guaranteed Income Supplement (GIS). The amount you receive depends on your annual income and your family situation. The supplement, which is adjusted to the cost of living every 3 months, is not taxable.

If you are between the ages of 60 and 64, you can also receive the Allowance if your spouse receives the OAS and is eligible for the GIS. If your spouse dies, you may also be eligible for the Allowance for the Survivor benefit.

To learn more, visit the website of the Government of Canada External link. This link will open in a new window..

Government pension plans

The Québec Pension Plan

Like all Québec workers, you contribute to this pension automatically. The amount you’ll be paid out depends on how many years you’ve contributed, the earnings your contributions are based on, and the age at which you’ll start drawing on your pension.

When should you apply for the QPP?

Whether you are a salaried employee or self-employed, you decide when you want to apply for the Québec Pension Plan (QPP). Did you know that you can apply even if you are still working?

The amount you will receive will vary depending on when payments start:

  • Before 65: Your pension will be reduced for each month from the date you apply until you turn 65.
  • At 65: Your pension will not be reduced or increased, since age 65 is considered the “normal age” to say goodbye to the 9 to 5.
  • After age 65: Your pension will increase by 0.7% each month from your 65th birthday until you apply, until you turn 70.

How does the QPP work?

QPP contributions are split equally between the employee and the employer. Self-employed workers pay all of the contributions themselves. Self-employed workers who don’t declare a lot of income—and therefore don’t contribute a lot—are penalized in the long term.

The QPP is indexed to the cost of living every January and is taxable. Few new annuitants receive the maximum.

To determine what’s best for you, take a look at your QPP statement External link. This link will open in a new window..

To learn more about the QPP, visit the website of the Government of Quebec External link. This link will open in a new window..

The Canada Pension Plan

Like all Canadian workers, you contribute to this pension automatically. The amount varies according to the number of years you have contributed and the earnings your contributions are based on.

When should you apply for the CPP?

Whether you are a salaried employee or self-employed, you decide when you want to apply for the Canada Pension Plan (CPP). Did you know that you can apply even if you are still working?

The amount you’ll receive will vary depending on when you start receiving payments:

  • Before 65: Your pension will be reduced for each month from the date you apply until you turn 65.
  • At 65: Your pension will not be reduced or increased, since age 65 is considered the “normal age” to say goodbye to the 9 to 5.
  • After age 65: Your pension will increase by 0.7% each month from your 65th birthday until you apply, until you turn 70.

How does the CPP work?

CPP contributions are split equally between the employee and the employer. Self-employed workers pay all of the contributions themselves. Self-employed workers who don’t declare a lot of income—and therefore don’t contribute a lot—are penalized in the long term.

The CPP is indexed to the cost of living every January and is taxable. Few new annuitants receive the maximum.

To determine what’s best for you, take a look at your CPP statement External link. This link will open in a new window..

To learn more about the CPP, visit the website of the Government of Canada External link. This link will open in a new window..

Supplemental pension plan

Workers who are part of a private pension plan save throughout their career without even realizing it (almost).

What is it?

“Private pension plan,” “registered pension plan” and “pension fund” all refer to your supplemental pension plan (SPP).

It’s the plan your employer contributes to in order to provide participating employees with a retirement income.

The benefits you accumulate are usually “locked-in” until you retire, meaning you can’t access them before then. Your contributions are deducted from your income, and the income you receive once you retire will be taxable.

What type of plan are you in?

There are 2 main types of plans:

  • Defined benefit plan: With this type of plan, the amount is determined in advance and is generally a percentage of your salary multiplied by the number of years of service recognized by the plan. Contributions are regularly re-evaluated to fund the promised benefits. Some of them can be indexed to the cost of living.
  • Defined contribution plan: This type of plan sets the employee and employer contributions in advance, but the amount of the pension is not known ahead of time. The amount depends on your contributions, your employer’s contributions and the investment performance of the pension fund. The pension amount is therefore calculated based on the funds in your accounts and the value of your investments at the time you decide to withdraw them rather than on your salary.

To estimate your future retirement income, review the statement of benefits provided by your employer each year.

Personal savings

Investing your savings in an RRSP or TFSA is a good way to supplement public pensions and your pension fund so you can have the retirement of your dreams.

How much should you save for your retirement?

To determine how much you need to save to maintain your standard of living, you need to consider things like inflation, what kind of retirement you want, when you plan to stop working and how long your retirement will be (life expectancy is increasing!).

Set a goal of saving 10% of your net income. As your goals become clearer, you can adjust the amount you save. Keep track of your budget so you can pinpoint any small unnecessary expenses that could turn into a nice nest egg over time.

Saving is a question of discipline, but it’s also about consistency. Get into the habit of setting money aside as soon as you get your paycheque. To make it even easier, you can set up automatic payments to your RRSP.

How do you grow your investments?

It all depends on your situation. Your advisor can help you determine your investor profile and choose suitable investments.

As for registered investments, the registered retirement savings plan (RRSP) and the tax-free savings account (TFSA) are the 2 main tools you can use to give yourself a solid financial cushion.

  • By contributing to an RRSP, you accumulate tax-sheltered savings for retirement while reducing your taxable income. Remember that any withdrawals you make are taxable. An RRSP is a good idea if you think your tax rate will be lower when you retire than it currently is.
    When you turn 71, you will need to convert your RRSP into an RRIF (registered retirement income fund) or an annuity. Your savings will continue to grow, but you’ll no longer be able to contribute to the plan, and you’ll have to withdraw some of the money you’ve accumulated each year.
    Note that you can contribute to your spouse’s RRSP before the end of the year in which they turn 71, as long as you still have contribution room.
  • When you contribute to a TFSA, you protect your savings from taxation, whether they’re for retirement or another project.
    If you don’t think your retirement income will exceed $40,000, the TFSA is a good option for you. Unlike withdrawals from an RRSP, withdrawals from a TFSA are not taxable and therefore will not jeopardize your access to income-based assistance and credits when you retire.

The future may be unpredictable, but you can still plan for it

Talk to your advisor about your retirement plans. They’ll help you see the big picture of your retirement. You’ll work together to determine the best way to approach this new stage of life and build the right retirement plan for you.