Are you planning for retirement? Some Canadians have paid into a retirement fund from their very first “adult job” paycheck. Others, however, needed to find their footing first. If you find yourself playing catch up, keep in mind that there are a variety of potential sources for retirement income. It’s just a matter of figuring out what works best for you and your financial goals.
The importance of retirement planning
The nature of work has drastically changed in recent decades. Firstly, there’s the rise of career pivoting, contract work, and job-hopping. It’s now normal to have several positions at a variety of companies over the course of a career. Secondly, it was previously not uncommon for companies to pay into pension plans. Workers would stay at the same job their entire careers, and upon retirement, walk out of the building at 65 and into a comfortable retirement.
According to Statistics Canada (as reported by the Financial Post), only 37% of Canadian workers are covered by a pension plan. The vast majority of retirement saving in this country is self-driven, illustrating the crucial need for proper retirement planning.
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How does retirement work in Canada?
All employed Canadians pay into the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP). These plans are a key source of retirement income for many seniors. As of April 2023, the average monthly CPP benefit was $760.07 per month. If you’re a new beneficiary, the maximum you could receive (starting at age 65) is $1,306.57.
It doesn’t take a financial wiz to know that this is hardly a liveable income — even if you’re able to access the maximum.
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What is the average Canadian retirement income?
A 2017 Statistics Canada survey found that the average senior household (65+) spent $60,359 (including taxes) annually. This amount has likely crept up even higher. In the end, that makes for one heck of a shortfall between what seniors have and what they need in retirement. What’s crystal clear is the need to determine where you may have gaps in income, and how much you’ll actually need for those post-career years.
How do I prepare for retirement in Canada?
Winding down your working life also means a gradual end to your steady income. Of course, you still need to eat and live when you retire, but the combination of (potential) extra free time and less income could prove a problem. This is where careful retirement planning comes in.
A well-executed retirement plan creates a strategy to replace that lost income upon retirement so that you can still put a roof over your head and live your life. It’s all about understanding how much money you need for retirement and setting a plan to get there.
What are the best retirement plans in Canada?
Putting together a retirement plan means you’ll likely draw from a variety of sources. The traditional Registered Retirement Savings Plan (RRSP) — which we discuss further down — is one of the most common ways of saving for retirement.
Let’s look at some of the other sources of income for retirement available to Canadians.
Canada Pension Plan (CPP) & Quebec Pension Plan (QPP)
You pay into the Canada Pension Plan your entire income-earning life. It’s designed to replace 25% of your pre-retirement income. And when you retire, you can finally reap the benefits.
Monthly payments from the Canada Pension Plan Investment Board can start as early as age 60, or as late as 70. Many experts, however, recommend you start later since benefits are based on how long and how much you contributed.
In other words, it’s quite clear that this benefit alone won’t be anywhere near enough for a sustainable, liveable life. Some sort of supplementary retirement savings is necessary.
Old Age Security Pension (OAS)
The great thing about OAS is that since it comes out of tax revenues, everyone in Canada qualifies for this monthly public pension once they hit age 65. It’s true — whether or not you have ever been employed, or are currently employed. Depending on whether or not the government has enough information, you’ll either be automatically enrolled or need to apply.
Payments are based on how long you’ve lived in Canada, and start the month after you turn 65. The July to September 2023 maximum monthly payment is $698.60 for the 65 to 74 age group. For the 75 and up age group, the maximum monthly payment is $768.46.
The Government of Canada’s full overview of the OAS.
Guaranteed Income Supplement (GIS)
Unlike the previous two pension plans, GIS is specifically for lower-income individuals. It is a non-taxable OAS supplement for people who need it. Your income tax declarations determine whether or not you qualify.
The Government of Canada’s full overview of the GIS.
2023 CPP, OAS, and GIS Payment Dates
- January 27, 2023
- February 24, 2023
- March 29, 2023
- April 26, 2023
- May 29, 2023
- June 28, 2023
- July 27, 2023
- August 29, 2023
- September 27, 2023
- October 27, 2023
- November 28, 2023
- December 20, 2023
Related Reading: How much will CPP and OAS increase in 2023?
Employer Pension Plans
Employee pension plans come in a variety of forms: self-directed, employer-sponsored, or a mixture of both. No matter the option, it’s important to take advantage of any opportunity where your employer helps you save for retirement.
Under some plans, employers exclusively contribute to a vested retirement plan. That means you can take it when you leave, after a certain number of years of service. It pays out in full, upon retirement — again, after a certain number of years of service.
Other plans allow you to set money aside per paycheque towards your retirement. Your employer may or may not contribute a percentage or dollar amount based on what you contribute. Some employers don’t contribute to a plan, allowing you instead to create forced savings. In this case, you’d be offered the option to set aside funds into an RRSP before it ever hits your paycheque.
If you leave or get laid off from your job that has an employer pension, those funds get transferred to a Locked-In Retirement Account (LIRA), a type of registered account. You might also have the option of keeping your pension at your former company, with regular monthly payments sent to you once you retire, or transferring it to a new employer pension.
In the lead up to retirement, your LIRA must be converted into a Life Income Fund (LIF), a registered account through which you’ll receive your pension funds as retirement income.
Registered Retirement Savings Plan (RRSP)
As mentioned above, Registered Retirement Savings Plans (RRSPs) are one of the most common ways of saving for retirement. A savings account designed to help Canadians save money for retirement, contributions to RRSPs are protected from income tax.
Bonus: you can invest your RRSP funds in a variety of ways. Any funds earned through these investments are also protected from tax for as long as they remain invested. This allows you to grow your portfolio in time to retire comfortably.
Recommended Reading: Our RRSP blog section
Tax-Free Savings Account (TFSA)
Tax-Free Savings Accounts (TFSAs) work like any savings account. You set aside whatever money you want (up to a government-set maximum), and you can remove it whenever you want, without penalty.
The money, while in the account, accrues interest – more interest than you would see in a traditional savings account. What sets the TFSA apart is that the interest that is typically subject to taxation in an unsheltered account, is tax-free when invested in a TFSA.
Even better, while it is called a savings account — and for many people, it’s just that — almost any investment that can be held in an RRSP can go into a TFSA — think bonds, stocks, mutual funds, exchange-traded funds, options, and more. Ultimately, it’s a savings shelter that’s similar to an RRSP.
Real Estate
One of the major benefits of homeownership is that it is a great vehicle for retirement savings. Many of us buy family homes that we no longer need once the kids move out. Why sit on a large property with empty rooms? Downsizing in retirement allows you to free up the equity you have in that home and use it in retirement.
How much do I need to retire in Canada?
How much you need for retirement depends on a variety of questions. Namely, how you live now, how you intend to live until retirement, when you want to retire, and even where you want to retire. Here’s a collection of calculators that can help put together some of these puzzle pieces:
- Canadian Retirement Income Calculator (includes the Old Age Security pension and Canada Pension Plan benefits)
What is the minimum retirement income in Canada?
The rule of thumb repeated most often is that you need to save 70-100% of your pre-retirement income in preparation for your post-work years. Whether this will be enough for you depends on the above-mentioned factors, like your current lifestyle and what kind of retirement you’d like to have (eg. a quiet, relaxed, and down-sized vs. travel and adventure).
Keep in mind that times have changed since this rule of thumb came into play. People are living much longer these days. Some even find a whole new career or passion once they’ve retired from the one they had for decades. Working with an advisor can help you figure out a baseline goal to work toward.
How to plan your retirement income
1. Your retirement goals
Consider whether you plan on travelling, downsizing to a condo, or moving into the cottage you’ve visited every summer for the last 20 years. Do you have grandchildren? If so, are you planning on contributing to their education? Knowing the age you want to retire is also a solid benchmark for figuring out how much you need to retire.
2. Your spending habits
Be honest: are you the type of person who lives beyond your means now? If so, how much money can you set aside now without plunging yourself into debt to keep up with your lifestyle? Living below (or as close to) your means today will allow you to set aside more money for the future. You definitely don’t want to tap into your savings early to pay off debts — especially if it’ll come with financial penalties.
Are you planning to be more frugal in retirement? Or do you plan on travelling the world and living life? Your current and future spending habits are heavily influenced by how much you can, and should, invest in your retirement.
3. Unexpected expenses
Life’s curveballs don’t stop when you retire. Protect yourself and the savings you’re carefully putting away. For starters, consider an emergency fund. In your savings plan, account for market changes and inflation. Your current daily expenses may not be enough to get you through a year of living 30 years from now.
Our best advice? Sit down with a trusted advisor and review all of these concerns.
Retirement may seem like a far-off dream, but it’ll be here before you know it. It is something you should look forward to with excitement and anticipation, not fear and stress. Setting yourself up for the future will ensure your retirement is a reward after a lifetime of hard work.
Read More: CPP vs OAS: What are the differences?