Personal Finance Insights

Will You Have Enough Retirement Income?

Whether retirement is getting close or years away, it doesn’t hurt to understand the basics of retirement income. It’s important to get an idea if you’ll be well prepared when it’s time to retire.

Think about it: nobody wants to run out of money, but it becomes a growing risk as people live longer and spend more years in retirement. Also, inflation and other economic challenges can erode purchasing power over time, making it tougher to get by.

Making a consistent effort over the years to save for retirement is a great way to help ensure money will be there when you need it. This entails building wealth by saving diligently, managing debt, contributing to a registered retirement savings plan (RRSP) and/or a tax-free savings account (TFSA), depending on your situation and goals. Your funds can then be invested in various investments like stocks, bonds, exchange-traded funds (ETFs) and mutual funds. Over the years, your funds will compound and you will benefit from the investment growth.

How much money you’ll need in retirement will depend on many factors, such as the age you intend to retire, expected lifespan, where you’ll live, desired lifestyle, and your legacy and estate plans. A general rule of thumb is that roughly 60% to 70% of pre-retirement income can maintain your standard of living when retired, but your specific number could be higher or lower.

Fortunately, you may have access to several sources of income in retirement to help meet your financial needs. Let’s look at some of these sources and how they work.

Government pensions

Many Canadian retirees rely on government benefits like the Canada Pension Plan (CPP) and Old Age Security (OAS). Both benefits were designed to start at age 65, although you may begin receiving CPP payments as early as 60 (at a reduced monthly amount) or as late as 70 (at an enhanced monthly amount), provided you made contributions to the plan during your working career (to a maximum of age 70). Your monthly CPP payment amount will depend on factors like the number of years and annual amounts you contributed.

Eligibility requirements for OAS differ based on country of residence, but generally speaking you must be at least 65 and satisfy the threshold for number of years living in Canada as either a Canadian citizen or legal resident. CPP and OAS are taxable benefits, so report this pension income annually on your tax returns. Individuals working in Quebec contribute to the Quebec Pension Plan (QPP) and may collect taxable QPP pension benefits when they retire.

Workplace pensions

Employer pension plans also generate retirement cash flow. Typically, the company contributes to the plan on behalf of employees, while some also allow employees to contribute (and will often match employee contributions to a specified extent). Two common types of workplace pension plans are defined benefit (DB) and defined contribution (DC). Employers manage DB plans and guarantee a certain monthly payment for life, while employees select investments for their DC plans and the payouts depend on how successfully the employee has invested. Regardless of plan type, these pension benefits are taxed as income whenever payments are made.

Registered retirement income funds (RRIF)

Throughout their working careers, Canadians may contribute a percentage of their earned income to a personal RRSP. When you’re ready to retire—or by December 31 of the year you turn 71, at the latest—you’ll transition your RRSP assets to an income-producing product like a RRIF. You may invest in a similar range of securities as in an RRSP, and once you begin withdrawing RRIF funds, you must take a minimum amount each year, based on a formula. By default, this minimum amount isn’t taxed at source but you can choose to do so. It will then be taxed as regular income on your tax return. RRIF withdrawals exceeding the annual minimum are taxable at source and are reported on your tax return as regular income. According to the Canada Revenue Agency, the 2023 tax rate at source for lump-sum RRIF payments above the minimum amount are:

  • 10% (5% for Quebec) on amounts up to $5,000
  • 20% (10% for Quebec) on amounts above $5,000, up to $15,000
  • 30% (15% for Quebec) on amounts above $15,000

Note: Quebec levies an additional 15% tax on its residents for each category above (e.g., for amounts up to $5,000, Quebec residents will pay a total 20% withholding tax).

Other sources

Many people hold money in bank accounts, GICs and certain registered (e.g., TFSA) and non-registered (e.g., investment) accounts, and each can be used for retirement cash flow purposes. Withdrawals from TFSAs are non-taxable, while the others are generally subject to some form of tax. It’s also important to have an emergency fund in place at all times, if possible, during working years and at retirement (cash savings to cover three to six months of living expenses).

While none of the income sources discussed here is usually enough to sustain you in retirement, when you add them up they may adequately support your lifestyle. It’s important to start saving early, tuck away as much as possible and invest wisely to generate income for your retirement years. It’s also important to have a plan to avoid bad surprises down the road. A Certified Financial Planner (CFP) professional can help you by creating a retirement plan that will serve as your road map and help you remain on track to reach your goals. In your plan, you will see all your retirement income sources as well as their order of withdrawal for tax optimization.

CI Direct Investing’s team of professional financial advisers will work with you to create your plan. We’ll show you your options and guide you toward choices that make sense, given your stage of life and financial goals. All this tailored to your own goals and situation.

Book a call to speak to one of our advisers today.