Seven paycheques in retirement

For most of our lives, we go to work and earn a paycheque. What happens in retirement when we stop working? Where will our income come from?

Here are the seven possible paycheques you will get in retirement. Most people will get at least one of these paycheques, many will get more than one. The most financially secure retirees will get income from at least five of these sources.

1. Pension plans

If you have a pension plan, you already have a head start at replacing some of your working income in retirement. About 40 per cent of Canadians who are still working participate in a pension plan, and 56 per cent of retirees collect a paycheque from a pension plan. For these people, pensions will form the foundation of their retirement income. Its very important that those without a pension plan create their own. For example, a 65-year-old couple without pensions would need to save about $200,000 on their own in order to create their own pension of $1,000 per month.

2. Canada Pension Plan

This is one of two paycheques that will come from the government. The amount you get from CPP depends on how much and how often you put money into the Canada Pension Plan through your employment paycheque. The most you can get from CPP is $844.58 a month, or $10,134.96 a year. These figures apply if you take the income beginning at age 65. You can, however, take CCP as early as age 60 at a reduced rate. A person who qualified for the maximum of $844.58 a month at 65 would get $591.21 a month if he or she took the income beginning at 60. You can also defer taking CPP to age 70 at an enhanced rate if you plan to work later than age 65.

3. Old Age Security

The second paycheque from the government is Old Age Security. It is a program that is funded out of tax revenue. As a result, 99 per cent of all retirees collect some amount of OAS. The benefit is based primarily on years of residency. Back in 1952, when OAS was started, it paid $40 a month, and payments began when the recipient reached age 70. (Incidentally, average life expectancy back then was 67.) Today, the maximum OAS payment is $487.54 a month, and recipients must be age 65 or older to collect. There is no provision to take it any earlier. Other components of the OAS program include Guaranteed Income Supplement and the Allowance for low-income earners.

4. Registered Retirement Savings Plan

Unfortunately the government does not provide enough benefits to support most people fully in retirement. If you do not have a pension plan, you should create your own through RRSPs. They are one of the best ways to save for retirement. Once you retire, an RRSP provides a tremendous amount of flexibility. You can convert it to a Registered Retirement Income Fund (RRIF) or an annuity to create a regular stream of income. The more you have, the bigger the cheque. Start saving.

5. Non-RRSP investments

You can create another paycheque if you have investments outside an RRSP. They might include savings, bonds, stocks and rental property. Any asset that you own outside the RRSP may fall into this category. Non-RRSP investments are usually the most tax efficient paycheque you can create in retirement you don’t have to pay tax on your original capital, of course, and RRSP funds are taxed as income as you draw them out. Most people should not include their personal residences in this category. You will always need a place to live, and to liquidate your house to supplement income is often a last resort.

6. Employment income

One of the biggest trends among older people is a return to work. Many retirees are starting their own businesses, consulting for their previous employers or working part time. Some do it for the money especially those without a pension plan but many do it because they are bored or just want to keep busy. Studies have shown that retirees today are more healthy and active than ever. At one time, people would look down on those who were older and still working. Today, working in retirement is very much accepted.

7. Other income

This is a catchall category. It might include reverse home mortgages, inheritances, life insurance benefits or foreign sources of income. The large number of baby boomers heading for retirement are getting more creative in establishing investments that will generate paycheques later in life.

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