Where will your retirement income come from?
Retirement is supposed to be the best years of your life. Most people think retirement planning is about saving enough for the future but as you get closer to retirement, an essential part of retirement planning is simply understanding where your income will come from.
The foundation of retirement income planning lies in government benefits. In Canada we some key government programs:
- Canada Pension Plan (CPP),
- Old Age Security (OAS),
- Guaranteed Income Supplement (GIS), and
- the spouses allowance
It is important that you understand how they work. The most you will receive from the government is $24,346.44 if you have no other sources of income and only $16,684.92 if you have other sources of income. Clawback and contribution rules may reduce these amounts. Don’t count solely on government benefits for your retirement!
A pension can be a very significant part of your retirement income if you stay with a company for a long period of time. Today, pension benefits will depend on whether you are part of a defined benefit pension plan or a defined contribution pension plan. The best pensions are usually defined benefit plans that replace a maximum of 70% of your pre-retirement income. Typically you have to stay with the company for 25 to 35 years. Today, it is rare to see maximum pension plan benefits because people are changing employers more frequently and fewer employers are offering pension plans as benefits.
Registered Retirement Savings Plans (RRSPs)
With fewer employers offering pensions, RRSPs will become one of the biggest sources of retirement income in the future. RRSPs provide a tremendous amount of flexibility. You can take out as much as you want subject to the government regulated minimum amounts. You can change income, investment options and tailor income to your specific needs. Good retirement planning will incorporate the best way to draw RRSPs for your income needs.
Investments outside the RRSP provide the most flexibility. Non-RRSP investments include stocks, bonds, GICs, mutual funds, investment real-estate, etc. The after-tax implications of non-RRSP investments are crucial to your total retirement income plans. For many people, contributing to CPP, Pension Plans and RRSPs will make it difficult to accumulate significant amount of non-RRSPs.
Income from work
One of the fastest growing trends in retirement planning is that more and more retirees are working in retirement. It used to be that retirement meant not working but now that’s not the case. Some work for others while others works for themselves. Some work for money while others work for other reasons like keeping busy, maintaining social relationships or just for fun. Whatever the case may be, the key to working in retirement is to do work because you want to and not because you have to.
Good planning makes all the difference
If you want to know if you can retire, it is essential to know which sources of income you will get in retirement. Typically, the best place to start is to find out how much money you will get from your company pension, Canada Pension Plan (CPP) and Old Age Security (OAS). Once you have that, you will need to figure out how to supplement your income with more flexible pots like RRSPs, non-RRSPs and income from work. Sometimes there can be debate over which source of income to start with. This is where a good financial plan can make all the difference. Whether you are just starting your career or whether you are already in retirement, understanding the retirement income pyramid will help you to build the foundation of planning for the future.