Planning your retirement
A comfortable retirement requires preparation well before you reach retirement age. It is important to build a plan that’s most appropriate for you, depending on your age, needs and level of involvement in financial decisions. A retirement plan is funded by income, which is often generated through a combination of employer- and/or government-sponsored pension plans, as well as your own investments (like a Registered Retirement Savings Plan) and assets, like your home or business. This income can collectively help to ensure your financial safety and security throughout retirement. When thinking about your retirement, you may also want to give some thought to planning your estate and to finding a financial advisor who can help you build and review your retirement plan in the years ahead.
There are several sources of retirement income including employer-sponsored retirement plans, government pension plans, and your own savings and investments. Here’s an overview of the most commonly used options:
Employer-sponsored retirement plans
- Defined Benefit Plan: This plan pays a specific amount of pension income based on a formula that factors in your years of employment and salary. Defined Benefit Plan structures vary from company to company.
- Defined Contribution Plan: This plan allows both you and your employer to make specific annual contributions to an account based on your earnings. At retirement age, the accumulated value of your plan must be used to purchase either a life annuity or a Life Income Fund. Unlike a Defined Benefit Plan, a Defined Contribution Plan depends on the success of your investments and does not guarantee a specific level of pension income at retirement.
- Group RRSP: Employees can choose to contribute to an employer-sponsored RRSP fund. Group RRSPs are flexible because employees are typically offered a choice of how the funds are invested and how much to contribute.
- Deferred Profit Sharing Plan (DPSP): An arrangement where an employer may share with employees the profits from the employer’s business. Employees do not make contributions to the plan. DPSPs can be used as a supplement to a company’s Group RRSP or as a company pension plan.
- Pooled Registered Pension Plans (PRPP): A deferred income plan designed to provide retirement income for employees who would not otherwise have access to a workplace pension, particularly the employees of small- and medium-sized businesses and to self-employed individuals who do not have access to a workplace pension. Because individuals' assets will be pooled, investment and savings opportunities are offered at lower administration costs. They are currently available to federally-regulated businesses and their employees, as well as to provincially-regulated businesses operating in those provinces that have passed the appropriate legislation.
- Canadian Pension Plan (CPP): CPP and the Quebec Pension Plan (QPP) are Canada’s major pension plans, providing regular payments to people in retirement who have contributed to either of these plans while they were working.
- Old Age Security (OAS) and Guaranteed Income Supplement (GIS): Funded by the federal government with general tax revenues, these programs provide a monthly income security benefit based on your age and the amount of time you’ve lived in Canada. The GIS provides a monthly non-taxable benefit to OAS recipients who have a low income and are living in Canada. In addition to the GIS, low-income Canadians may be eligible for the Allowance and the Allowance for the Survivor benefits. The Allowance provides benefits to spouses or common-law partners (aged 60 to 64) of GIS recipients and the Allowance for the Survivor benefit is available to widows or widowers aged 60 to 64.
Your own savings and investments
- Registered Retirement Savings Plans (RRSP): An RRSP is a government registered account that holds investments, allowing them to accumulate in value tax-free until withdrawal at retirement. You may own as many RRSPs as you wish, although it's advisable to have fewer for ease of management and to minimize fees. RRSPs provide a tax-sheltered environment where investments can grow faster. Outside an RRSP, investments are subject to being taxed on gains.
- Tax Free Savings Account (TFSA): TFSA is a registered savings account that allows you to earn investment income tax-free inside the account. While contributions to the account are not deductible for tax purposes, withdrawals of contributions and earnings from the account are not taxable. Currently, additional contribution room of $10,000 is made available each year. Withdrawals made in the previous year are added to your contribution room for the current year. Unused contribution room from the previous year is also added to the contribution room for the current year.
- Non-Registered Investments: These are savings and investments that are non-tax-sheltered, which can include money held in savings accounts, GICs, mutual funds, stocks and bonds.
- Housing Equity: Another source of retirement savings is the equity that you have built in your home. While homeowners’ equity is not as liquid as other financial assets, it can be drawn upon without incurring any taxes. Accessing the equity in your home can be accomplished by either downsizing to a less expensive property, thereby saving the difference, or through a reverse mortgage, which allows you to access some of the equity in your home without selling it.
- Business equity: If you are a small business owner, the equity you have accumulated in your business represents another form of savings that you can draw upon during retirement. Your retirement savings will be influenced by whether you decide to sell your business, pass it along to your children or remain a shareholder of the company.
At age 71, if have an RRSP, you will need to convert it into a source of income to sustain yourself financially throughout retirement. There are a number of retirement income options available. You may prefer to choose a Registered Retirement Income Fund (RRIF), withdraw your savings or purchase an annuity depending on your goals, income needs and the value of your RRSP.
- Registered Retirement Income Fund (RRIF): You can convert your RRSP to a RRIF, which will provide you with an income stream to last throughout your retirement years.
- Annuity: In exchange for a lump sum payment, an annuity provides a constant and guaranteed stream of payments at regular intervals for a fixed period of time. An annuity can be purchased before retirement or during retirement. Once an annuity is purchased, you do not have to decide how to invest your retirement savings and if you purchase a life annuity, you do not have to worry about outliving your savings because your monthly annuity payments are guaranteed for as long as you live.
- Cash in your RRSP: Cashing in your RRSP allows you to withdraw the savings. But be aware: you pay tax on the full amount.
In addition to saving and investing your money for retirement, planning your estate is also important. Proper estate planning includes preparing a will, tax planning, signing a power of attorney and purchasing life insurance.
- Will: Your will is a precise legal document that defines the distribution of your estate when you pass away. Without a will, upon your death the provincial government decides how your estate is distributed and divided.
- Tax Planning: Proper tax planning can result in reduced estate taxes. Financial advisors, lawyers or accountants can recommend tax planning strategies.
- Power of Attorney: This is a legal document that authorizes a person, or persons, to make financial or health care decisions on your behalf should you ever become incapable of making them yourself.
- Life Insurance: This can help provide your family with replacement income after your death, as well as cover your final expenses and any debts. There are different types of life insurance, including term, permanent and universal.
There is a lot to think about before you retire and the decisions that you will need to make can be complicated so you may want to consider seeking out the help of a financial advisor. A financial advisor can guide you through the process of making appropriate investment decisions as well as provide advice on managing your entire portfolio of assets and debts in a tax efficient manner. As you get closer to retirement, your advisor will conduct periodic reviews of your retirement plan to ensure that it properly reflects any changes in your life. When you are ready to retire, an advisor can help you manage income from your investment savings,
For small business owners, retirement planning involves special considerations that take into account multiple sources of retirement income, special tax considerations and succession planning. A financial advisor can provide you with the expertise to develop an appropriate business transition plan and ensure that you meet your retirement goals.
Retirement planning can be complicated, but if you research your options carefully and consider talking to a financial advisor, you will be in a better position to ensure your financial health throughout your retirement years.
Here are a few additional resources for more information:
- Éducaloi – information about wills and estate planning in Quebec
- Investor Education Fund – Information about wills and estate planning
- Canadian Retirement Income Calculator – this online tool will provide information about your retirement income, including the Old Age Security (OAS) pension and Canada Pension Plan (CPP) retirement benefits, based on the information you enter.