When you were working full-time your cash flow was relatively easy to predict - your paycheque came in and you used it to save and pay your expenses. In retirement, however, your income might come from different sources.
5 places to look to for money when you retire:
If you've been saving for retirement in stocks, bonds or mutual funds, then you need to find the best way to convert those savings into income when you retire.
If your investments are unregistered - then you will pay tax on any gains your investments have made when you take your money out. Check with an advisor or accountant to find out how to do this more effectively.
If you have been saving your money in a registered investment like a retirement savings plan (RRSP), you can either cash it in, transfer it to a registered retirement income fund (RRIF) or buy an annuity. Remember: you have to do this by December 31 of the year you turn 71. When considering which option is best for you, remember that cashing in your RRSP means your income for that year will rise. If you receive public benefits that are tied to income, a large RRSP withdrawal could make you ineligible for some public benefits, such as dental, medical, OAS or GIS benefits. In that case, it may be better for you to make gradual withdrawals from your RRSP through a RRIF or annuity.
If your money is saved in a Tax-Free Savings Account, then you can withdraw it any time without paying any taxes at all.
It's all about tax - Cashing in your RRSP means that you have to pay tax on all of your savings in the same year. Instead, many people decide to withdraw it gradually through an annuity or RRIF to minimize the tax paid and stretch savings over a longer period of time.
If your money is in a TFSA you don't pay any tax at all on your withdrawals and you can take it out whenever you want.
2. Public retirement benefits
Public pension benefits are a key part of Canada's retirement system. The main types are:
Canada Pension Plan (CPP) - Applies to all Canadians, except in Quebec where workers eligible for the Quebec Pension Plan (QPP). The CPP provides pensions and benefits when contributors retire, become disabled, or die. It is designed to replace approximately 25 percent of the earnings on which your contributions were based over your working life. Find out more.
Old Age Security (OAS) - A monthly payment available to most people 65 years of age. You can receive the OAS pension even if you have never worked or if you are still working. You have to apply for it. Find out more.
The Guaranteed Income Supplement is another public pension benefit available to Canadian seniors provided they meet the requirement, including being low income. Find out more.
Tip: Delay collection of CPP or OAS and earn more every month - If you start your CPP pension after age 65, you will increase your pension amount by 0.7% for each month that you delay receiving it after age 65, up to age 70 (that's a 42% increase over the amount you would have received had you taken it at age 65). Delay receiving your OAS pension and your monthly pension payment will be increased by 0.6% for every month you delay receiving it, up to a maximum of 36% at age 70. Read more here.
3. Workplace pensions
How much you get depends on how much you paid in and it can depend on what type of plan you had.
If you have a defined benefit (DB) plan, then the amount you receive will be fixed and your employer will ensure you receive regular payments in retirement.
If you have a defined contribution plan (DC), then you need convert this to savings by buying an annuity or an income fund.
4. Other assets
What other assets do you have that you can convert into income?
Income from your home - Consider selling, renting it or borrowing money against the value of your home through a home equity line of credit or a reverse mortgage.
5. Work in retirement
Did you know that a third of Canadians return to work after retiring and nearly half (48%) do so for financial reasons? (source: 2014 ING Direct report).
Here are a few things to consider if you're thinking of working in retirement:
It could impact your public benefits - If you earn more than a certain amount, it could reduce some of your benefits - for example your OAS pension. Once your income is over a certain amount, the value of your OAS pension is reduced at a rate of 15 cents for every dollar of income over this amount. And you don’t even need to be working to have your benefits reduced. Raising your income by cashing in large amounts of your investments, such as your RRSP for example, could have an impact on your benefits.
You'll still have to make contributions - You and your employer will still have to make contributions to CPP, but those contributions will increase the amount you are paid later on.
Working can help delay OAS and CPP/QPP payments - If you wait until you're 70 to receive OAS and CPP/QPP, you will receive more. The charts below show how much more of a monthly benefit you can receive if you defer payments for a few years.
OAS - Average
CPP - Average
QPP - Maximums
The Financial Consumer Agency of Canada has a financial checklist - use it to find out how much income you can expect and where it will come from. Service Canada’s Canadian Retirement Income Calculator tool will also provide information about your retirement income, including the OAS pension and CPP retirement benefits, based on the information you enter.
Tip: Did you know that the Canada Revenue Agency (CRA) has a Community Volunteer Income Tax Program (CVITP)? The program arranges for volunteers to prepare income tax and benefit returns for eligible individuals who have a modest income and a simple tax situation. If you need a hand with your tax return, find out if you qualify for the CVITP program and find a tax clinic near you by visiting the CRA website.