UNDERSTANDING YOUR FINANCIAL FUTURE UPON RETIREMENT
Retirement income sources should be a topic that everyone discusses whether they are single, widowed, married or common-law because we all have to live after we stop working.
The money has to come from somewhere especially if you still have a mortgage to pay or rent that is due from month to month.
The best retirement plans begin with questions and actions well before retirement age whenever that may be for you as it differs from person to person in Canada.
Almost everyone I know among my circle of friends wants to know how much money they will have to retire on. It can be a scary time for seniors because of health concerns and lack of savings so it’s important to tackle this topic in advance of your retirement years.
If you really want to know about your personal retirement income sources the best way to find out is to write them all down and then expand on what each has to offer you come retirement.
When Mrs. CBB and I finally hit a net worth of one million dollars at age 40 we were thrilled but at the same time our financial advisor said that with the amount of income we were considering for retirement we’d have to save aggressively.
At the time I wasn’t thinking about earning extra money during retirement and to be honest right now I don’t want to keep working if I don’t have to. That might change in 20 years so keeping my options open is very important as well considering things I might do to earn more money.
Retirement Income Sources In Canada
Income after retirement is based on many things and as I mentioned above creating a retirement budget is a great way to first understand on average how much money you will need when you retire.
For most people income after retirement will significantly decrease however if you have saved money in investments, own a home or have a pension plan at work you may earn more than what you were during your working years.
Let’s have a look at the typical retirement income sources in Canada.
The first two are Government Retirement Benefits.
- Old Age Security (OAS) Guaranteed Income Supplement (GIS)
- Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
- Retirement Savings Plans (RRSP, TFSA, RRIF, Annuity, Pooled Retirement Pension Plan PRPP)
- Personal Savings (House, Savings account, chequing account, stocks, business, bonds, mutual funds, real estate rental property etc.)
- Employment Pension Plan
- Extra income from working side-jobs
- Retiring Allowance from your employer
- Other Foreign Pensions from outside of Canada
Old Age Security
The Old Age Security (OAS) is not based on your contributions but rather how long you’ve lived in Canada over the age of 18 and Canadian legal status. The OAS is available to most Canadians after the age of 65 or older.
For example if you’ve lived in Canada you must have lived here for 10 years after your 18th birthday to collect OAS. In my case since I’m a permanent resident in Canada I must reside in Canada 10 years after my 18th birthday to collect OAS or GIS (if applicable).
On the other hand….
Canadian seniors who move from Canada to another country will be able to receive OAS pension only if they had resided in Canada for 20 years (after they turned 18). If they had lived in Canada for less than 20 years, their pensions will be paid for the month that they leave and for six months after that. For example, if a senior left Canada in January, he or she would get payments until the end of July. If he or she returns to live in Canada, the payments will be restored from the month of return. Source.
As per the chart below if you are single, widowed or divorced your OAS will be a maximum $898.32 if you earn over $18,240 a year.
Depending on your situation OAS will increase or decrease with $898.32 being the highest allotted as noted above and to a couple who earns a combined income of $43, 728 where one spouse or partner is not eligible for OAS.
The lowest OAS amount is $540.77 each month.
Source: Old Age Security Canada.ca
|Your situation||Maximum monthly payment amount||Maximum annual income to receive the OAS pension Footnote 1|
|Old Age Security (OAS) pension|
|Regardless of your marital status||$601.45||$125,696 (individual income)|
|Guaranteed Income Supplement (GIS) amounts for individuals receiving a full Old Age Security (OAS) pension.|
|If you are a single, widowed or divorced pensioner||$898.32||$18,240 (individual income)|
|If your spouse/common-law partner receives the full OAS pension||$540.77||$24,096 (combined income)|
|If your spouse/common-law partner does not receive an OAS pension||$898.32||$43,728 (combined income)|
|If your spouse/common-law partner receives the Allowance||$540.77||$43,728 (combined income)|
|Your situation||Maximum monthly payment amount||Maximum annual income to receive the OAS pension Footnote 1|
|If your spouse/common-law partner receives the GIS and the full OAS pension||$1,142.22||$33,744 (combined income)|
|Allowance for the Survivor|
|If you are a surviving spouse or common-law partner||$1,361.56||$24,552 (individual income)|
Guaranteed Income Supplement
These benefits are for persons aged 65 or older who wish to apply for their Old Age Security Pension and the Guaranteed Income Supplement.
The Old Age Security pension is a benefit payable to most Canadians aged 65 and over who meet the Canadian residence requirements.
The Guaranteed Income Supplement is a non-taxable amount added to the Old Age Security Pension for single or married persons or persons living in a common-law relationship, living in Canada with low income.
So if you are collecting the OAS and your income is considered low-income as per current government thresholds then you can apply for the GIS supplement. This is something my mother-in-law will be doing when she turns 65 this year as she has no income and her spouse has passed away.
You apply for the GIS or statement of income form ISP3025 tax form when you apply for your OAS and do so every year.
Using your income information from your federal Income Tax and Benefit Return, we will review your eligibility for the GIS every year. If you still qualify, your benefit will be automatically renewed. In July, you will receive a letter telling you:
- that your benefit will be renewed;
- that your benefit will be stopped; or
- that your income information is required.
You may be eligible for the Allowance if your spouse or common-law partner receives the OAS pension and is eligible for the GIS. You must file your income tax return each year to be eligible for the GIS and also report the non-taxable income of the GIS on your income tax return.
It will then be deducted so it is not part of your net or taxable income as it’s more about reporting the income than anything.
I moved to Canada when I was 30 so I’ve been here more than 10 years so I will be eligible for the GIS and OAS (if applicable) when the time comes.
One of the things I’ve been doing since starting this blog is educating myself on what I can apply for and what I can’t in Canada because I’m a permanent resident and not Canadian.
If you are a sponsored immigrant and you have resided in Canada less than 10 years after age 18, you are not eligible to receive an OAS income-tested benefit (the GIS, the Allowance or the Allowance for the Survivor) during your sponsorship period unless your sponsor:
- suffers personal bankruptcy;
- is imprisoned for more than six months;
- is convicted of abusing you; or dies.
Related: How Not To Retire Poor In Canada
Canada Pension Plan
This is the big one for many Canadians because it is based on contributions during your working years and provides partial replacement of earnings after age 65.
Generally in Canada people retire at the age of 65 which is when people begin to collect their Canada Pension Plan (CPP) or take a reduced CPP at age 60 or an increased CPP working after the age of 65.
There is however no financial benefit to working after the age of 70 in terms of your CPP. Whichever option you take the month after the date is when you will begin to collect your CPP benefits.
Some opt to retire early based on their pension plan at work, retirement savings or due to health decline. Either way it’s important to understand where your retirement income sources are coming from and the average retirement income you will be earning.
Your CPP is based on how many years you worked in Canada and paid into the plan so I won’t get as much as someone who has lived and worked in Canada their entire life since I moved here when I was 30 years old from the UK.
In Canada they have set aside provisions called dropping periods that help Canadians with their CPP during times when they are unable to work or have limited income. These are through periods of parenting, disability, school, unemployment or leaving work to care for someone as in the case of my mother-in-law.
This provision affects 17% of your base contributory period, allowing up to 8 years of your lowest earnings to be dropped from the calculation. This benefits all CPP contributors.- Canada Pension Plan
This protection allows the government to drop your lowest earning points when calculating your CPP benefit or crediting you with earning depending on circumstances.
During periods that you are disabled you will not be penalized as well by CPP as they are not included in your contribution period.
When calculating the enhanced components of a retirement or survivor’s pension, individuals who become disabled in 2019 or later will have a credit dropped-in to the months they are disabled.
The value of the credit is based on the individual’s earnings in the 6 years before becoming disabled.- Canada Pension Plan
There are also child rearing provisions for anyone who stopped working to care for children or received a lower-income for the same reasons. If you are eligible the government will drop those years of low-income from your CPP to calculate your CPP benefit.
They will also add pension credits to the 5 years prior to the birth of adoption of your child based on your average income at the time if the amount is higher than your actual earnings. This will protect your CPP benefits while you are taking care children.
If you decide to work past the age of 65 they can drop years of low-income or no income of years prior to calculate your CPP income.
My mother-in-law opted to take early CPP which was a big mistake on her part but at the time she didn’t know what she was getting herself into. All she knew was that she could get her CPP early if she applied because it was an income source that she thought she needed when she really didn’t.
It also didn’t help that she likely had dementia at the time and was beginning to do things that were out of the ordinary for her.
On the other hand there are people who love to work and want to continue working like my wife’s uncle who is a lawyer in his 80’s and can’t seem to stop doing what he loves and that’s perfectly fine.
CPP Payment Amounts
Keep in mind these numbers will change based on the date of this blog post and the CPP and are average pension income amounts for 2019.
CPP payment amounts are adjusted every January if there is an increase in the cost of living as measured by the Consumer Price Index. Subsequent to the increase in the Consumer Price Index, CPP benefit amounts will increase by 2.3% in January 2019.
|Type of pension or benefit||Average amount for new beneficiaries (January 2019)||Maximum payment amount (2019)|
|Retirement pension (at age 65)||$723.89||$1,154.58|
|Post-retirement benefit (at age 65)||$8.21||$28.86|
|Post-retirement disability benefit||$496.36||$496.36|
|Survivor’s pension – younger than 65||$437.21||$626.63|
|Survivor’s pension – 65 and older||$310.59||$692.75|
|Children of disabled CPP contributors||$250.27||$250.27|
|Children of deceased CPP contributors||$250.27||$250.27|
|Death benefit (one-time payment)||$2,302.28||$2,500.00|
|Combined survivor’s and retirement pension (at age 65)||$890.34||$1,154.58|
|Combined survivor’s pension and disability benefit||$1,115.35||$1,362.30|
Death and your CPP
I was not blissfully aware about this until my father-in-law passed away but if you are not over the age of 70 when you die then no one can collect your CPP benefit.
If you are over the age of 70 when you die then your estate must submit an application to earn up to 12 months of CPP income paid to the estate.
Also, your estate, spouse or common-law partner, or next-of-kin may be eligible for the CPP death benefit if minimum contribution requirements are met. In addition, your spouse or common-law partner may be eligible to receive the CPP survivor’s pension, and your dependent children may be eligible to receive the CPP children’s benefit.- Canada Pension Plan
These are very important things we all need to know living in Canada because upon death of a spouse or common-law partner things can get messy or missed when calculating any retirement income sources that are owed.
How much do I need to retire?
Your retirement income depends on a few things but if you want to retire early and take CPP there are few things you may want to consider first.
- How your age will affect your retirement income
- Do you have any other retirement income sources?
- Your health and that of any family members
- How much have you contributed to your CPP plan?
- How much money you have saved in your retirement savings or work pension plan
- What you want your retirement lifestyle to look like.
I spoke on the phone last night to a gentleman who says he was retired but still works on the side earning extra money with his wife who is a master gardener.
Since they both work after retirement and likely already collecting CPP what they earn will still go towards their future CPP which means they must pay into it still but will also increase their retirement benefits.
They charge $30 an hour and will come to your property and clean it up, landscape it and add any flowers you’d like based on your needs.
This is how they earn money during their retirement years although I’m not sure if it’s cash under the table or they claim it as income.
This is where it can get tricky but judging by his phone character I’d say he pays his taxes as they are due.
Your retirement age depends on lots of thing but the main thing is your health because if you’re not well enough to work you may have to opt for early retirement.
Other people want early retirement so they can enjoy more time doing what they love outside of work which is why Freedom 55 is a term you might hear tossed around quite a bit.
Ideally if you want to retire early you have to look at whether you want a simple retirement plan or you’re looking at something more complex. By this I mean do you want to travel and how often, buy a bigger house, new cars etc.
How much money do you want to have each year to spend in your retirement years?
This is why it’s important to understand where all of your retirement income sources are pointing from and approximately how much you will get from them.
Comfortable Retirement Plan
What does comfortable mean to you? This is what our financial advisor asked us and he has a good point because it’s not really something we considered before.
In my opinion there is a difference between a comfortable retirement plan and a simple retirement plan where both are fairly easy-going but one has more financial options than the other.
As Mrs. CBB and I both looked at each other we knew we had to take that question home and sit down with a piece of paper and write down everything we wanted from our retirement.
This is a MUST if you want to understand your financial picture when you retire as well the retirement income needed to take on the life you want to live. If your house is paid off then that’s one thing you can eliminate from your monthly expenses as for most people it’s their biggest expense.
Creating a retirement budget is crucial for this reason just as it would be to create a budget that incorporates a new mortgage payment before you opt to become homeowners.
When life shifts make sure you have the finances to shift with it and the only way to know if you do is to create a financial plan such as budget.
Retirement offers plenty of benefits and the first one being not waking up to an alarm to get ready for work. You may notice your stress levels decrease and an enjoyment in the simple things life has to offer that you may have pushed aside during your working years.
You may also notice significant health benefits to retiring early or at age 65 because as we age things tend to stop working as well as they used to. Having the ability to come and go as you please, added exercise and meditation are all added health benefits for just about anyone.
Retirement also allows you more time to spend with family or to begin a new lifestyle that you’ve always dreamed of. You may have a hobby that has been collecting dust or want to read more now that you have the time.
Whatever you choose to do during your retirement years as long as it brings you joy and fulfillment enjoy this time of stress reduced peace in your life.
Your retirement sources whatever they may be will dictate what you can and cannot do financially when you retire. Before you reach that stage in your life do your research, get the low-down on numbers, create a mock retirement budget and be prepared for what you can control.
Discussion: Have you written down all of your retirement income sources? Do you know what you want from your retirement? If no, now is the time to consider what your future may hold for you or how you can better build up your savings to accommodate your retirement needs.