A defined benefit pension plan gives a retiree a set amount of income based on their years of service, age and earnings history. They are usually offered by large companies or in the public service sector.
That’s great – but what if your company doesn’t offer that? Where will your income come from?
I don’t have a defined benefit pension plan so this topic has been on my mind since I graduated and started working full time.
Below are the basics of different types of retirement income and where my own retirement income will come from.
Registered Retirement Savings Plan
A registered retirement savings plan (RRSP) is a vehicle that allows Canadians to save money for retirement while being sheltered from taxes. The money is taxed when it is withdrawn, but not before then – and contributions can be deducted from your taxable income each year.
I know that I won’t have a pension plan so saving money in an RRSP is important in order to achieve my retirement goals. Not having a pension plan means that I can create significant amounts of RRSP contribution room each year, without the contribution room being reduced by a pension adjustment.
I am a ‘DIY’ investor who focuses on dividend stocks that offer long term growth.
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My goal is to contribute towards my RRSP through my working years and then use the dividends I receive each year as income when I retire. I currently only receive about $5,000 in dividend income annually – so I’ve still got a ways to go!
Tax Free Savings Account (TFSA)
Another obvious source of income is the Tax Free Savings Account (TFSA). Canadians are able to contribute up to $5,500 per year towards a TFSA account and withdrawals are free of all taxes. If you’ve never contributed to a Tax Free Savings Account in the past, you’d be able to contribute $31,000.
A TFSA is an important tool when planning for retirement income because it can hold a wide range of investments (such as dividend paying stocks) that can provide tax free income upon retirement.
My Tax Free Savings Account currently pays about $500 per year in dividends but I’m hoping to start making regular contributions in 2014.
Old Age Security
Old Age Security (OAS) is income that Canadians can receive from the government when they retire. It is given to most people ages 65 and older and who have lived in Canada for 10 years or more. The amount you can get depends on the number of years you live in Canada after turning 18.
Most people born and raised in Canada will receive the full amount (in 2013 the maximum was $546.07 per month).
The only downside is the OAS ‘clawback’ – when your net income reaches a certain level the government starts to reduce the amount of OAS you receive.
In 2013, the cutoff was a net income was $70,954 and above. Any amount higher then that and the government starts to tax the OAS more heavily.
Canada Pension Plan
Canada Pension Plan (CPP) is another cornerstone of retirement income for Canadians.
The amount you will get is based on two things: (1) the amount of time you contributed when you were eligible to (generally your middle aged working years) and (2) the amount you contributed. Most financial experts agree the vast majority of Canadians don’t get the maximum amount – currently $1,012.50 monthly (in 2013).
For the sake of being conservative, I am counting on receiving about half that amount per month when I retire. I entered the workforce later than most due to my education and I plan on retiring early, so that means I likely won’t be eligible for the full amount.
Guaranteed Income Supplement
Along with OAS, low income seniors are entitled to Guaranteed Income Supplement (GIS). The maximum is $8,788 for single seniors and $11,655 for couples.
If only one spouse has reached 65, the younger spouse can receive GIS but not OAS. You must have an income below $16,368 (or $21,648 for couples) in order to qualify.
We are expecting our retirement income to be high enough that we will not qualify for GIS.
Other Income Sources
When I retire I am also counting on receiving rental income (assuming we still own the rental property) as well as some side income – possibly from consulting. Ideally I would like to earn income from my hobbies when retired.
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I also plan on earning investment income from non-registered investment accounts – likely dividend income. Again, it won’t be much but it will help with monthly expenses.
Adding It All Up
It’s possible to have a reasonable income when you retire even if you don’t have a company pension. As far as taxes go it’s tough to beat the earnings within a Tax Free Savings Account since everything can be taken out as needed (free of tax) and there are no withdrawal limits.
As I mentioned, I don’t plan on budgeting for the maximum CPP as it is difficult to attain. The majority of my retirement income will be from my RRSP and TFSA, as well as some rental income and non-registered investment accounts.
Where will your retirement income come from?
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