Your monthly retirement income will be an accumulation of benefits and payments from various sources – and to get the most out of them, while paying the least amount of tax, you need to know what they are.
Source 1: Public Income Programs and Pensions – in other words, what the government will pay you in retirement.
- Old Age Security (OAS) provides a basic monthly pension benefit at age 65. Benefits are taxable, adjusted for inflation, and ‘clawed back’ in increasing amounts as your individual net income climbs above a threshold amount. Individuals with lower incomes may also qualify for the Guaranteed Income Supplement (GIS).
- The Canada Pension Plan/Québec Pension Plan (CPP/QPP) pays a monthly pension to people who have been employed and contributed to CPP/QPP. Benefits are approximately 25% of your average annual earnings during your working life up to certain limits. Benefits are indexed to inflation, are taxable, and can start at a reduced amount as early as age 60, or as late as age 70 with an increase.
Source 2: Employer-sponsored Pension Plans – in other words, what your employer provides.
- Defined Benefit (DB) pension plans provide a specific pension amount paid to you for your lifetime after you retire. The amount of a DB pension benefit is set according to your age, length of service, and salary. It may or may not be indexed for inflation.
- Defined Contribution (DC) pension plans are also known as money purchase plans and do not guarantee the amount of your future benefits. DC retirement income depends on accumulated contributions and the investment returns earned by these contributions.
Source 3: Individual Retirement Plans – in other words, what you will provide.
When you retire, investments held in your Registered Retirement Savings Plan (RRSP) can be converted to income in three ways:
- A Registered Retirement Income Fund (RRIF) is like an RRSP in reverse. Instead of contributing to it, you withdraw from it. A RRIF offers the flexibility of a wide range of investment choices as well as your choice of the amount you wish to withdraw each month (subject to an annual minimum withdrawal based on the value of the investments in your RRIF and age.)
- An Annuity offers the simplicity of a guaranteed lifetime income but can’t be increased to keep up with inflation or escalating living costs.
- Cash – convert investments in your RRSP to cash and you will be subject to tax on the entire amount. Not the most attractive option in most cases.
To be sure you will have enough income to fund your retirement dreams, talk to your professional adviser.
This column, written and published by Investors Group Financial Services Inc. (in Québec – a Financial Services Firm), and Investors Group Securities Inc. (in Québec, a firm in Financial Planning) presents general information only and is not a solicitation to buy or sell any investments. Contact your own advisor for specific advice about your circumstances. For more information on this topic please contact your Investors Group Consultant.