You probably already know that retirement takes planning. This includes knowing how much you need to save before you retire as well as where your income is going to come from.
On this page you’ll find
What investments can be a source of retirement income?
Many Canadians rely on multiple sources of income during their retirement years, including personal savings and investments.
1. Registered Retirement Income Fund (RRIF)
If you contribute to a Registered Retirement Savings Plan (RRSP), you’ll need to close the RRSP by the age of 71. The funds can be withdrawn into cash or converted to a RRIF. The advantage of contributing to an RRSP before you retire is that you will receive a tax deduction for the contributions, and it will not be considered taxable income until you withdraw the money. If you expect to be in a lower income bracket in retirement, then RRSPs — later converted to a RRIF — may be a good choice for you.
Just as in an RRSP, your savings grow tax-free while they’re in a RRIF and you can choose how to invest your money within the plan. You do have to withdraw a minimum amount each year, which is considered taxable income. Learn more about RRIFs.
2. Tax Free Savings Account (TFSA)
Many Canadians contribute to a TFSA as well as, or instead of, an RRSP. The TFSA can be used for any kind of savings goal and can hold most types of investments. One advantage to using a TFSA is that withdrawals from TFSAs are not taxed. This is because your TFSA contributions are made with after-tax income, unlike RRSP contributions which usually result in tax deductions. Learn more about TFSAs.
An annuity is a contract with a life insurance company. You invest a lump sum of money, and they agree to pay you a guaranteed income over a set period of time, or for the rest of your life. Annuities are commonly used to generate retirement income.
Annuities allow you to convert your savings into a guaranteed monthly income. No matter what the markets do, your income will never change. You can choose a term-certain annuity (monthly payments for a set number of years) or a life annuity (with monthly payments until you die). But if you buy a life annuity, any money left over when you die won’t go to your estate. Learn more about annuities.
4. Investments outside a registered plan
A variety of investments can produce regular income, such as GICs and bonds that pay interest, and stocks that pay dividends. Learn more about investing for income. Any money you make from “unsheltered” investments is taxable. Learn more about how investments are taxed.
Tip: One way to help minimize risk is by diversifying — holding a mix of investments with prices that don’t always move in the same direction. If you diversify, you’re less likely to lose a large portion of the money you’ve invested just because one part of the market isn’t doing well. Learn more about diversification.
Retirement income from government benefits
The federal government offers retirement benefits based on your income and/or the amount you contribute during your working years. In order to start receiving the benefits you will need to apply for them, even if you know you are eligible.
1. Canada Pension Plan/Quebec Pension Plan (CPP/QPP)
The Canada Pension Plan/Quebec Pension Plan (CPP/QPP) is a public pension plan that gives monthly payments starting as early as your 60th birthday. The amount you receive depends on what you paid into the plan while you were working. You must be 59 or older and apply nine months before you retire. You can start receiving CPP payments any time after age 60. But your monthly payment is smaller if you start receiving it before age 65.
2. Old Age Security (OAS) benefit
The Old Age Security (OAS) benefit is a monthly amount paid to Canadians over the age of 65. In order to receive the benefit, you have to be a Canadian citizen and have lived in Canada for a certain number of years after age 18. How much you receive depends on your other income and how long you’ve lived in Canada.
You may be automatically enrolled for OAS — if so, you will be informed by Service Canada. Otherwise, you may have to apply for OAS directly.
3. Guaranteed Income Supplement (GIS)
The Guaranteed Income Supplement (GIS) is a monthly amount paid to Canadians aged 65 or older living on lower incomes, in addition to the OAS. How much you receive depends on your income (and your spouse’s if you have one). Your annual income must be less than the maximum threshold in order to qualify.
When you retire, you’ll likely be entitled to at least some federal government retirement benefits. But you won’t get them if you don’t apply. Stay up to date on your tax filing and sign up for CRA MyAccount to stay on top of your benefits information.
Other considerations for managing your retirement income
1. Income splitting to reduce tax
Consider splitting your pension income with your spouse and help reduce the tax you pay. You might be able to share up to half of your pension income with your spouse or common-law partner each tax year. Learn more about income splitting.
2. Funding your retirement using your home
A home is the most valuable asset many people own. You might be considering selling your home to add to your retirement income, or to your savings before you retire. It’s wise to consider this carefully before selling.
When estimating how much your home could be worth when you retire, it’s important to be conservative. A house or condo is an asset, and selling assets comes with risk. Just like the prices of stocks, bonds, ETFs and mutual funds, home prices will fluctuate depending on market conditions.
If you’re interested in downsizing, you’ll also need to consider where you’d like to move, and how much it would cost compared to what you’d gain from selling your home.
3. Borrowing against your home to free up equity
There are several options for borrowing against your home, including a reverse mortgage. In a reverse mortgage, you can in most cases borrow between 10% to 40% of your home’s value, depending on what your home is worth, your age and interest rates. Borrowing against your home lets you free up equity without having to move and may come with certain tax advantages. However, you will need to pay appraisal and other fees, and the amount borrowed will accumulate interest.
Just like other areas of your life, retirement should be planned out. Some considerations for you include:
- Understanding the different income streams that will fund your retirement.
- Applying for government benefits when you are eligible.
- Potentially using the sale of your home to fund your retirement or borrowing against its value.