Retirement Income – Where Will it Come From?
When you’re working your salary is your main source of income. You may have other money coming in – maybe rental income or dividends – but on the whole, your salary is what you live on. Once you retire you stop receiving that paycheque and the income you receive will instead come from multiple sources.
When you walk out of your place of employment for the last time it can feel daunting financially. You’ll no longer be receiving the income you’re accustomed to.
Where will your retirement income come from? It’s important to review all your financial resources prior to retirement to determine how they will support your desired lifestyle.
While not all will apply, here are seven sources of retirement income you can pull from to meet your expenses.
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1. Government pensions
You’ve most likely contributed to CPP from your paycheques over the years. CPP payments are automatically provided to retirees at age 65. You can choose to receive payments as early as age 60 (reduced) or a late as age 70 (increased), or anywhere in between. Spouses can share benefits if it will be advantageous to minimize tax.
Old Age Security (OAS) is a security program that pays automatically at age 65, or you can choose to delay as late as age 70 for an increased amount. You must have lived in Canada for a number of years (10+ for partial benefits, 40+ for full benefits) to be eligible. OAS is income tested and will be clawed back for every dollar earned above the income threshold.
Guaranteed Income Supplement (GIS) is a means-tested additional income source for lower-income Canadians.
The Government of Canada has a calculator to help you manage your government pensions.
2. Defined-benefit pension plan
You may be fortunate enough to have a company pension plan. Pension payments are based on a formula that depends on your salary, age, how long you have worked for the employer, and whether you have survivor benefits. You may be given the option of taking the monthly pension amount or a lump sum which must be transferred to a Locked-In account (LIRA or LIF).
3. Defined-contribution pension plan
Many companies offer their employees a defined contribution pension plan. The employer invests a percentage of the employee’s salary and often matches that contribution. Depending on how generous the plan is and how long the employee has worked there, these investments can be substantial. The final amount will be converted to an annuity for monthly payments, or you can take the cash and transfer it to a Locked-In account.
4. Your Investment Portfolios
For many retirees, funds held in RRSPs, LIRAs, TFSAs and non-registered accounts are often the largest component of retirement income. Effectively managing withdrawals and income splitting can provide significant tax savings and improve your future cash flow. It will be different depending on your age, your health, your relationship status, and your current and expected level of income.
5. Tap into your existing home equity
If you own your home you can access the equity with a Home Equity Line of Credit to draw down cash over time, or a Reverse Mortgage to provide retirement income. To free up capital from your home, you may want to sell and downsize or move to a less expensive location. Or you may prefer the lifestyle of a renter and let someone else take care of the costs of maintaining the property.
6. Income from working in retirement
You many find opportunities to work part time after you retire. Not only will you supplement your retirement income, you’ll stay active, pursue your passions and meet new people.
There are many reports that state that Baby Boomers are on the threshold of an enormous wealth transfer from their parents. If you’re expecting an inheritance be realistic in your expectations. Given current longevity, pricey retirement homes and expensive long-term health care costs, you may receive a lot less than you think.
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The bottom line
When you retire, not only does your daily routine change, you also stop receiving a pay cheque.
Building tax smart, steady retirement income through your investments and government programs is a key part of any retirement plan.
There is no one right way to structure an income plan because there are so many variables. Income requirements in retirement will depend on your age, your spouse’s age, whether you will continue some sort of employment, your health, how much you have saved, and the amount of pension income you can expect from various sources at different timelines.
It takes quite a bit of thought to put it all together and make your income plan work for you.