Understanding Retirement Income
Written by Tangerine
Friday, January 2nd, 2015
No matter what stage of life you’re in, having a budget is essential. A budget has two basic components: income, and expenses. You’ll generally only have one income source before retirement, but when you DO retire, you may have multiple sources. In fact, one of those sources could be from a part-time job, since many people may transition slowly into full retirement, and some may never end up stopping work completely.
Let’s break down some of the other possible income sources:
The Canada Pension Plan: Part of the income you earned during your working career went into contributions towards the Canada Pension Plan. The income you’ll receive from the CPP will depend on how long, and how much you’ve contributed over your lifetime.
Old Age Security: Your OAS entitlement is based on how long you’ve lived in Canada, even if you didn’t earn an income during that entire time.
The Guaranteed Income Supplement: This is a program that provides a monthly benefit to people who are eligible for Old Age Security AND have a low income. The exact amount you receive depends on your marital status as well as your income level.
Retirement Savings Plans
If you contributed to a Registered Retirement Savings Plan, it can provide income for you in retirement. Many Canadians choose to convert their RRSPs to Registered Retirement Income Funds in the year they turn 71, which is the year RRSPs have to be wound down.
More and more Canadians are turning to the Tax-Free Savings Account to save for retirement. This account is more flexible than an RRSP or RRIF, and you can add or withdraw from it up to any age, even throughout retirement, without penalty as long as you don’t exceed your allowable contribution limit.
If you’ve maximized the contributions to all of your tax-advantaged accounts, then you might have only option contributed to a non-registered investment account as well. There are no contribution limits for these accounts at any time during your life.
A pension plan at work
Some companies provide pension plans to their employees. Some plans have a defined benefit, meaning your monthly income in retirement is known in advance, while other plans are known as defined contribution plans, which are similar to RRSPs in that you know what the contributions are, but the income in retirement is dependent on the performance of the investments you selected.
Next, you’ll have to break down your expenses.
When you stop working, you’ll stop contributing into the Canada Pension Plan and you’ll stop paying Employment Insurance premiums. You might stop saving into certain retirement plans, although more and more people continue to save into their TFSAs even after they retire.
Hopefully you’ll be mortgage-free, you won’t be commuting to work, or having to update your work wardrobe anymore, and at least for the time being, you’ll have access to a wide variety of “Senior’s Discounts” on everything from transit, to restaurants, to entertainment, and more.
But not everyone’s retirement looks the same. Some people will travel more, others may have stopped travelling. Some may have lower cost hobbies than others. And then there’s the question of what types of health care costs you might incur as you age… something that’s hard to know when you’re young. There is a lot of debate as to how much of your pre-retirement income you need to replace to maintain your lifestyle, but the truth is that there is no one right answer that will work for everyone. One thing to keep in mind is that retirement expenses may change over time, too. Some may start with higher expenses that gradually decrease, while others may be just the opposite. As you get closer to retirement, it’ll be easier to gauge what your particular expenses might look like.
But for now, hopefully you have a better idea about planning for your retirement budget. Fundamentally, it requires the same approach to your finances as before you retire: knowing how your income and expenses balance out.