Retirement is a new phase in an individual’s life, and it is important to have a reliable source of income to support a comfortable standard of living. In Canada, there are several sources of income available to retirees, each with its own advantages and disadvantages. In this article, we will discuss the different sources of income available to retired Canadians and provide examples to help you make an informed decision.
Canada Pension Plan (CPP)
The Canada Pension Plan (CPP) is a government-run pension plan that provides retirement, disability, and survivor benefits to eligible Canadians. To be eligible for CPP, an individual must have made contributions to the plan throughout their working life.
Pros:
- The CPP is a reliable and predictable source of income, with payments made monthly.
- The CPP is indexed to inflation, meaning that payments are adjusted to keep up with the cost of living.
Cons:
- The amount of CPP received is based on the individual’s contributions to the plan and their average earnings over their working life, which may not be enough to provide a comfortable standard of living in retirement.
- The CPP is not designed to provide full income replacement, and it is likely that individuals will need to supplement their CPP with other sources of income.
Example: If an individual has made maximum contributions to the CPP and retires at age 65, they can expect to receive a monthly benefit of $1,175.50, or $14,106 per year.
Old Age Security (OAS) Pension
The Old Age Security (OAS) Pension is a government-run pension plan that provides a basic monthly income to eligible Canadians who are 65 years of age or older. To be eligible for the OAS pension, individuals must meet residency requirements and have a minimum of 10 years of residency in Canada.
Pros:
- The OAS pension is a reliable and predictable source of income, with payments made monthly.
- The OAS pension is available to all eligible Canadians, regardless of their income or contributions to the plan.
Cons:
- The amount of OAS received is modest and may not provide enough income to support a comfortable standard of living in retirement.
- The OAS pension is not indexed to inflation, meaning that the value of the payments may decline over time.
Example: If an individual is eligible for the OAS pension, they can expect to receive a monthly benefit of $614.99, or $7,379.88 per year.
Guaranteed Income Supplement (GIS)
The Guaranteed Income Supplement (GIS) is a government-run program that provides additional income to eligible low-income seniors who receive the OAS pension.
Pros:
- The GIS provides additional income to low-income seniors, helping to improve their standard of living.
- The GIS is available to all eligible seniors, regardless of their income or contributions to the plan.
Cons:
- The GIS is only available to eligible low-income seniors, and those who do not meet the eligibility requirements will not receive this benefit.
- The amount of GIS received is modest, and it may not provide enough income to support a comfortable standard of living in retirement.
Example: If an individual is eligible for the GIS and receives the full OAS pension, they can expect to receive a monthly benefit of $846.86, or $10,162.32 per year.
Employment Pension Plans
Employment pension plans are retirement benefits provided by employers to their employees. These plans can be defined benefit plans, defined contribution plans, or a combination of both.
Defined Benefit Plans:
Defined benefit plans provide a predetermined monthly pension benefit based on the employee’s salary and years of service. These plans are typically funded by the employer and are insured by the Pension Benefit Guaranty Corporation of Canada.
Pros:
- Defined benefit plans provide a predictable and reliable source of income in retirement.
- The benefits are based on the employee’s salary and years of service, providing a higher benefit for those who have been with the company for a longer period.
Cons:
- Defined benefit plans are becoming less common, with many employers shifting to defined contribution plans.
- The benefits provided by defined benefit plans are subject to changes in the financial markets, which can result in lower benefits.
Defined Contribution Plans:
Defined contribution plans are retirement benefits that are funded by the employee and employer contributions and invested in a portfolio of stocks, bonds, and other assets. The benefits provided by these plans depend on the performance of the investments and the contributions made by the employee and employer.
Pros:
- Defined contribution plans provide flexibility and control over the investment portfolio.
- The benefits provided by defined contribution plans are not subject to changes in the financial markets, as the benefits are determined by the contributions made.
Cons:
- The benefits provided by defined contribution plans are dependent on the performance of the investments, which can be unpredictable.
- Defined contribution plans typically provide lower benefits compared to defined benefit plans.
Example: If an employee has a defined contribution plan with a balance of $500,000 and expects to receive a 4% return on their investments, they can expect to receive a monthly benefit of $1,666.67, or $20,000 per year.
Personal Savings and Investments
Personal savings and investments, such as RRSPs, TFSAs, and non-registered savings accounts, can provide additional income in retirement.
Pros:
- Personal savings and investments provide flexibility and control over the investment portfolio.
- Personal savings and investments can be used to supplement other sources of income, improving the standard of living in retirement.
Cons:
- The benefits provided by personal savings and investments are dependent on the performance of the investments, which can be unpredictable.
- The benefits provided by personal savings and investments are subject to taxes and may be subject to penalties if withdrawn before the age of 71.
Example: If an individual has a RRSP with a balance of $500,000 and expects to receive a 4% return on their investments, they can expect to receive a monthly benefit of $1,666.67, or $20,000 per year.
Rental Income
Rental income can provide additional income in retirement, either from a rental property or from a rental unit in the retiree’s primary residence.
Pros:
- Rental income provides a steady and reliable source of income in retirement.
- Rental income can help to offset housing costs in retirement.
Cons:
- Rental income is subject to taxes and may also be subject to fluctuations in the rental market.
- Owning a rental property requires ongoing maintenance and management, which can be time-consuming and costly.
Example: If an individual owns a rental property with a monthly rental income of $1,500, they can expect to receive a yearly income of $18,000.
Retirement is a new phase in life, and it is important to have a comprehensive plan in place to ensure a comfortable and secure financial future. There are several sources of income available to retired Canadians, each with their own advantages and disadvantages.
It is essential to consider all options and weigh the pros and cons of each source of income to determine the best combination for your individual circumstances. This may involve a combination of government benefits, employer benefits, personal savings and investments, and rental income.
It is also important to factor in inflation and taxes when considering your retirement income sources. Inflation can reduce the purchasing power of your money over time, while taxes can reduce your overall income.
It is recommended to seek professional financial advice to help develop a retirement plan that meets your individual needs and goals. A financial advisor can help you assess your current financial situation, consider your future financial needs and goals, and develop a plan to help ensure a secure financial future in retirement.