Where Will My Money Come From in Retirement?

James Schofield - May 11, 2023
Once work stops and with it the regular pay cheque, how does the switch to relying on savings work? Which investments should be taken out first and which should be left to grow? We'll show you.

This is a question we hear frequently. People who have been working and saving for the last thirty plus years understand that once you stop working, you won’t have a pay cheque coming in, so you’ll switch to living off of your savings, but how will this work? What investments should be taken out first and what investments should be left to grow?

Government Sources:

For many retirees, the answer will depend on a few different factors. The main one is age. If you’re 60 or older, you can begin taking CPP and at 65, you can begin taking old age security. For a couple retiring at 65 receiving maximum for both CPP and OAS, they can expect to receive approximately $3,578/month from these two sources. For lower income individuals over age 65, there is another government source available called guaranteed income supplement (GIS). GIS is meant to supplement OAS so the lower your income the more supplement you’ll receive. GIS is not applicable once the taxpayer’s income is above $18,600 excluding OAS .

Defined Benefit Pensions:

Another potential source of income during retirement, especially in Ottawa, is a defined benefit pension. Many government employees receive a pension when they retire. Defined Benefits plan typically use a formula to calculate the amount, which involves multiplying a factor between 1.3% and 2% of your best five year of salary averaged then multiplying the resulting by the number of years you worked at the company. The resulting number is payable to you annually for the rest of your life. These plans usually include a survivor benefit which is typically between 50% and 75% which continues to the surviving spouse. Here is an example of the match for calculating your pension. ($70,000 x 2%) = $1,400 x 30 years of service equals a pension of $42,000.

Personal Savings:

If your employer does not have a pension plan, savings are the only income source other than CPP and OAS. Most Canadians are familiar with RRSPs and hopefully remember benefiting from the tax deferral when making contributions. In retirement, RRSPs become an income source. A 55-year-old retiree with no pension may rely heavily on their RRSP at the beginning of retirement as they will not have any other sources of income for at least the first 5 years until they can begin taking CPP. The benefit of making withdrawals from the RRSP during this five-year time period, it that the first $12,069 of income every year is exempt from federal tax and the next $32,442 after that will only be taxed at 20.05% (Ontario 2019).

There may be other investment accounts other than RRSPs. These may be Tax Free Savings Accounts and/or non-registered investments. There are a few other possible sources and account types, but they are less common. Individuals with a large pension may not require income from other sources during retirement, and many require more strategic planning to keep taxes low. There may be tax reasons to utilize the TFSA early, but generally this will be the last account you’ll use.

Start Planning before Retirement

If you haven’t started planning your income sources in retirement, fifty-five is a good age to begin. Starting to analyze various retirement income sources at this age can help to avoid making irreversible mistakes like choosing the wrong time to start CPP and OAS. The earlier you start planning, the easier it is to set yourself up for better financial outcomes.

i https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html

ii https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments/tab1-51.html#above

iii https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/about-your-tax-return/tax-return/completing-a-tax-return/deductions-credits-expenses/line-30000-basic-personal-amount.html