Aug. 10, 2019
Various sources help keep money coming in during post-work years
Many Canadians start to get serious about their sources of retirement income as retirement age approaches, and figuring out those sources is critical because they can be complicated.
"Most Canadians are used to having that one job and one paycheque to manage for the last 30 to 40 years," says Lisa Elle, a Cochrane, Alta.-based certified financial planner.
"Retirement is different because most retired Canadians begin to draw on many streams of income when they retire and this can cause confusion, tax liabilities if not handled properly, and government benefit clawbacks."
For those approaching or entering retirement, here are the most common sources of retirement income, their maximum amounts and some planning tips to consider:
Employer-sponsored pension plans
The most obvious source of retirement income is the company pension.
It's that small amount your employers deducted from your paycheques for years to contribute to your Registered Retirement Savings Plan (RRSP).
"RRSP contribution is up to 18 per cent of last year's (2018) earned income up to a maximum of $26,500 for 2019," Elle says, adding it's a good idea to check your Notice of Assessment from the CRA to confirm you are not overcontributing, which could result in penalties.
As a source of retirement income, it's fully taxable upon withdrawal, she adds.
Canadian Pension Plan (CPP)
For some individuals, this can be about $19,000 a year, or higher if one delays receiving it until past age 65. Whether one receives CPP or not depends on if they contributed to the CPP, says Marie DeLauretis, a wealth management professional at Desjardins Financial Security Investments Inc.
Those with T4 income will have contributed to the CPP. Qualified Canadians can start receiving CPP at age 60 and must take it by age 70. CPP is taxable income and the monthly payment amount is currently $1,154.58 at age 65.
While Canadians are eligible for CPP at age 60, they should consider a few things before tapping that option, says Elle.
These include questions such as, "Are you still working or are you fully retired by age 60?" she says, adding that individual financial goals and current income are other elements to take into account.
Old Age Security (OAS)
OAS payments are not dependent on one having worked, however one must be age 65 or older, a Canadian citizen, and have lived in Canada for at least 10 years after the age of 18.
Qualified Canadians can receive OAS at age 65 or older. Maximum OAS currently sits at $607.89 per month. Clawback of OAS starts at an annual income of $77,580 (for 2019) and is fully clawed back if income is $125,937 or more. One can delay receiving OAS up to five years for an increased amount.
"If deferring OAS, one would receive an additional 0.6 per cent per month for every month they defer, up to a maximum of 36 per cent increase if deferring till age 70," DeLauretis says.
Guaranteed Income Supplement (GIS)
This government benefit serves as an additional pension for seniors earning less than $18,404 annually as a single person.
"One cannot receive GIS if not receiving OAS," DeLauretis says. "Careful planning is required and should be based on one's needs."
Those in a higher income bracket, who would not need nor qualify for GIS, may consider delaying CPP and OAS in order to draw down another taxable income source, such as RRSP/RRIF.
"Those with a large RRSP who are in their late 50s or early 60s wanting to avoid potential OAS clawback in future will draw down the RRSP and delay taking CPP and OAS until age 70," DeLauretis says. "If done accurately, they could potentially get the full OAS instead of getting clawed back."
An annuity is a steady stream of guaranteed income payments, for a fixed period or for life, from an insurance company, that one receives in exchange for a lump sum of cash.
"For those in retirement or approaching retirement, this can be a low-risk investment option that will convert some of their investments that they have been accumulating and growing to an investment that provides a guaranteed retirement income," DeLauretis says. Annuities are one of the safest investments around as they are sold through and backed by Canada's insurance companies, she adds.
However, annuities have been less popular in recent years due to low interest rates. Yet, Elle argues that annuities "shouldn't be discarded, even with low interest rates, as they are usually a small percentage of a client's net worth, but do provide that peace of mind and income for life."
One's principal residence could provide a future income stream by way of Home Equity Line of Credit (HELOC) or reverse mortgage, means for homeowners to access a portion of the stored value of their home.
"Reverse mortgage should probably be a last resort option, but is still a viable option for Canadians who have all their net worth tied up in their principal residence," Elle says.
Another way to unlock a retirement income stream is to rent out an investment property, or a portion of a principal residence. Consider the tax implications, though, Elle cautions.
As a final option, homeowners could sell their home and downsize or rent.
"This option helps reduce legal fees and executor fees when cleaning up one's estate," Elle says.
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