Financial Considerations in Retirement
Retirement comes with many changes to your finances. You won’t be drawing a salary anymore, so you need to ensure your other sources of income can support the lifestyle you desire. Think of your retirement income as three pillars.
FIRST PILLAR: YOUR PENSION
You’re probably accustomed to a certain salary level, but in retirement, you’ll find there’s a discrepancy between the salary you’re used to, and the pension you will receive.
It’s important to consider adjustments you might need to make to your current lifestyle to ensure your pension works for you. But even if your pension is lower than desired, there are still two more pillars to help you fill in the gaps.
SECOND PILLAR: GOVERNMENT SUPPORT
This comes in the form of programs like the Canada Pension Plan (CPP) and Old Age Security (OAS).
You can start drawing CPP as early as age 60, even if you’re still working. However, withdrawing early means you’ll receive less money per month than if you had waited until you turned 65. So why collect CPP early? If your retirement income isn’t enough to meet your expenses, an early CPP will give you the support you need, when you need it.
You can also postpone collecting CPP at 65 and wait until age 70 instead. You’ll receive a larger-than-average monthly income as a result. For many, this seems like the best deal, but before you take it, ensure your other finances can support you until you reach age 70. You can choose to start receiving your CPP any time between the ages of 60 – 70, as your financial situation dictates.
OAS is an income stream given to every Canadian at age 65, regardless of how much income they generated during their career. Similar to CPP, you can choose to defer your OAS payments from age 65 until age 70, and your monthly income will increase.
If you have a stable income stream, deferring your payments is worth considering, as it will leave you with more money in the long run. However, if you need money early in retirement, you would be wise to apply for OAS as soon as it becomes available to you.
THIRD PILLAR: SAVINGS AND INDEPENDENT INVESTING
Your savings can help you to supplement your income during retirement, filling in any gaps that may arise.
When it comes to investment, a good place to start is with your Registered Retirement Savings Plan (RRSP). Your RRSP is an investment portfolio that you contribute to during your career. These contributions get invested and grow over time. When you retire, you can withdraw from your RRSP, and since you’re in a lower income-tax bracket as a retiree, you will pay lower taxes on both the initial income you invested, as well as any additional funds generated by your investments.
A Tax-Free Savings Account (TFSA) allows you to set money aside to invest and you can watch those savings grow, tax-free, throughout your lifetime. Any income generated by a TFSA is tax-free for life. Your TFSA savings can be withdrawn from your account at any time, for any reason, and all withdrawals are tax-free as well.
It’s best to open a TFSA early to maximize profits, and just like your regular savings, you can draw upon it when needed. You can also reinvest your TFSA funds in future years, so you’re never locked in. Lastly, when planning your estate, any monetary value in TFSAs does not attract any tax at death.
Ideally, your RRSP and TFSA were set up early into your career, but if not, it’s not too late to gain a small benefit from them, or to explore other investment options.
With all three pillars in place, you can look forward to a retirement free of financial anxiety. If you are worried about your finances as you approach retirement, or if you want to learn more about your options, it is best to consult your bank, a qualified accountant, or a financial planner.