I want to start
You want to start planning for your retirement and are wondering what to do first? Knowing and understanding certain financial concepts related to retirement is a good starting point.
Government plans such as the Old Age Security program, the Canada Pension Plan and the Quebec Pension Plan are your basic sources of retirement income.
First pillar: Old Age Security (OAS) pension
The OAS pension is a monthly benefit paid to Canadians. You qualify for this pension when you turn 65 if you have legal status in Canada and have resided in the country for a period of no less than 10 years after you turn 18. The amount of your pension is determined according to the number of years that you have resided in Canada after the age of 18.
You can defer payment of your OAS pension up to a maximum of 60 months (5 years). Your OAS benefit will then increase for every month it is deferred. Deferring your OAS pension can be a beneficial option if your income is above the set threshold for the year, as you will have to repay some or all of your pension. By deferring your OAS benefit until your income is lower, you will pay less tax on it.
OAS beneficiaries who have a low income and who live in Canada are entitled to the Guaranteed Income Supplement (GIS), a monthly non-taxable benefit.
If you can be automatically enrolled, Service Canada will send you a notification letter no later than the end of the month following your 64th birthday. If you do not receive this letter, you must apply in writing for the OAS pension.
A. Canada Pension Plan (CPP)
The CPP is in force everywhere in Canada except Quebec, where similar benefits are available through the QPP. The CPP is a monthly benefit paid to eligible Canadians who apply for it.
During your working life, you contribute to the CPP. The pension you will receive will be based on how much, and for how many years, you will have contributed at the time you become eligible.
You can submit an application at 65 years of age or begin receiving a reduced pension at age 60. You can also delay your CPP benefits until age 70. Your benefit increases in that case.
B. Quebec Pension Plan (in the province of Quebec)
The Quebec Pension Plan (QPP) is available at the age of 60. However, the age that you choose to begin receiving your pension has an impact on your income for the rest of your life:
- When retirement benefits begin before age 65, the benefit amount is reduced for each month between the beginning of the benefit payment and the 65th birthday.
- The pension benefit is increased for every month it is deferred after age 65. At age 70, however, you have to apply for your pension.
During your working life, you contribute to the QPP. The pension you will receive will be on based on the employment earnings on which you will have paid contributions to the Plan, as well as your age when pension payments begin.
You can submit an application for your retirement pension as of age 60, or one to three months before the date on which you would like to receive your first payment.
Did you know...?
- Government pension plan benefits are indexed every year.
- Government pension plan benefits are considered taxable income.
- If you have worked in Canada and are now living out of the country, you retain the rights you accumulated under governmental plans and you can apply to receive a retirement pension from your last province of residence in Canada.
Are government plans enough?
To enjoy a comfortable standard of living in retirement, you will need to add other savings to these government benefits, which are meant to replace a basic level of income. If your pre-retirement income is higher, you will need to make sure to save more in a private retirement plan.
Private pension plans
Many employers offer retirement plans to their employees.
Various types of plans are available:
- Defined-contribution plans and defined-benefit plans
- Group registered retirement savings plans (RRSP)
- Deferred profit sharing plans (DPSP)
- Voluntary retirement savings plans (VRSP) – Quebec only
- Supplemental pension plans (SPP)
Retirement income received from private plans is considered taxable.
If you are a member of a private plan, make sure you understand the terms and conditions to optimize your retirement planning.
The money that you save over your lifetime will add to your retirement income. When you retire, you can gradually withdraw what you need to maintain your standard of living. The amount that you have available at retirement will depend on the money that you put away over the years.
There are various ways to save for retirement. The most common ways are through registered retirement savings plans (RRSP), tax-free savings accounts (TFSA) and voluntary retirement savings plans (VRSP – Quebec only).
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In Canada, the age for eligibility for retirement is set at age 65 in government plans and in most private plans. There are, however, other possible scenarios.
Before age 60
- If you have a pension plan through your employer, you could be eligible for early retirement. Your benefit will be reduced due to the fact that you will receive your pension over a longer period of time.
- Personal savings are the only other source of available income.
Between 60 and 64
- Everywhere in Canada, except in Quebec – for which the equivalent is the Quebec Pension Plan (QPP), you can choose to start receiving a pension through the Canada Pension Plan (CPP).If you do so before the age of 65, there will be a penalty. You will only receive a portion of the pension for the rest of your life.
- If you have a pension plan through your employer, you could be eligible for early retirement. Your benefit will probably be reduced due to the fact that you will receive your pension over a longer period of time.
At age 65
- All the government plans are available without penalty.
- You can choose to defer payment of government plans up to age 70.
- If you have a pension fund through your employer, you qualify for the maximum pension.
If you’re thinking of retiring early, take the time to consider the impact that it will have on your savings.
- You will save for a shorter period.
- Your savings will generate returns for fewer years (your money will therefore not have grown as much).
- You will have to deal with increases in the cost of living (that is, each year of retirement).
- You will have to live several years with your savings (with life expectancy continually increasing, you could outlive your savings).
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What expenses will be reduced or eliminated in retirement?
Financial planning experts estimate that, in order to maintain your standard of living, your retirement income should be about 70% of the gross salary you were receiving before retirement.
An income that is lower than your current employment income will be enough, as many expenses will be reduced or eliminated by retirement:
- Job-related expenses: contributions to employment insurance, the Quebec Pension Plan or the Canada Pension Plan, professional or union dues, group insurance premiums, etc.
- Lifestyle expenses: the cost of transportation and clothing, mortgage payments, dependent children, etc.
- Expenses related to income tax: reduction in taxable income, pension income credit, age credit, etc.
- Retirement savings: contributions to the employer’s pension plan, RRSP, TFSA, etc.
Government plans, such as CPP, OAS and QPP, are the only basic sources of income. It will be necessary for you to have additional savings to supplement this income.
The higher your pre-retirement income, the less these public plans will be enough to replace your income. If this is your case, the amounts that you need to invest in a private retirement plan should therefore be more substantial if you want your retirement income to be 70% of your salary.
The 70% replacement ratio for everyone?
You need to view the 70% rule as a general guideline. However, depending on the lifestyle that you want in retirement (travel, leisure, indulgences) and based on your personal situation, this percentage could be too high or too low for you. Remember to consider unexpected events and how long your retirement will last.
Budget for success
There are many reasons for creating a budget. Planning for your income in retirement is very important. A budget will help you stay focused on your goals.
Use our follow-up and planning tools to assess your progress in reaching your retirement goals and develop your savings strategy.