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Retirement Planning: Sources of Income in Retirement
Your income in retirement will come from a number of different sources: the Public Service Superannuation Plan (PSSP), government benefits such as Canada Pension Plan and Old Age Security, and personal savings such as RRSPs and non-registered investments. Public Service Superannuation Plan (PSSP) As a YTG employee, you participate in the PSSP, which is a defined benefit pension plan. The pension you will receive at retirement is based on your salary for your highest five years of earnings and the number of years you have been a member of the plan. Once you start to receive your pension, it will be indexed each year to reflect the change in the Consumer Price Index. The federal Treasury Board website has detailed information about the PSSP, including retirement benefits available on disability or termination of employment, as well as provisions for buying back service. Follow this link to access the document Your Pension Plan. The federal Public Works and Government Services website provides two calculators that will help you to estimate your pension. Follow this link to calculate your PSSP benefit at retirement. Follow this link if you are eligible to buy back service and want to see the impact on your pension. Your spouse may or may not receive a pension from their employer. As there are many different types of pension plans, it’s important to get estimates of potential pension income from the plan administrator. You should also realize that most private sector pension plans are not indexed to inflation. Government Benefits The government provides two main forms of retirement income to Canadians: Canada Pension Plan, and Old Age Security. Canada Pension Plan (CPP) is available to all Canadians who have been employed or self-employed and contributed to the plan. The amount of the benefit you will receive is based on your contribution history, including the amount and the number of years you contributed. Benefits are indexed annually. You can apply to receive your CPP benefits as early as age 60, as long as you have stopped working for a period of time, or as late as age 70. The amount of your benefit is reduced if you start to receive it before 65, and increased if you start to receive it after 65. Old Age Security (OAS) is paid to all Canadians when they reach the age of 65, subject to certain residency requirements. You must have lived in Canada at least 10 years after the age of 18 to qualify for the benefit, and 20 years after the age of 18 in order to receive the benefit if you move away from Canada when you retire. OAS benefits are indexed quarterly. There is a reduction in the amount of the benefit paid to higher income earners in retirement, although this reduction affects a very small percentage of retirees. Further information about government benefits is available from www.canadabenefits.gc.ca. Registered Retirement Savings Plans (RRSPs) RRSPs are a great way to save for retirement. Your contributions are tax-deductible, and the income your investments earn isn’t taxed as long as the money stays in the plan. But you have to pay the piper eventually! Whenever you withdraw money from your RRSP, the withdrawal is included in your income and taxed at that time. Although you can withdraw money at any age, you must convert your RRSP to a regular source of retirement income by the end of the year you reach age 69. What's considered a "regular source of retirement income"? You have two options: buying an annuity, or transferring your RRSP to a Registered Retirement Income Fund (RRIF). An annuity can be purchased from an insurance company. In exchange for a lump sum of capital, the insurance company guarantees that they will pay you a regular monthly income for the rest of your life (life annuity) or to age 90 (term to 90 annuity). The amount of the income will vary depending on the amount of the initial investment, your age, and prevailing interest rates. When an annuity is purchased with the proceeds of an RRSP, the total monthly income you receive is fully taxable. An annuity can be a good choice for those who want to know that they won’t outlive their income, or who don’t want the ongoing responsibility of monitoring their investments. However, there is no flexibility in how much of your capital you can use each year – the monthly payments are fixed for life. The estate protection provided by an annuity varies according to the form you choose. A straight life annuity, for example, provides payments for your lifetime alone – when you die, the annuity dies with you. Other variations are designed to provide income for a spouse’s lifetime, or for a specific number of years following the purchase of the annuity. A Registered Retirement Income Fund (RRIF) is somewhat like an RRSP in reverse. You continue to invest your money as you did within the RRSP; but now, instead of contributing a certain amount each year, you have to withdraw a certain amount. The minimum withdrawal is based on a percentage of the assets in the plan at the beginning of each year, and the percentage rises with your age. Note that you can withdraw more than the minimum if you want, but if you do this too often, you may run out of money sooner than you anticipated! You will be taxed only on the funds withdrawn from the plan; the funds that remain in the plan will continue to grow on a tax-deferred basis. From an estate planning point of view, the residue of your RRIF after your death can pass to your spouse on a tax-deferred basis. If you name someone other than a spouse or minor child as a beneficiary, the RRIF will be taxed on your final tax return. The Social Development Canada website has an excellent retirement income calculator that incorporates CPP, OAS, employer pension, and RRSP information. Follow this link to estimate your total retirement income.
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Last Update: 2005-08-22