Whether you are just entering the workforce or you are already nearing retirement, at some point everyone wants to know how much income they can expect in retirement.
In Canada, there are three broad pillars of retirement income:
- Government-administered pension plans like the Canada Pension Plan (CPP) and Old Age Security (OAS)
- Employer-sponsored pension plans, and
- Personal savings and investments
All three sources of retirement income are important and play a role in your ability to achieve the retirement lifestyle you have dreamed of.
Read on to learn about Canada’s retirement income system, how much you can expect in benefits, and a checklist for your retirement planning.
Old Age Security
The Old Age Security (OAS) is a monthly benefit paid to eligible retirees who are 65 years of age or older.
This publicly funded pension plan does not require you to make contributions during your working years. Instead, the amount you receive is based on how long you have lived in Canada as an adult.
For example, you qualify for the full old age pension if you have lived in Canada for at least 40 years after turning 18. Since the benefit is pro-rated based on a 40-year residency, an individual who lived in Canada for 20 years as an adult would receive half of the full OAS pension (i.e. 20/40th).
Eligible retirees can delay their OAS pension for up to 5 years until age 70 in exchange for higher payments - an increase of 0.6% each month the benefit is deferred.
How do I apply?
Service Canada will send you a letter if you have been automatically enrolled into the OAS pension. If you do not get a letter after turning 64, you should contact them to inquire about applying.
Online OAS applications can be completed through your My Service Canada (MSCA) or you can print and complete the paper form ISP-3550.
Canada Pension Plan
The Canada Pension Plan (CPP) is a monthly benefit paid to eligible seniors who have made at least one valid contribution to the plan during their working years. In Quebec, it is known as the Quebec Pension Plan (QPP).
Unlike the OAS, you can only receive CPP pension payments if you had deductions from your paycheque that were sent to the CPP.
The regular age to begin receiving your CPP benefit is 65; however, you can collect CPP earlier at age 60 and receive a reduced pension.
Alternatively, you can also delay collecting CPP for up to 5 years, in exchange for higher monthly payments - increase of 0.7% for every month your CPP benefit is delayed.
How do I apply?
You can apply for the CPP online through your My Service Canada Account or by completing Form ISP-1000 and mailing it to a Service Canada office.
Online applications are processed within 7-14 days, while paper applications sent by mail can take up to 120 days.
Guaranteed Income Supplement
Seniors who have a low income can qualify for an additional benefit under the OAS.
The Guaranteed Income Supplement (GIS) provides extra monthly payments if your income falls below an annual threshold published by the government.
Unlike the OAS and CPP benefits, GIS payments are non-taxable.
The spouse of a GIS recipient or a low-income surviving spouse aged 60 to 64 years old may also qualify for the Allowance and Allowance for the Survivor Benefits respectively under the GIS.
How do I apply?
You will receive a letter if you have been automatically enrolled for the GIS. If you do not get a letter or the information in the letter you received is incorrect, you will need to apply directly.
You can reach the OAS by phone at 1-800-277-9914 to inquire about your eligibility.
Workplace pensions come in various formats.
In general, your employer may offer a registered pension plan (RPP) or group registered retirement savings (GRRSP).
The two common RPPs are:
- Defined Benefit Pension Plan (DBPP), and
- Defined Contribution Pension Plan (DCPP)
For defined benefit pension plans, you know how much your monthly pension income will be in retirement based on a formula that includes your annual earnings and years of service.
With defined contribution pension plans, you do not know how much your retirement benefit will be as it is not guaranteed.
Group RRSPs are like individual RRSPs (more on this below), except that they are offered through an employer and may also include employer contributions.
Other Retirement Plans
While much emphasis is placed on the CPP, OAS, and workplace pension sources of retirement income, private savings are just as important if you want to retire comfortably.
The enhanced CPP is designed to replace 33% of your pre-retirement income while OAS takes care of about 15%.
With workplace pension plans fast disappearing (cue the DBPPs) or being watered down, it is increasingly important to build up your personal savings.
Two tax-friendly accounts you can use to save for retirement are the:
- Registered Retirement Savings Plan (RRSP), and
- Tax-Free Savings Account (TFSA)
Registered Retirement Savings Plan
The RRSP is a type of registered investment plan you can contribute to while working.
Each year, you get an RRSP contribution room that is equivalent to 18% of your earned income up to a specified maximum. For example, the maximum RRSP contribution limit in 2022 is $29,210.
You can hold a variety of assets in your RRSP account and invest in stocks, Exchange-Traded Funds (ETFs), mutual funds, bonds, and Guaranteed Investment Certificates (GICs). You can also hold cash in an RRSP savings account.
Investment income earned in your RRSP is not taxed until you begin making withdrawals in retirement.
It is also important to note that your RRSP contributions are tax-deductible and lower your tax owing today.
Tax-Free Savings Account
Like the RRSP, the Tax-Free Savings Account (TFSA) is a registered investment account.
You can choose to use it to save for retirement or other short- and long-term financial goals.
Canadians who are 18+ years of age can contribute to a TFSA account and invest their money in various assets.
While TFSA contribution are not tax-deductible, your investment earnings are tax-free for life.
The TFSA contribution limit in 2022 is $6,000 and if you have been eligible since the account was introduced in 2009, your total contribution room is $81,500.
How Much Income Will You Receive in Retirement?
Putting private savings and workplace pensions aside, how much can you expect in retirement benefits?
Using numbers for 2022, you could receive a maximum of $7,784 in OAS pension per year (i.e. based on $648.67 per month). For the CPP, the maximum in 2022 is $15,043 (i.e. based on $1,253.59 per month).
The reality for most people is that these amounts are lower, and you can see this by looking at the average monthly amount for the CPP which is just $779.32.
Both the OAS and CPP pension benefits are indexed annually, based on the Consumer Price Index to reflect inflation.
Are any pension increases in the works?
Yes, OAS benefits are increasing by 10% in July 2022 for seniors aged 75 and up.
And CPP enhancements which include increases in your CPP contributions, are expected to increase the CPP retirement pension over time to replace 33% of average work earnings (up from 25%).
After figuring out your retirement income sources, you should also consider the following:
Tax Planning: A higher income in retirement could result in a loss of pension benefits, such as the OAS. You could potentially limit OAS clawback by splitting income with a spouse or partner, withdrawing RRSP early, deferring CPP until later, and more.
Estate Planning: If you don’t already have a will, you should consider creating one. This way, you have a say in how your assets are distributed long after you are gone. An online will service like Willful makes the process convenient and affordable.
Insurance: If you will need some type of life insurance, it may be better to get it while you are younger and still healthy.