During your working years, your primary source of income is likely from employment. Have you thought about where your income will come from once you retire? And how will you cover your expenses to maintain your current lifestyle?
Individuals are now living longer than ever before, so it is more important to plan for retirement by saving sufficiently during your working years, and investing effectively to benefit from the power of compounding.
In Canada, there are four main pillars of income that can support you in retirement:
- Government benefits;
- Employer-sponsored pension plans;
- Personal savings and investments; and
- Alternative sources.
Within the government benefits pillar, there are two key benefits you may receive:
- Canada Pension Plan (CPP): The Canada Pension Plan is something that you contribute to during your working years to enable you to receive a monthly, taxable benefit that replaces only part of your income starting when you are at least 60 years of age. The CPP retirement pension is designed to replace up to one quarter of your average work earnings or up to one third of your average employment earnings you receive after 2019.
- Old Age Security (OAS): OAS is a monthly federal retirement benefit payable for life to individuals who are age 65 and over. You don’t make contributions to receive OAS benefits; this program is funded through general tax revenues paid to the Government of Canada. For 2024, the benefit at age 65 to 74 is $713.32/month or $784.67/month for those age 75 and over. If you defer receiving OAS until age 70, you will receive $970.12/month. These amounts are clawed back if you have an income higher than $90,998, and the full OAS is eliminated at a net income of $148,065 for those under age 75. The threshold for those age 75 and older is $153,771.
Although these government benefits will supplement your income and cover a portion of your life expenses, you will need to look to other sources of income if you would like to maintain your current lifestyle in retirement.
That brings us to the second pillar, employer-sponsored pension plans:
Your employer may offer a pension plan that you and your employer contribute to during your working years. There are two different types of plans including Defined Benefit Plans and Defined Contribution Plans. Both plans allow you to grow your savings while receiving tax benefits, however, it is important to be aware of how your pension plan works to ensure you are taking full advantage of its offerings and to understand the income you will receive from it once you are retired.
The third pillar, personal savings and investments, is especially pertinent and necessary for those who do not have a pension plan. Your savings and investments act as a safety net, and can help you achieve your goals in retirement.
During your working years, you can save and contribute to accounts such as a Registered Retirement Savings Plan (RRSP), Tax Free Savings Account (TFSA), and a non-registered account, which you can invest within. It is important to be aware of how you are investing your hard-earned savings. My investment philosophy is to own great quality, dividend paying stocks. I choose companies to invest in that provide services and products that we use every day and are paying a dividend that they increase on a consistent basis. No matter if the price of the dividend paying stock is up or down, the growing dividends provide you with an income.
Time is key. The earlier you start investing and the more you keep saving, the greater your net worth will be in the future. If you invest in great quality companies that pay a growing dividend, you will also benefit from a growing income that could one day replace your current income in retirement. The best time to start investing is when you are young, but the next best time to start is today. Even if you are 40, 50, or 60 years young, it is never too late to start, especially since we are all living longer. If you retire at age 65 and live until age 95, you will have many years in which you will require income, yet you also can benefit from the power of compounding.
Lastly, you may have alternative sources of income/funds in retirement, including part-time employment, passive business ventures, rental income, inheritance, etc. It is important to take the time to understand where you will receive income from during your retirement years, and to put processes in place to allow you to live the life you would like to live.
If you could benefit from our services, and would like to discuss how you can grow your investment income in retirement, please do not hesitate to give us a call. We would love to help in any way we can!