The silvering Maple Leaf

The ageing Canadian population cohort – those 65 years of age and older – is growing rapidly, reaching 5.9 million people in 2016, according to the latest census data from Statistics Canada (StatCan). That’s an increase from 4.9 million just five years earlier. More recent non-government data suggests that the number is now closer to seven million, and the group now represents nearly one in five Canadians.

With the vast majority of this cohort embracing retirement, generating income becomes increasingly important, and every dime matters. 58% of ageing Canadians’ income is derived from what StatCan refers to as “market income” – investments and pensions. The pension portion of that income – or 44% of the total – includes the Canada Pension Plan (CPP) and Old Age Security (OAS). How that income is taxed, and what ageing Canadians actually net after taxes – or their cash flow – is critically important to how they live in their golden years.

What: Sourcing your retirement income

The first step to ensuring you are maximizing your retirement income is to establish its sources, how much from each of these sources will be paid out to you over time.

Canadians’ key sources of retirement income include:

• Government retirement benefits, e.g., Old Age Security (OAS), the Canadian Pension Plan (CPP) or the Quebec Pension Plan (QPP), foreign government pension plans.
• Employer pension plans, e.g., company-administered defined-benefit (DB) and defined-contribution (DC) pension plans.
• Registered retirement plans, e.g., Registered Retirement Savings Plans (RRSPs), Registered Retirement Income Plans (RRIFs), Tax-Free Savings Accounts (TFSAs).
• Other personal savings and investments in non-registered accounts, e.g., investments such as rental or income-producing properties. 

When: Drawing your retirement income

The next step is to establish the best withdrawal structure from one’s various retirement income sources. Consider drawing from the least flexible sources of income first, allowing you increasing flexibility as you age, and a degree of control over minimizing taxes. Depending on your age, and individual situation, the following drawdown process can help minimize your tax bite, while generating the greatest flexibility to meet your evolving cash flow needs:

Drawing income in the right order to maximize tax efficiency

It’s important to keep in mind that there is no set order that’s right for everyone. The order you draw on your income sources can be important, so it’s best to consult with your advisor on what’s the best strategy for you.  

How: Maximizing your retirement income

Here are just a few ideas to consider that may help enhance your after-tax retirement paycheque:

• You can start drawing on your CPP as early as age 60 and as late as age 70. If you are less concerned about cash flow in your early retirement years, consider drawing on your CPP later. Doing so can substantially increase your CPP payments.

• Assess when you can start receiving company pensions to maximize what you get, e.g. with employer Defined Benefit plans there is often a formula based on age or years of service where there may be an optimum time to start drawing.

• Consider leaving your registered funds to grow as long as possible to benefit from tax-deferred growth, i.e. waiting until you are 71 to convert your RRSP to a RRIF.

The “what, when and how” of building your retirement paycheque is important to maximizing your after-tax retirement income – and enjoying your retirement years. Talk to us about how we can help you build a personalized retirement income strategy that’s right for you. 

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