When you are retired you will probably have more sources of income than you had when you were working. There will be OAS, GIS, CPP, RRIF, TFSA, Annuity, company pension and investments. You may have all or some of them depending your income and time in Canada during your working life. This post will help you understand how these are obtained and their impact on retirement income and taxes.
Purpose of this Post
An Excel spreadsheet can be downloaded that you can use to estimate your pension incomes. It has a number of enterable fields and charts that will show you how the various sources will provide your retirement income. Whether this income is enough is a topic of other posts, or if you want to get right to it, you can try out the FinanceBase-Lifetime Finances application I developed to help individuals and couples plan their life-time cash flow up to age 100.
There are many sources of information that you can access on the internet that provide details on what you can expect during retirement. If you are interested, a few I found useful while preparing this post are listed at the end of this post.
The Government of Canada provides three retirement benefits for which you may qualify. These are intended to provide a foundation for your retirement income, but are not expected to be enough to match what you had during your working years.
Old Age Security (OAS) – Everyone who has lived in Canada for at least 10 years and is over 65 years old can receive OAS. The amount per month depends on the number of years of residency and costs you nothing, except that you have to apply. The age of eligibility is changing starting in 2023 and will go from 65 up to 67 for those born after 1958. For 2015, the yearly maximum amount is $6,764 if you have lived in Canada for 40 years. For each year less than that, the amount is reduced by 1/40. Voluntary deferral is also possible for up to 70 years of age, with some restrictions.
Guaranteed Income Supplement (GIS) – This is a means-tested income and is only available to low-income individuals and couples and only if you are eligible for OAS. Again it cost nothing, but each dollar of other income earned reduces the GIS next year. For 2015 the yearly maximum for a single person is $9,172 for no income except OAS reducing to zero for an income of $17,088.
Canada Pension Plan (CPP) – All people that work in Canada have to pay into the CPP. The rate for the past few years has been 9.9%, but if you are an employee, your employer has to pay half. There is a maximum amount based on a maximum income, which changes each year based on inflation. You can take the CPP retirement income starting at age 60 up to 70, with changes to the payment. For 2015 the yearly maximum is $12,780 for 40 years of employment at or above the maximum earnings for all years.
Your Employer Pension Plan
If you are one of the less than 40% of employees lucky enough to work for a company that offers an employer pension plan, you should have a pension when you retire. You normally have to pay into the plan during working years. Depending on what the company provides, there is 1) the Defined Benefit plan where the company takes on the management and risk of the plan and you know how much you get in pension income based on years of service and income and 2) the Defined Contribution plan where you take on the risk of the plan and what you get as a pension income depends on how well your investments do over the years.
The Pooled Registered Pension Plan (PRPP) is a new plan that permits small businesses and self-employed people to buy into a plan offered and managed by banks and insurance companies.
Your Registered Retirement Savings Plans
Since 1957 Canadians have been able invested in the Registered Retirement Savings Plan (RRSP) up to a percent of their income. Any contribution to Employer or Pooled pension plans reduces the amount that is available for an RRSP. This plan has been the mainstay for most Canadians over the years to plan for a retirement income, but even then, it is not as widely used as it could be. For 2015, you can save up to 18% of your income to a limit of $24,930. Any unused amount can be used in later years and is added to your Unused RRSP Contributions which Revenue Canada keeps current and shows as amount (B) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment.
TFSA as a Retirement Savings Plan
With the 2009 introduction of the Tax Free Savings Account, with its fixed amount per year contribution limit, it can be used as an alternative to the RRSP, if your savings are limited or as an adjunct to it, if they are not. Please refer to the post TFSA and RRSP – Providing a Fixed Retirement Income for how this is can be done. Revenue Canada also keeps track of the TFSA contribution room but you must ask for it or view it online. For 2015, the yearly contribution limit is $5,500 and the total amount since 2009 is $36,500. (2009 – $5,000, 2010 – $5,000, 2011 – $5,000, 2012 – $5,000, 2013 – $5,500, 2014 – $5,500, 2015 – $5,500)
There are many other investments that can be used to generate income during retirement. During your lifetime your investments in, for example, stocks, bonds, real estate, guaranteed investment certificates (GICs), mortgages, will all be available when you need income during retirement. They can provide a significant part of your total assets and your retirement income.
There are a few types of taxes that you have to pay: on income, on pension income, on business income, on dividends and on capital gains. Each of the incomes discussed above are taxable in retirement using one of these types and often with different rules. Here is a brief description of each. For more details and advice, talk to a financial advisor or a tax preparation firm or examine the federal and provincial tax forms.
- OAS – Taxed as income on line 113 of the T1 form and subject to the Social benefits repayment on line 235.
- GIS – Taxed as income on line 146 of the T1 form and subject to the Social benefits repayment on line 235. OAS and TFSA are not counted as income when calculating the GIS.
- CPP – Taxed as income on line 114 of the T1 form.
- Employer Pension Plan – Taxed as pension income on line 115 of the T1 form. It can be split with a spouse at lines 116 and 210.
- RRSP – When converted to a RRIF (Registered Retirement Income Fund), it is also taxed as pension income on line 115 of the T1 form. It is also part of what can be split with a spouse at lines 116 and 210.
- TFSA – Never, ever taxed and not reported on any T1 line.
- Other Investments – Depending on the investment, it can be in any of the other lines on the T1 form and be subject to full or reduced taxes. If you have not already done so, you need to ensure you are familiar with the tax implications of each of your investment.
How Much Will You Receive?
Every person’s situation is different due to a variety of factors, such as number of working years in Canada, income over these years, company support, and how discretionary money is invested.
To give you a feel for how much you can expect, an Excel spreadsheet is available, by clicking on Download Sources Of Retirement Income Spreadsheet. Once you enter the number of years to retirement (or 0 if already retired), the conditions for the government pensions, your investments and the rates you expect pensions and investments to increase, you can obtain an estimate of the amount that each pension and investment will be worth upon retirement. Charts are provided that show the yearly income.
Years to Retirement – Enter as many years that you think you are away from retirement. Enter 0 if already retired. This is used to determine the future values of OAS, CPP and GIS.
OAS – Enter the Years of Residency when Retired (up to 40) as this determines how much of the OAS maximum payout will be used. There is no voluntary referral included.
CPP – Enter the Working Years when Retired (up to 40) and the % of the Maximum earnings you believe that you had over the years. You can get a statement from Revenue Canada of your contributions and earnings for past years.
OAS, GIS & CPP Rate Increase/Year – These government pensions are adjusted by inflation each year. Try different percentages to see what affect it has.
TFSA – Enter the total amount you expect to have in TFSAs when you retire. Also enter the Interest rate you expect at that time. These will be guesses, unless you have already retired, but try a few values to see what affect it has. The interest rate is used to generate the income. The principal is not touched.
RRSP/RRIF – Once retired, any RRSP must be converted to a RRIF before or at age 71. They can also be converted to an annuity or taken as income, but the RRIF option is included here. The RRIF payout rate is set to the first year after age 71 and is 7.38%.
Company Pensions – Unless you are already retired, you will have to guess at the pension or pensions that will be available to you from the companies that you worked for over your lifetime. Make your best guess and try some values.
GIS – This is calculated from the income of all of the items discussed above excluding OAS and TFSA. To see the calculations, scroll down. Do not change any of these values.
More Comprehensive Solution
I found that dealing with the impact of inflation is beyond the ability of Excel spreadsheets to handle. Also, dealing with all of the different types of income, assets and taxes requires much more that a spreadsheet. Consequently, a few years ago I developed a comprehensive application called Lifetime Finances. It uses your assets, income & expenses during your lifetime to project whether you will outlive your money. It can be used at any age and provides a yearly cash flow (income less expenses, including taxes) from now to 45 years after retirement. If desired, changes can be made in any year. You can see what it provides by clicking on this link to FinanceBase-Lifetime Finances. It can be downloaded free in a demo mode for 31 days. After that a license is required which is a very nominal amount.
The following are some of sources of information that you can access on the internet that provide details on what you can expect during retirement.
Retirement Planning – Government of Canada, Service Canada
Understanding Canada’s retirement income system – Government of Canada, Financial Consumer Agency of Canada
Old Age Security Payment Amounts – Service Canada
Voluntary deferral of OAS – retirehappy.ca, D. Runchey
Canada Pension Plan Payment Amounts – Service Canada
Pooled Registered Pension Plan (PRPP) – Questions and answers for employers – Canada Revenue Agency
Statement of Contributions to the Canada Pension Plan – Service Canada
Canadians losing out on as much as $3-billion in ‘free money’ defined-contribution pensions – Financial Post, B. Shecter, Dec 2, 2014.
Income that lasts a lifetime – MoneySense, S. Efron, April 2, 2012
Contributing to an RRSP – Canada Revenue Agency
TFSA Contributions – Canada Revenue Agency