The financial industry sometimes overlooks the fact that people’s investment knowledge varies widely. Some investors are knowledgeable and self-directed, but others don’t understand the difference between an RRSP and a TFSA.
A recent study on Tangerine by Angus Reid found that only 74 per cent of those surveyed knew that: TFSA stands for Tax-Free Savings Account. Despite having been around much longer than TFSA, the RSP acronym was only 39 percent known. Retirement savings plans are often referred to as: RRSP or Registered Retirement Savings Plan In the same way.
One of the problems with money is that even people who are smart and successful in other areas of life can be hesitant to reveal their lack of financial literacy. This is one reason why these same people may be vulnerable to some members of the financial industry who may exploit their lack of knowledge.
According to a recent poll from FP Canada and CIBC, 54 per cent of Canadians define a financial plan as detailing long-term and short-term investment products. This rules out many other factors. retirement planning, not to mention tax strategies, insurance needs, and estate planning. The industry’s focus on investment sales can neglect investors’ understanding of how investments translate into retirement paychecks.
For all you non-professionals planning for retirement, here’s a quick overview of the sources of retirement income at your disposal.
public pension
Canada Pension Plan (CPP) A contributory pension is a system in which you make contributions yourself, and the more you contribute, the higher the pension you will receive. Contributions are paid based on employment or self-employment income. Typically, up to 39 years of contributions are required for a contributor to earn the maximum CPP at age 65. Currently $1,365 per month. However, the average recipient receives much less than that, at just $758 per month as of October 2023. CPP is calculated based on inflation in January of each year.
Old Age Security (OAS) A non-contributory pension is a pension in which you do not make any contributions. The government pays this money to long-term or lifelong Canadian residents. Anyone between the ages of 18 and 65 who has lived in Canada for more than 40 years is currently entitled to receive up to $714 in OAS. Pensions are adjusted quarterly for inflation. At age 75, his OAS pension will increase by 10%.
If your 2024 income exceeds $90,997, OAS is subject to pension recovery tax or clawback. If your income is less than her $51,840 and your spouse or common law partner is not receiving her OAS pension, you may be entitled to an additional amount called the Guaranteed Income Supplement (GIS). The income threshold is lower if your spouse is receiving her OAS or if you are single, widowed, or divorced. For a single low-income OAS recipient, the maximum GIS is $1,065 per month.
CPP can start as early as age 60 and as late as age 70. OAS can begin as early as age 65 and as late as age 70. To qualify for GIS, you must have taken the OAS. The sooner you start receiving pension benefits, the lower your monthly payments will be.
Retirees who receive the maximum combined CPP and OAS pension at age 65 will now receive $24,940, but most will receive less than that.
RRSP withdrawal
You can withdraw your registered retirement savings plan at any time. You don’t have to wait until you retire or reach a certain age. However, withdrawals are fully taxable income. The reason is that the funds are invested on a pre-tax basis. tax credit You will have to pay taxes on your return as you will be paid according to your donation.
Retirees typically wait until they no longer have a job to begin withdrawing their RRSP. Withdrawals must be made by age 72.Most people use RRSPs. Registered Retirement Income Fund (RRIF) Once you start making withdrawals, or by December 31 of the year in which you turn 71, you must begin making withdrawals. RRIF minimum withdrawals start at 5.28% of the account value at age 72 and increase to 6.58% in the year you turn 80.
The sustainable withdrawal amount that a retiree can take from a RRIF without depleting the funds may be higher or lower than the minimum withdrawal amount. It depends on your investment risk tolerance, future market performance, investment fees, and life expectancy. Once you make minimum withdrawals, you will often have some money left in your RRIF account as an inheritance.
Locked-in retirement accounts (LIRAs) are similar to RRSPs in that they are tax-deferred and require minimum withdrawals to begin before age 72. These differ in that they are due to pension scheme transfers rather than voluntary personal contributions. As a result, stricter withdrawal limits are in place, including annual maximum withdrawal amounts.
workplace pension
The most common is an employer pension. Defined benefit (DB) pension or a defined contribution (DC) pension. DB pensions pay out monthly payments based on a formula and an estimate of your future income is usually reported in your annual report, giving you a rough idea of what to expect in the future. Some DB pensions are indexed to inflation after inception, but most are not.
A DC annuity is similar to an RRSP in that you buy mutual funds that grow and shrink over time, and you eventually have to start making minimum withdrawals by age 72.
Pension income is fully taxable.
Other assets
Tax-Free Savings Account (TFSA) withdrawals are always tax-free and can be made at any time. TFSAs are an effective retirement savings solution for people with low or moderate incomes to save for retirement, and are often better than RRSPs.
People who have savings outside of a TFSA or RRSP, so-called unregistered investments, may pay very little tax on withdrawals. Withdrawals from savings accounts are tax-free. Withdrawals from accounts holding stocks, bonds, mutual funds, or exchange-traded funds (ETFs) can result in capital gains if the investments are sold for a profit, but taxes are usually , ranges from just 10% to about 25% of capital gains. percent. Otherwise, investors will be taxed on their annual income from interest, dividends, and realized capital gains, even if they don’t withdraw the money. Therefore, the income, not the withdrawal, is taxable and often includes a tax-free principal.
Retirement income planning becomes more difficult if you own other assets, such as rental properties or a business.
Rental real estate can be a source of income during retirement, but you can also raise funds for retirement by borrowing or selling rental real estate assets as collateral.
Most businesses stop generating income when the owner retires, but others may be able to be sold. Business owners may hold business savings and invest in businesses. Retirement planning for business owners can be more complex.
housing assets
Retirees who own their homes can access their assets in a variety of ways. You can also sell your property and downsize, or rent it out instead. You can also borrow through a line of credit or a mortgage. They may find traditional borrowing options with income eligibility requirements somewhat limiting. A small number of lenders offer reverse mortgages, which allow seniors to borrow up to 55% of their home’s equity, albeit at a higher interest rate, with no monthly payments or income verification required.
tax management
A retiree with $50,000 of taxable income could pay between 10 and 20 percent in taxes. If her income is $75,000, it could be 20 to 25 percent, and if she earns $100,000, it could be 20 to 30 percent. The amount of tax you pay varies widely by state and territory, and further by type of income and tax deductions and credits.
Note that withdrawals from a TFSA are tax-free, and only a portion of unregistered withdrawals will be taxed. Couples can split qualified pension income, including RRIF withdrawals and her DB pension income, to equalize income and minimize combined taxes.
summary
Regardless of your age or stage, retirement income planning should be an important consideration for anyone saving, investing, buying a home, or making other big financial decisions. If you don’t know how much you need to save or what you’re saving it for, it’s like being on a road trip without a destination.
If you’re retired and don’t know how much you can spend each month, you run the risk of spending too little during your healthy years or spending too much in the future. If you have a financial advisor, ask them. Even if you don’t personally provide a retirement plan, someone within your organization may be able to help. If you are a self-directed investor, that means you need to create a self-directed retirement plan.
Jason Heath is a fee-based, advice-only Certified Financial Planner (CFP). Objective Financial Partners Co., Ltd. In Toronto. He does not sell any financial products. You can contact him at: jheath@objectivecfp.com.
