In 30 or 40 years on the job, you’ve probably become knowledgeable in your field. Maybe you know a lot about teaching. Or plumbing. Or project management. But you’ve never retired before, so how much do you know about that? You might look at your parents’ experience, or that of older friends. But what you’ve heard about retirement finances could be a mix of correct and incorrect assumptions. Now is a good time to find out the facts.
Here’s the truth behind three incorrect assumptions about retirement.
- If you take money out of your RRSPs in retirement, will that reduce your government pension?
- Do you need to replace 70% of your income in retirement?
- Do you need a plan to draw retirement income if you’re not rich?
If you take money out of your RRSPs in retirement, will that reduce your government pension?
“People often think that if they withdraw from their RRSPs in retirement it will reduce their pension. Not so,” explains Sun Life advisor and mutual fund representative Nathalie Jacques.*
In fact, Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) base your payments on how long and how much you contributed to the plan. Your payment is:
- fixed and
- not affected by your other sources of income during retirement (i.e. money from your RRSP).
Here’s what you need to know about other government retirement benefits:
- The Guaranteed Income Supplement (GIS) is for people with an annual income less than $18,984. Most people who have contributed to the CPP/QPP throughout their working lives have incomes above that limit. That’s because the government includes CPP/QPP pension payments when calculating your eligible income. “Keep in mind that the government designed the GIS for people with low incomes. If you want more money in retirement, you need to save more, not depend on the GIS,” says Jacques.
- You could have a reduction in Old Age Security (OAS) pension if your taxable income in 2021 is more than $79,845. You get to keep less and less as your income approaches $129,581. Over this threshold, you’ll have to give it all back. They call this a “total or partial recovery” – often called the “clawback” – of the OAS.
Here’s a welcome fact, though. If you’re an average retired Canadian, you don’t have to worry about either the GIS or the OAS clawback. That’s because your income will be too high for the GIS, but not high enough for the clawback. According to Statistics Canada, the average total income in 2019 for Canadians age 65 and older was $41,500. That’s well above the GIS limit and well below the OAS clawback threshold.
But if you think you may find yourself in clawback territory, your advisor can help. See your advisor before you retire. Together, you can plan a way to draw down your retirement income that will avoid – or minimize – the clawback.
What if the taxable income you expect in retirement is nearer the low end? Your advisor can help you there, too. The right drawdown strategy can qualify you for benefits like the GIS. Either way, it’s best to consult a professional to design your drawdown strategy.
In any case, both CPP/QPP and OAS payments are taxable income. It’s possible for your RRSP income to push you into a higher tax bracket. In that case, you might have to pay a bit more tax on your government pension. But your pension itself won’t be reduced.
Do you need to replace 70% of your income in retirement?
People commonly talk about needing 70% of their gross employment income to live on in retirement. But several surveys (including one by Sun Life in 2016) tell a different story. Most retired people actually live on between 60 and 70%. “It really depends,” says Jacques. “This 70% figure is simply an assumption that financial planners and advisors use to calculate retirement income.”
The actual percentage of your pre-retirement income you need may vary from 50 to 110%. It will depend on your plans for retirement, financial obligations and accumulated assets. Also, it's not unusual for the amount you need to change over time. Suppose you have seven years left on your mortgage when you retire. You might need to replace 80% of your gross income while you finish paying off your mortgage. But afterwards, you could live comfortably on 65%. Or suppose you want to travel extensively – once that becomes attractive again – after you stop working. You might want to replace 100% of your income to finance your globetrotting lifestyle. But you could drop down to 70% later, when you start sticking closer to home.
Do you need a plan to draw retirement income if you’re not rich?
With little or no savings and no company pension, drawing your retirement income entirely from CPP and OAS can be straightforward. You’ll have no tricky tax implications or clawbacks to avoid. But see whether any of these scenarios look familiar:
- You saved what little you could in your RRSP for years. But since you paid off your mortgage, you’ve been able to maximize your RRSP and TFSA savings.
- You have a bit left over that you’ve put in non-registered investments.
- You have a company pension, or a pension from a former employer in a locked-in retirement account.
- You plan to downsize your home and/or move somewhere less expensive.
- You plan to do a little consulting or freelance work to keep busy, at least for a while.
- You expect to get the maximum OAS and at least the average CPP payment.
If any or all of these statements describe you, you probably don’t consider yourself wealthy. But the way you draw your income from all these sources can still have a significant financial impact. When will you start? How much will you take out? In what combination? The OAS clawback is only one consideration. The choices you make will also affect the amount of income tax you’ll pay. They’ll influence how long your money will last. And, finally, they’ll make a difference to the estate you leave to your children.
Talk with an advisor before you retire
That way, you can plan how best to draw that retirement income you worked so hard to save. Most advisors now offer to meet Clients virtually by video chat. Find an advisor.
* Financial Security Advisor, Group Insurance and Group Annuity Plans Advisor and Financial Planner, Solutions financières N. Jacques inc.†, Financial Services Firm, Distributor authorized by Sun Life Assurance Company of Canada and firm partner with Sun Life Financial Distributors (Canada) Inc.†
Mutual Fund Representative, Sun Life Financial Investment Services (Canada) Inc., Group Savings Plan Brokerage Firm
† Subsidiaries of Sun Life Assurance Company of Canada
This article is meant to only provide general information. Sun Life Assurance Company of Canada does not provide legal, accounting, taxation, or other professional advice. Please seek advice from a qualified professional, including a thorough examination of your specific legal, accounting and tax situation.