Turning your savings into retirement income

From: Financial Consumer Agency of Canada

Where will your income come from when you retire

Your income during retirement will typically come from three main sources:

  • the Canada Pension Plan (CPP) or Quebec Pension Plan (QPP)
  • the Old Age Security (OAS)
  • employer-sponsored pension plans and personal savings and investments

Your retirement savings and investments may come from sources such as:

  • Registered Retirement Savings Plans (RRSPs)
  • Tax-Free Savings Accounts (TFSAs)
  • real estate
  • employer pension plans
  • non-registered investments and savings accounts

You’ll need to know how much money you may get from these sources to be able to plan for your retirement. You’ll also need to consider what to do with your personal savings at certain stages in your life.

You should start thinking about all of these things before you retire. This will help you figure out when you can comfortably retire, and how much money you can expect to have when you do.

Speak with a financial or investment professional to learn more about what options are available to you and what will work best for your financial situation when you retire.

Converting your RRSP or lump-sum benefit from a pension plan

Generally, you will need to convert your RRSP into some form of income by the end of the year you turn age 71.

Your options typically include:

  • buying an annuity
  • converting your RRSP into a Registered Retirement Income Fund (RRIF)
  • taking the money out as a lump sum

Learn more about RRSP options after you turn 71.

What to consider when planning your sources of income

There are a number of things you should consider when figuring out how to make the most of your savings when you retire.

When you will want or need income

When you will need retirement income and how much money you will need will depend on your lifestyle and personal circumstances.

For example, you may want more income earlier in your retirement if you want to take up new hobbies or travel. You may also want extra income if you retire before 65 and aren’t yet eligible to collect your Old Age Security (OAS) pension.

You may want to give money to a friend or family member when you retire. For example, you may want to set up a Registered Education Savings Plan (RESP) for a grandchild. You may also want to leave money to a loved one or donate to charity when you die.

This choice will impact not only when you need retirement income, but also the financial products you buy when you retire. For example, some annuities will make a payment to your estate when you die while others will not.

Unexpected events can also have a big impact on your retirement income.

For example, you may have:

  • major unplanned expenses such as home or car repairs
  • health emergencies for you or your spouse or partner
  • to move or make changes to your home because of a change in your health or the health of your spouse or partner

You should have a plan to cover these expenses, such as extended health benefits or an emergency savings fund. You may want to consider planning to have more retirement income later in life in case your benefits or emergency savings are not high enough to cover unexpected expenses.

How much risk you are willing to take with your money

Different savings and investment products come with different levels of risk. Generally, the more money you could earn from a product, the higher the risk. Ask yourself if you could afford to lose money from your investment and still be able to cover your expenses.

You may want to consider speaking with a financial or investment professional to help you figure out what products best meet your needs and risk tolerance.

The cost of investment fees

Most financial and investment professionals will charge a fee for their services. This may be a flat rate, or a percentage of the money that you invest. You may also pay different fees depending on the type of investments you have.

Some examples of investment fees include:

  • costs to buy an investment
  • costs to sell an investment
  • investment management fees
  • financial advisor fees
  • administration fees for registered plans

Investment funds, including mutual funds, charge a fee for managing the fund. The fees are called the management expense ratio (MER).

The MER:

  • may include an ongoing commission paid to advisors who sell the fund (also known as a trailer fee)
  • is paid regardless of whether the fund makes money
  • is deducted before calculating your return
  • is set at a percentage of the fund’s value

Your MER is typically a percentage of the total value of your investment. The percentage varies depending on the investment product and where you buy it from. For example, it can be less than 1%, over 3% or somewhere in between.

High fees can result in a lower net return from your investments. For example, if you have a $50,000 investment with an MER of 1%, you would pay $500 a year in fees. However, if you had a $50,000 investment with an MER of 3%, you would pay $1,500 in fees. Paying more in fees will mean that you will have less money for yourself each year.

Make sure you ask about any up-front or ongoing fees before working with a financial or investment professional.

Implication on your taxes and benefits

Some sources of retirement income, such as money withdrawn from an RRSP or an RRIF, are considered taxable. This means that you may have to pay tax on them.

Your net income during retirement can impact the amount of money you get from federal government benefits that are based on your income, such as the Old Age Security pension (OAS) and the Guaranteed Income Supplement (GIS).

For example, if your income is higher than a certain amount then you may have to pay a recovery tax on your OAS payments. This means you would have to pay back some or all of your OAS pension by having to pay the OAS recovery tax. You may hear this called an OAS clawback.

As another example, if you are a GIS recipient and your retirement income is higher than a certain amount in a given year, then you may receive less money from the GIS during the following year. If you take too much money out of an RRSP, you might not receive any money from the GIS in the next year.

Speak to a financial professional to get help with the options that are available for you.

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