Retirement planning is crucial for Canadians who want to maintain their standard of living in their golden years. With the right strategies, you can grow your retirement savings into a substantial nest egg. This guide will provide tips on how to maximize your retirement accounts like the Canada Pension Plan (CPP) to achieve your retirement goals.
Understand How CPP Works
The Canada Pension Plan is a fundamental pillar of retirement planning for Canadian workers. It provides a base level of income in retirement based on your contributions during your working years. Here’s a quick overview of how CPP works:
- Mandatory contributions – You and your employer must contribute a percentage of your earnings to CPP every year you work. The current contribution rate is 5.7% each.
- CPP retirement pension – At age 65, you become eligible to start receiving your CPP retirement pension based on your contribution history and the current payment rates. The average monthly CPP benefit is currently about $700.
- Early and late retirement options – You can start your CPP as early as 60 or delay it up to age 70. Your benefit amount will be adjusted up or down accordingly. Delaying increases your eventual payment.
- Post-retirement benefits – CPP provides disability, survivor, and death benefits even after you start your retirement pension.
Understanding the CPP system is the foundation for planning the rest of your retirement income sources.
Maximize Your CPP Contributions
Since CPP payments are based on your lifetime contributions, it pays to maximize your input while working. Here are some tips:
- Contribute for at least 40 years – This ensures you qualify for the maximum CPP benefit. Years you were unemployed, made low income, or left the workforce count as zero contribution years.
- Maintain your earned income at the YMPE level – The Yearly Maximum Pensionable Earnings (YMPE) is the income cap for CPP contributions. Contribute up to the YMPE each year if possible. The 2023 YMPE is $64,900.
- Top up any missed contributions – You can make voluntary contributions to fill gaps in your CPP record, such as when you were unemployed, out of the workforce, or earning under the YMPE.
- Coordinate contributions with your spouse – Strategic CPP contributions between spouses can maximize your household’s total CPP income.
Maxing out your CPP contributions gives you the foundation for a better retirement income.
Consider Delaying Your CPP Start Date
You can significantly increase your CPP payments by delaying when you start receiving benefits. Here’s how it works:
- Monthly increase – Your CPP payment rises by 0.7% for every month you delay receiving it past age 65 up until you turn 70.
- Permanent increase – The higher payment you get from delaying CPP is permanent. You receive that boosted amount for the rest of your retirement.
- Bridge benefit – If you continue working while delaying CPP, you become eligible for the CPP Post-Retirement Benefit which offers a temporary additional monthly payment.
Delaying CPP is like buying an annuity that increases your retirement income. Make sure to weigh the pros and cons and coordinate the timing with other retirement income sources.
Understand CPP Survivor Benefits
An often overlooked feature of CPP is that it provides ongoing income for your surviving spouse after you pass away in retirement. This survivor benefit is based on your CPP contribution history. Here’s how it works:
- Automatic survivor benefit – Your spouse will receive a base survivor pension when you pass away equivalent to 60% of your retirement CPP amount. They can start receiving this at age 60.
- Top-up option – Your spouse can also apply for a survivor benefit top-up which will increase their payment to your full CPP amount (minus any applicable reductions).
- Planning for survivor benefits – Couples should consider survivor benefits when deciding when to start CPP payments. It may make sense for the higher-income spouse to delay CPP to maximize the survivor benefit.
Make sure you factor CPP survivor benefits into your overall retirement plan. They provide vital income protection for your spouse after you’re gone.
Draw Income From RRSPs or RRIFs
While CPP provides a base level of retirement income, you’ll need other income sources to maintain your lifestyle. Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs) should be part of your strategy.
- Use RRSPs for tax-deferred savings – Contribute to an RRSP during your working years to benefit from tax deductions and tax-deferred growth. Withdrawals are taxed as income.
- Transfer to a RRIF by age 72 – Your RRSP savings must be transferred into a RRIF or annuity by the end of the year you turn 72. RRIFs also grow tax-deferred.
- Take regular withdrawals – You must make minimum annual withdrawals from your RRIF based on your age and account balance. You can withdraw more as needed for income.
- Consider partial transfers – You may choose to transfer only some of your RRSP to a RRIF by 71 to have more flexibility.
RRSPs and RRIFs work hand in hand with CPP to offer retirement income along with tax and investment benefits.
Use TFSAs as a Supplement
Tax-Free Savings Accounts (TFSAs) are a flexible retirement savings option that complements CPP and registered plans. Here are some TFSA benefits:
- Tax-free growth – Investment gains and income are not taxed, even when withdrawn. This allows faster growth compared to taxable accounts.
- No mandatory withdrawals – You can leave funds in a TFSA as long as you want and take withdrawals whenever you need income.
- Tax-free withdrawals – Amounts withdrawn are not added to your taxable income, so they don’t impact your CPP or OAS benefits.
- Carryforward room – Unused TFSA contribution room carries forward each year if you don’t max out your contributions.
- Easy access to funds – You can withdraw amounts from your TFSA at any time for any purpose with no tax implications.
Use TFSAs wisely as a supplemental income and savings vehicle alongside your core CPP and registered plan holdings.
Consider Annuities as a Hedge
Annuities are insurance products that can provide guaranteed lifetime income to supplement CPP after retirement. Here are some benefits of annuities:
- Income insurance – You pay a lump sum to an insurer and in exchange receive a guaranteed monthly payment either immediately or in the future.
- Efficient use of capital – Annuities allow you to convert a portion of your retirement savings into reliable income that you can’t outlive.
- Risk management – Since the income from an annuity is guaranteed for life, it provides protection against market volatility and longevity risk.
- Payment flexibility – Many annuities offer customized payment schedules and survivor benefits.
- Peace of mind – The guaranteed income from an annuity can give you comfort knowing you’ll have funds to cover essential costs.
Used judiciously, annuities can enhance retirement security alongside sources like CPP. Shop around for good rates and features.
Have a Plan for OAS and GIS
Two other government programs to factor into your overall retirement plan are Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). Here are key details on how they work with CPP:
- OAS pension – Most Canadians qualify for OAS payments starting at age 65 based on years of residency in Canada. The maximum monthly OAS amount is currently about $650. It’s clawed back at higher incomes.
- GIS top-up – Low-income seniors can apply to have their OAS pension topped up by the Guaranteed Income Supplement. The GIS maximum is over $1,000 monthly for singles, but phased out as incomes rise.
- OAS clawback – OAS is clawed back at a 15% rate once individual net income exceeds around $80,000. CPP payments are included in this calculation, so higher CPP amounts from deferring can trigger OAS clawbacks.
- Coordinating benefits – Consider timing your CPP, OAS, and GIS benefits together to maximize your net income while avoiding unnecessary clawbacks.
Make sure to factor programs like OAS and GIS into your overall financial plan. They can provide a boost if your other retirement income is modest.
Have a Drawdown Strategy
To take full advantage of your retirement accounts, you need a tax-efficient drawdown strategy that provides steady income. Here are some key points:
- Draw CPP and OAS first – Since this government pension income is taxable, drawing it first at lower incomes minimizes the taxes.
- Start RRIF minimum withdrawals at 71 – Make the minimum withdrawals from your RRIF(s) to benefit from tax-deferred growth as long as possible.
- Withdraw TFSA funds tax-free – Take advantage of the tax-free nature of TFSAs by making withdrawals whenever you need additional cash flow.
- Delay drawing down RRSPs if possible – Since RRSP withdrawals are fully taxable, wait as long as you can to start drawing these down to maximize tax deferral.
- Limit taxable accounts draws – Try to meet your spending needs without selling investments and realizing capital gains that would increase your taxable income.
A purposeful drawdown sequence is key to funding your retirement expenses in a tax-efficient manner.
Have a Plan to Manage CPP/OAS Clawbacks
If you have multiple strong retirement income pillars like CPP, RRSPs, and TFSAs, your net income may end up high enough to trigger clawbacks on CPP or OAS benefits. Here are some strategies to help manage clawbacks:
- Stagger RRIF withdrawals – Keep RRIF payments as low as possible in years when you have high CPP/OAS income to avoid crossing clawback thresholds.
- Draw down TFSAs and taxable accounts – Shift withdrawals to non-registered accounts in high-income years to bring down your taxable earnings.
- Look for tax deductions – Find opportunities to claim tax deductions to reduce your net income, such as making charitable donations.
- Consider portfolio losses – Realizing capital losses in some years can offset capital gains and lower your income.
- Delay CPP/OAS – If clawbacks seem inevitable, you may want to defer starting CPP and OAS to keep the amounts below clawback ranges.
With some planning, you can often mitigate or avoid CPP and OAS clawbacks.
How To Grow Your Retirement Savings
Achieving your retirement goals requires growing your savings into a large enough nest egg. Here are some key investment principles:
- Take advantage of long time horizons – Retirement savings can benefit from decades of compounded growth. Invest early and for the long term.
- Manage fees and taxes – Keep investment fees, transaction costs and tax burdens minimized to prevent erosion of returns. Use registered and tax-advantaged accounts.
- Maintain a balanced asset mix – Diversify your portfolio across equities, fixed income and other asset classes to balance risk and return. Rebalance periodically.
- Leverage the power of dividends – Stocks and funds with growing dividends can provide retirement income that increases to combat inflation.
- Stay disciplined through market declines – Don’t panic sell when markets fall. Maintain perspective and stick to your investment approach for the long run.
Patient, disciplined investing is required to accumulate sufficient retirement savings to generate the income you’ll eventually need.
Options For Investing CPP Funds
The Canada Pension Plan Investment Board (CPPIB) prudently invests the capital backing the CPP on behalf of all Canadians. As a CPP contributor, you may wonder how those funds are invested. Here’s an overview:
- Diversified global portfolio – The CPPIB holds public and private equities, real estate, infrastructure, bonds, and other alternative assets in Canada and around the world.
- Steady returns – The CPPIB has earned 10-year annualized returns of over 10% through disciplined, diversified investing in thousands of holdings.
- Responsible investing – Environmental, social, and governance (ESG) factors are considered in CPPIB’s investment processes and ownership practices.
- Transparency – Detailed reports on holdings and investment performance are provided regularly online. Holdings are required to be disclosed.
- Independent stewardship – CPPIB operates at arm’s length from the government with a mandate to maximize returns prudently.
You can take comfort knowing CPP contributions are managed responsibly by investment professionals to fund future benefits.
Seek Guidance From Qualified Experts
Successfully managing all the moving parts of retirement income planning is difficult. An experienced financial advisor can help craft a customized strategy. Here’s how a pro can guide you:
- Clarify your retirement goals – An advisor will help you define the lifestyle you want and income required in retirement. This sets the foundation.
- Analyze your income sources – They will review your expected government and employer pensions, personal savings, and any other assets that can generate income.
- Identify gaps – Your advisor can calculate where your projected retirement income is likely to fall short of what you need and by how much.
- Create a plan – They will develop a financial plan to help you fill the income shortfall using tools like CPP optimization, RRIF drawdowns, annuities, and insured products.
- Tax minimization tips – Advisors have expertise to help you structure accounts, manage withdrawals, and coordinate benefits to reduce taxes in retirement.
Knowing you have a thoughtfully developed, professional plan gives peace of mind leading up to and during your retirement years.
Leverage Pension Income Splitting
Married couples have the advantage of being able to split certain retirement income to save on taxes. Pension income splitting allows you to shift up to half of eligible pension income to your spouse to balance your incomes. Here is how pension splitting works:
- Eligible income types – CPP, RRIF withdrawals, annuity payments all qualify for pension splitting. RRSP withdrawals and TFSA withdrawals do not.
- Calculate the amount to split – Determine up to half of your eligible pension income that can be allocated to your spouse for tax purposes.
- File a joint election – You and your spouse must jointly file Form T1032 with your tax returns to split the agreed amount.
- Share the tax savings – Since income is usually taxed at higher rates at higher levels, shifting some of your income to your spouse will result in overall tax savings for your family.
- Spouse’s taxes – The pension income reported by your spouse via the transfer is taxable on their return at their marginal tax rate.
- Age and residency requirements – To split pension income, you and your spouse must be living together and your spouse must be a Canadian resident who is at least age 65.
Pension splitting provides an opportunity to potentially lower your family’s overall tax burden in retirement.
Understand RRIF Minimum Withdrawals
Once you open a RRIF, you face minimum withdrawal requirements each year dictated by federal tax rules. Here are some RRIF rules and tips:
- Minimum withdrawal percentages – You must withdraw at least a percentage of your RRIF balance based on your age at the start of the year. Percentages range from 5.28% at 71 to 20% at 95.
- Withdrawal amounts – The exact minimum withdrawal amount is your RRIF balance at Jan 1 multiplied by the percentage for your age bracket.
- Taxable income – These RRIF withdrawals become part of your taxable income for the year. No withholding tax applies.
- Younger spouse, lower minimums – If you have a younger spouse, they can open a spouse RRIF with you as annuitant to access their lower minimum withdrawal schedule.
- Lifelong requirements – You must continue taking annual minimum RRIF withdrawals based on your age and the fund balance each and every year.
Follow the RRIF withdrawal rules carefully to avoid troublesome tax over-contribution penalties.
Buy An Annuity to Generate Fixed Income
Annuities are insurance products offering guaranteed income for life in exchange for a lump sum payment. Here are some types of annuities to consider:
- Immediate annuity – Provides a fixed monthly income starting immediately that is guaranteed for life.
- Deferred annuity – Income payouts start at some future date, allowing further growth before conversion to income.
- Registered annuity – Purchase with RRSP/RRIF funds on a tax-deferred basis. Payments fully taxed.
- Prescribed annuity – Pays non-registered guaranteed income without immediate tax liability on investment gains.
- Impaired risk annuity – Pays enhanced income if you have qualifying medical conditions.
- Joint life annuity – Income continues as long as either you or your spouse are alive.
Annuities can create retirement income certainty. Shop rates online or via an advisor.
Use Life Income Funds Instead of RRIFs
If you want minimum RRIF-type withdrawals but more flexibility, a Life Income Fund (LIF) may meet your needs. Here’s how they work:
- Available limits – Most provinces allow you to convert only 50% or 60% of your LIRA locks-in funds to a LIF. The rest must go to a life annuity.
- Minimum and maximum – Each year LIFs have a minimum and maximum withdrawal limit based on your age. For 2022, minimums range from 4% to 5%, maximums 7% to 10% of the balance.
- Variable payments – You can take any amount in between the minimum and maximum each year based on your income needs and tax planning.
- Unlocked at 65 – In most provinces, LIFs automatically convert to regular RRIFs at 65, eliminating the withdrawal limits.
- Lifetime payments – LIFs have the same requirement as RRIFs to make lifetime withdrawals based on your age.
LIFs offer more flexibility than RRIFs for accessing locked-in retirement funds before 65.
Use Retirement Income Funds After 71
Retirement Income Funds (RIFs) are a type of retirement savings account with no minimum withdrawals until age 71. Key features:
- Tax-deferred growth – You can grow investments in a RIF tax-free until you start withdrawals.
- No minimums until 71 – Unlike RRIFs, you don’t need to make withdrawals from a RIF before the year you turn 72.
- Flexibility – You can time RIF withdrawals flexibly to match your income requirements and manage taxes.
- Must convert by 71 – Funds in any RIFs must be transferred to RRIFs before the end of the year you turn 71.
- Contribution room – You accumulate new RIF contribution room each year like an RRSP. Unused room carries forward.
For short-term savings, RIFs offer tax-deferred growth without mandatory withdrawals.
Understand LIRAs for Locked-In Funds
Locked-in Retirement Accounts (LIRAs) are a special category of registered account for locked-in pension assets. Here are key LIRA features:
- Source of funds – LIRAs hold locked-in pension assets transferred from former employer defined benefit or contribution pension plans.
- Strict rules – Withdrawals from LIRAs are strictly regulated with limited access to the funds before retirement.
- Limited holdings – You can only hold funds that “lock-in” your pension assets until retirement, such as GICs, annuities, mutual funds.
- Conversion options – At retirement, LIRA funds can be transferred to a LIF, RLSP, or annuity. Some provinces allow conversion to a RRIF.
- Creditor protection – Assets in a LIRA can’t be seized by creditors in bankruptcies.
If you have defined benefit pension assets from an old job, a LIRA preserves that income for retirement.
Explore Pension Plan Payout Options
If you participated in an employer pension plan, you may have options when terminating employment or retiring beyond just leaving assets in the plan. Potential alternatives include:
- Transferring to a LIRA – This locks in pension assets that were in a defined benefit or money purchase plan with creditor protection.
- Transferring to an RRSP – Possible if you have unused RRSP contribution room available. Provides more flexibility to grow or withdraw funds.
- Taking cash – Some plans allow unlocking pension assets by transferring to a regular taxable account. Taxes and potential withholding apply.
- Creating a retirement income – Can set up scheduled income by purchasing an annuity within a pension plan.
- Combination approach – Can utilize a mix of options, like partial transfer to an RRSP and partial annuity purchase.
Make sure to review all the options before deciding what to do with pension monies when leaving an employer.
Integrate CPP with Workplace Pensions
If you will receive both CPP and a workplace pension in retirement, make sure you coordinate them together for maximum tax-efficiency:
- Start CPP early – Since both CPP and pension income are taxable, claim CPP as early as 60 to spread this taxable income over more years.
- Defer pension – If possible, defer starting pensions from former employers to as late as age 71 to minimize taxable income each year once CPP payments begin.
- Split pension income – If you have an eligible employer pension, utilize pension income splitting with your spouse to reduce tax exposure.
- Time RRIF withdrawals – Take just the RRIF minimum withdrawals in years when you have high CPP and pension income to avoid OAS clawbacks.
- Draw down TFSAs – Withdraw funds from TFSAs strategically in high pension/CPP income years to lower taxable income.
Integrating multiple streams of pension income takes some planning but can optimize your after-tax retirement cash flow.
Understand HRAs for Health Costs
A Health Reimbursement Arrangement (HRA) can provide tax-free funds to pay for medical expenses in retirement if offered by your former employer. Understand how HRAs work:
- Employer funded – An HRA must be funded by a former employer to shelter health expenses from taxes. No personal contributions allowed.
- Eligible expenses – The HRA can reimburse the same medical costs normally eligible under the medical expense tax credit.
- Tax savings – Reimbursements from the HRA come out tax-free since the employer contributions received preferential tax treatment.
- Retiree-only plans – Most HRAs are designed specifically for retiree health expenses. Spouses may also qualify.
- Limited carryforward – Any unused HRA balance can generally only be carried forward for one year before reverting to the employer.
An HRA created by your former employer can provide tax-free retirement health care funds.
Understand PRPP Accounts for Retirement
The Pooled Registered Pension Plan (PRPP) is a retirement savings option for the self-employed or those without workplace plans. Here is how PRPPs function:
- Self-directed savings – You open a PRPP with a provider and contribute as desired. You select the investments.
- Tax-deferred growth – No taxes are payable on investment earnings and growth until you make withdrawals.
- Spousal plans – Your spouse can also establish their own PRPP to make contributions.
- Retirement income – You ultimately convert your PRPP balance to a RRIF or annuity to generate retirement income.
- Small business plans – Employers can optionally set up PRPPs for employees instead of full pensions.
Think of a PRPP as an RRSP-like option tailored specifically for retirement savings purposes.
Consider Retiring Abroad to Cut Costs
Many Canadian snowbirds have discovered the financial benefits of spending all or part of the year living abroad in retirement. Here are potential perks:
- Lower cost of living – Retirement dollars can stretch much further in many tropical destinations or cheaper countries.
- Healthcare savings – Private healthcare costs are often much lower in other countries than Canada.
- Favorable exchange rates – Your CPP, OAS and other Canadian pensions/income go further when converted to local currencies abroad.
- Part-year residency – You may be able to structure partial residency to minimize taxes in Canada and/or your destination country.
- Nearby travel – Being based abroad provides easy access to international travel opportunities.
A well-planned partial or full retirement abroad could significantly reduce your overall retirement costs.
Consider Longevity Insurance
Longevity insurance is a variation of a deferred annuity that provides protection against running out of money in your later retirement years should you live longer than expected. Here’s how it works:
- Deferred income – You pay a lump sum up front to the insurer and begin receiving monthly payments down the road, say at age 85.
- Insurance aspect – If you die before the income payments begin, you forfeit the lump sum but your heirs receive no payouts.
- Risk transfer – The insurer covers the risk of you living longer than your life expectancy by providing lifetime income after 85.
- Coverage gap – The deferred income kicks in after you’ve exhausted other retirement income sources but still need funds if alive.
- Optional add-on – Longevity annuities can supplement pensions, CPP, RRIFs and TFSAs.
This niche product reduces the risk of late-stage retirement shortfalls.
The Canada Pension Plan is a cornerstone of retirement planning that can be enhanced through deliberate strategies. Maximizing your personal CPP contributions, deferring payments, utilizing survivor benefits and coordinating CPP with other income sources can help elevate your retirement lifestyle. Seek professional advice and follow proven investment principles to grow your savings. With the right preparation, you can enjoy the retirement you desire even with today’s economic uncertainties and longer lifespans.