Retirement Planning Canada: A Comprehensive Guide for 2022

Retirement planning in Canada is not an easy task, and there are so many unknowns, hurdles and government programs for which you may or may not be eligible. Whether you have accumulated over $2 million and can work with a team like SWAN or are working toward this level, there are items that you need to be aware of. This summary will give you the basics of what you need to have on your radar as you plan your future. 

TABLE OF CONTENTS

1. Planning Your Retirement in Canada
2. The Importance of retirement planning in Canada
3. What to Do Before You Start Creating Your Retirement Plan
4. Determining How Much Money You Need for Retirement
5. Planning Multiple Sources of Retirement Income
6. What Do All the Financial Planning Designations Mean?
7. The 70% Rule of Retirement Planning
8. Considering Tax Deductions and Credits
9. Canadian Pension Plan Basics
10. Old Age Security Basics
11. What is the GIS?
12. Contributing to an RRSP
13. Contributing to a TFSA
14. Real Estate vs. the Market for Retirement
15. How to Retire at 50 in Canada
16. Start Saving for Retirement Early
17. Best Retirement Plans in Canada
18. Common Retirement Questions
19. Summary of Key Points
20. Next Steps

Planning Your Retirement in Canada

When planning your retirement in Canada, the first thing to do is look at your financial needs. You’ll need to know what kind of income you want during retirement. At SWAN Wealth, we often refer to leaving your present employment as entering your work-optional phase since many people continue to work part-time or for fun.

Once you’ve set your retirement income goals, the next thing is to compile all your financial information.

The Importance of Retirement Planning

Many people who plan to retire in Canada have no idea what their retirement will look like. Here are some critical questions you’ll want to ask yourself:

• What do you plan to do in retirement?
• How much will this cost?
• What are the government benefits?

Answering these questions can bring tremendous stress to even the wealthiest of people. Yet, there is no need for this stress. Planning and thought can quickly alleviate the stress from your retirement.

What to Do Before You Start Creating Your Retirement

Plan

Before creating a retirement plan, ensure you have a general idea of what you want to do in retirement. Your ideas don’t have to be hyper-specific, but sit down and think about or dream about what you want. How would you like your life to look and feel?

Allow yourself to think about what you really want, not just the first thing that comes to mind, as that might be a limited view of what’s possible for you. Come up with a vision for your retirement, and then begin your planning.

We all know that plans change, but as the Roman philosopher Seneca once said,  “If one does not know to which port one is sailing, no wind is favourable.”

Determining How Much Money You Need for Retirement

When determining how much a client will need, we always project that each spouse will live to the age of 95. If you live 95, there is a 30-year window for those that retire at 65, and thirty years is a long time!

Once you’ve reached a certain income level and investments, using a qualified planning team to construct your financial and investment plans is a very good idea. Investment construction should be done based on your goal; it shouldn’t be a cookie-cutter process.

Financial planning and investment structuring are two very different tasks. If a consistent, conservative, low rate of return brings you safely to 95, then you have done an excellent job of saving. Meanwhile, the investment structure should be designed to allow for that long and happy retirement.

Planning Multiple Sources of Retirement Income

Proper management of your investments in retirement is crucial, which is why we advise our clients to have multiple sources of income.

Thus, our clients often hold dividends from company shares, interest from bonds or fixed-income investments, and cash flow from rents. You can have your flow of income structured by a good portfolio manager, and we recommend using a portfolio manager rather than a regular financial advisor.

READ MORE: Financial Advisors in Canada: Who Should Help You with Your Finances

What Do All the Financial Planning Designations Mean?

The 70% Rule of Retirement Planning

There is a lot of talk about the 70% rule. The 70% rule of retirement planning suggests that you will need 70% of your pre-retirement income once you have retired.

As with most “catch-all” rules, this does not work for everyone. At SWAN Wealth, we talk about retirement in three stages: the go-go stage, the slow-go stage and the no-go stage. 

In the go-go state, you often travel, play sports, or participate in hobbies. This go-go stage is generally more expensive. If you travel a lot or love to play golf, you’ll spend more in your first few years of retirement than you did in your working years.

The slow-go stage is generally much lower cost because you aren’t travelling as much or doing as many expensive activities. You’ve settled into a new relaxed pattern and have already crossed off many items on your bucket list. 

In the no-go period, we must account for medical spending and needs such as private assistance.

Considering Tax Deductions and Credits

Many entitlements and tax breaks are available to retirees in Canada. One excellent way to increase your take-home income is to purchase Canadian dividend-paying companies because they give you a substantial tax credit. When you have Canadian dividend-paying companies in your portfolio, the already generous bonuses that our banks, utilities and oil land gas companies pay are further enhanced by a tax break.

As a senior, here are some of the most common things that you may be able to claim as a deduction in Canada:

Here is a list of deductions from the CRA website:

1. Pension income splitting
2. Registered retirement savings plan deduction
3. Medical expenses
4. Age amount
5. Disability tax credit
6. Canada caregiver credit
7. Pension income amount
8. Guaranteed income supplement
9. Goods and services tax / harmonized sales tax (GST/HST) credit
10. Registered disability savings plan
11. Working Income Tax Benefit
12. Climate Action Incentive payment

Canadian Pension Plan Basics

Any Canadian citizen who has lived and worked in Canada for several years should be able to collect the Canada Pension Plan starting at 60 (at a reduced rate). The full pension plan comes into effect at age 65, and you can defer it until age 70. This deferral increases the amount collected, so if you feel you will live a long life, it may make sense to defer.

As of 2022, the maximum amount you can receive monthly should you start to take your pension at age 65 is $1,253.59. The average payout for a new benefits retirement pension at age 65 was $779.32 as of January 2022.

As you can see, it’s important to have investments of your own. You don’t want to rely on CPP for your retirement income; instead, consider it a bonus, not your primary source of income during retirement.

You can find out what your monthly CPP pension might look like by going into your My Service Canada Account and checking.

Old Age Security Basics

Old age security (OAS) is an entitlement program available to all Canadian citizens. There is a clawback in the amount paid as income creeps up. Eventually, you’ll reach an income level where no more OAS is paid; instead, it is clawed back. 

Proper planning can help alleviate the clawback as there are many strategies you can use to prevent this.

What is the GIS?

The Guaranteed Income Supplement (GIS) is a government program that supplements the incomes of retirees whose income falls below a threshold. GIS is a program to help those that need assistance in retirement. You can only receive it if you are 65 or over, get the OAS, and your income is below the maximum annual GIS income threshold. The GIS is non-taxable and is only available to low-income pensioners.

Contributing to an RRSP

A Registered Retirement Savings Plan (RRSP) is a tax deferral strategy that can be very powerful. Some people are in a high marginal tax bracket while working, and thus, the idea is to structure your income so that you are in a lower tax bracket once you retire. The RRSP enables each of us to put a certain amount of our income into the plan and receive a tax deduction at our present high tax rate. 

Once we retire, we can remove the funds from the RRSP at our current (lower) tax rate. Proper planning generally means significant tax savings plus tax-free growth while the funds are in the plan.

READ MORE: Canadian RRSP Facts for US Citizens Living in Canada

 

 

Contributing to a TFSA

The Tax-Free Savings Plan is one of the best ways to save. There is no tax break for putting the funds in the plan and no tax consequences when taking funds out. You can withdraw funds from the plan and return the full amount at a future date. The TFSA is a powerful way to save that you can use consistently over your lifetime.

*keep in mind a TFSA is no considered to be tax free by the IRS

READ MORE: TFS vs. Roth IRA - What’s the difference?

Real Estate vs. the Market for Retirement

Many Canadians have a large portion of their wealth tied up in real estate. I use the phrase “tied up” since the issue with real estate investing is that your wealth is very hard to access when it’s in real estate. Many Canadians have done well with real estate, but we still need to diversify into other areas to ensure we have the cash flow to fund our retirement needs. In addition, real estate can be a drag on retirement income since you’ll need to do repairs and pay the taxes on all your properties.

How to Retire at 50 in Canada

The concept of freedom 55, or freedom 50, has been around since the iconic advertisement many years ago. But is this achievable? It depends on your needs and your savings. The key is looking at your lifestyle goals and comparing them to the finances needed to make them happen. If you have enough funds saved so you can conservatively produce enough income to cover your expenses to 95, you are in a great position.

But first, you need to know your goals and how much you’ll need to have saved to live comfortably. Remember that if you retire at 55, you’ll need enough retirement savings to produce income for 40 years.

Use this Retirement Calculator from Raymond James to see how much you’ll need to have invested to achieve your retirement goals.

Start Saving for Retirement Early

If two people save $100 a month for retirement, but one starts at 25 and the other starts at 35, the early saver will have nearly twice as much in their bank account by age 65. That alone should convince you that starting to save early is the key to an easy and early retirement. The power of compounding interest means that the more you save early, the better off you’ll be in the future. Of course, you can’t just save the money and stuff it under a rug. You’ll need to invest what you save wisely using some of the tips mentioned above.

Best Retirement Plans in Canada

There are many factors when considering a retirement plan. Inflation protection, such as a cost of living allowance (COLA), is one factor to consider. There are defined benefit plans where employees know what they will receive. There are also defined contribution plans where employees know what they put in but do not know what they will eventually receive. There are also RRSP plans. But the best plan is the one that helps you meet your goals. There are no one-size-fits-all approaches.

Common Retirement Questions

How does a spousal RRSP withdrawal work?

A spousal RRSP withdrawal works similarly to a regular RRSP withdrawal. You can withdraw from spousal RRSP anytime, but any withdrawal will be considered taxable income. However, keep in mind that the annuitant of the spousal RRSP is the one entitled to make withdrawals, not the contributor. With a spousal RRSP, one spouse is the contributor while the other is the annuitant, i.e. the one who receives the annuity and can withdraw.

A spousal RRSP allows married or common-law couples to save for retirement and lower their taxes. The primary purpose of this tool is to even out retirement savings between two partners to lower their taxes.

How do the RRSP contribution carry forward rules work?

Your RRSP room carries forward, meaning the amount is cumulative. If you take 18% of the income, you earned in the previous year up to the current year’s maximum contribution limit, that’s your RRSP room for the year. “Room” means the amount you’re allowed to contribute based on government rules. For 2022, the max contribution limit is $29,210 for taxpayers who have earned at least $162,278 in 2021.

CPP vs RRSP: can you transfer CPP to an RRSP?

The Canada Pension Plan (CPP) is a plan set up by the government that enables citizens above the age of 60 who have met specific criteria to have a steady income stream. A Registered Retirement Savings Plan allows Canadians with income to defer that tax. Since there is no value to the CPP besides the income flow, you cannot move it to an RRSP. It is possible to take the income received from CPP payments and contribute that to an RRSP.

How is a RRIF taxed in the hands of the holder?

A Registered Retirement Income Fund is taxed as regular income. At age 71, an RRIF begins coming into income, and a minimum amount must be paid out to you each year. The first $2,000 attracts a 15% tax credit.

What is the average Canadian retirement income?

According to Stats Canada, the median Canadian retirement income is $65,300. This number refers to pre-tax income for households where the top income earners are 65 or older. Most Canadians have trouble making ends meet with entitlements such as CPP or OAS. Most Canadians have to draw from other sources, such as their pension plans or RRSP. Some take part-time jobs to earn enough to cover their costs.

How do I prepare for retirement in Canada?

The best way to prepare for retirement is to do some serious thinking about what you want your future to be. Include your spouse and family in this discussion. Often spouses have very different retirement goals, and each goal needs funding. Once you’ve set your goals, you must examine your finances and establish an investment plan. While this might sound daunting, there is a lot of help available. So seek out a partner in this endeavour. Excellent planning will enable you to sleep well at night.

What are the best retirement plans in Canada?

Many people feel that defined-benefit plans (DBP) are the best plans, and DBPs may be the best retirement plans when the cost of living allowances and investment markets are not performing well. The benefit is that you know what you are getting. However, a defined contribution plan (DCP) can give you much more in retirement. You have control of the investments in a DCP, and you are responsible for the outcome. A seasoned portfolio manager can help you make the best choice for your situation.

Summary of Key Points:

• Figure out how you want your “work optional” life to look.
• Compile your financial information.
• Look at which government entitlements you are eligible for (CPP, OAS etc.).
• Look closely at any pension plans you have.
• Look at what type of planning help or financial guidance suits your needs.
• Make sure you start saving early.
• Work with a professional if you’ve already amassed substantial savings and need help structuring a plan that will assure a work-optional lifestyle in the future.

Next Steps

If you’re a Canadian resident or are planning on moving to Canada and need assistance with retirement planning, moving your investments, estate planning, and portfolio management, please get in touch. At SWAN Wealth, we specialize in Canadian financial planning, cross-border financial planning and cross-border wealth management. We support successful professionals and retirees with wealth management that supports their ideal work-optional lifestyle.

More Canadian Financial Planning Articles & Guides

If you’re doing retirement planning or research in Canada, these articles and guides will help you simplify your move and ensure you’ve covered everything.

Canadian RRSP Facts for Dual Citizens, Expats and Canadians

Retiring to Canada - A Financial Planning Guide

Are You Retiring to Canada from the US? Read this next!

Financial and Tax Planning for US Citizens Living in Canada

The Ultimate Financial Planning Resource for Dual Citizens or Green Card Holders Living in Canada

Retiring in Vancouver: Everything You Need to Know

About the Author

John Woodfield is a Financial Management Advisor (FMA), a Chartered Investment Manager (CIM), a Certified Financial Planner (CFP), and in 2007 was inducted as a fellow of the Canadian Securities Institute (FCSI). As a portfolio manager and CFP®, he works with clients across Canada. John Woodfield’s clients are families, individuals and business owners who understand the importance of a comprehensive wealth and investment plan driven by the lifestyle they want to lead. Click here to schedule an introductory call with SWAN Wealth Management.

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References & Resources:

What is the Average Monthly Income In Canada
https://www.ictsd.org/what-is-the-average-monthly-retirement-income-in-canada/ 

Retirement Planning - Canadian Government Website
https://www.canada.ca/en/financial-consumer-agency/services/retirement-planning.html
https://www.canada.ca/en/financial-consumer-agency/services/retirement-planning/money-to-retire.html 

Forget 70: How to Calculate Your Actual Retirement Income
https://financialpost.com/personal-finance/family-finance/forget-70-how-to-calculate-your-actual-retirement-income-target

Retirement Savings Start at 25 vs 35
https://www.businessinsider.com/personal-finance/retirement-savings-start-at-25-vs-35-2019-4

Canada Benefits Calendar
https://www.canada.ca/en/services/benefits/calendar.html

Spousal RRSPs
https://www.advisor.ca/magazine-archives_/advisors-edge_/spousal-rrsps-what-you-need-to-know/

 

Information in this article is from sources believed to be reliable, however, we cannot represent that it is accurate or complete. It is provided as a general source of information and should not be considered personal investment advice or solicitation to buy or sell securities. The views are those of the author, John Woodfield, and not necessarily those of Raymond James Ltd. Investors considering any investment should consult with their Investment Advisor to ensure that it is suitable for the investor’s circumstances and risk tolerance before making any investment decision. Raymond James Ltd. is a Member - Canadian Investor Protection Fund.