Retirement in Canada
Retirement in Canada can take many different forms, depending on your personal wishes, the state of your health and your financial situation.
The age for retirement in Canada was traditionally 65, but this trend is changing. Many people retire as early as 55, or even younger, and others continue working past age 65. Some people choose to live in Canada year-round, while others take extended vacations elsewhere (often somewhere with a warmer climate), and still others decide to move abroad. It really depends on what people want to do during their retirement years.
One thing that every Canadian has in common: it’s never too early to start thinking about, and planning for retirement. One of the most significant parts of the planning process is figuring out how you finance your retirement years.
Most Canadians finance their retirement from a combination of several sources, including government pensions and private pensions or savings plans.
Old Age Security (OAS)
The government of Canada provides a retirement pension that is based on your age and the amount of time you’ve lived in Canada. It is payable to Canadian residents age 65 and older who have lived in Canada for at least 10 years after age 18. It doesn’t matter whether you have worked in Canada or not, or whether you are currently retired or still working.
OAS is not a universal benefit and may not be available if you earn a significant amount of money from other sources. Federal Government laws provide that your OAS may be "clawed back", meaning that you would have to repay some or all of the OAS payments if your Net Income is over a threshold amount.
On the other hand, the OAS Program offers additional benefits depending on level of income.
Canada Pension Plan (CPP)
This is the major government pension plan. Each year that you work in Canada, both you and your employer make contributions to the CPP (or to the Quebec Pension Plan [QPP], if you work in Quebec).
You may apply to receive your CPP payments anywhere from age 60 to 70; however, if you apply to receive it before age 65, you must have stopped working (at least temporarily) or earn less than the current monthly maximum CPP retirement pension payment.
The amount of your pension will depend upon the number of years you have worked in Canada, how much you contributed to the plan, and whether you take it before or after age 65.
Pensions from Other Countries
If you worked in another country before you came to Canada, you may be eligible to receive a company or government pension. Remember that this must be reported as part of your income for tax purposes in Canada, even if it must be reported for tax purposes in another country as well.
Employer-sponsored retirement plans
Some employers offer pensions or other types of retirement plans to their employees. These may take various forms, including:
- Defined Benefit Plan. This is a type of pension that pays an amount of money after you retire based on a formula that takes into account the number of years you worked for the company and your salary.
- Defined Contribution Plan. In this type of plan, you and your employer each make specific contributions based on your earnings. When you retire, you have the option of using the money to purchase a life annuity or transferring the money to a locked-in RSP, or to a Life Income Fund (LIF), which will pay you your pension. Alternatively, the money can be left in the employer’s defined contribution plan and income can be received directly from the plan with some restrictions.
- Group RRSPs. These are similar to regular Registered Retirement Savings Plans (RRSPs), except that your employer administers the overall arrangement. You have the option of contributing to a group RSP through automatic payroll deduction, and your employer may contribute as well.
Private Savings
Many Canadians begin saving for their retirement years long before they reach this age. To help them, the government offers Registered Retirement Savings Plans (RRSPs). These savings plans offer great flexibility in terms of how much you can save and how it can be invested.
The money you deposit into an RRSP helps reduce your taxable income and tax that you pay. The actual tax savings will depend on your marginal tax rate. Furthermore, investment income earned in the RRSP grows tax-free until it is withdrawn. Because your income at retirement will likely be lower than during your working years, the tax you will pay should be lower as well.
Employment Income
Some Canadians choose to continue working beyond the traditional retirement age of 65, either to supplement their income or because they enjoy the work they do and the opportunity it provides to contribute and to interact with others. Canadian retirees may work full-time or part-time, or they may start their own consulting or other small business. Many people also choose to do unpaid work.
Regardless of why you may choose to work, it is important to factor these plans into your retirement planning, and to structure your other finances — such as the age at which you apply for CPP/QPP and OAS pensions — around your decision to continue working.
Focus on Your Goals
Planning your retirement is an important process that will evolve as you move through life. It’s also a large undertaking that requires many decisions and considerations. It can be hard to picture yourself at retirement age — especially if this is still far off — and to imagine what you will want to do.
RBC has developed a helpful planning tool, called Your Future By Design, which helps you to decide what you want your retirement to look like. Try the interactive demo, then call your local RBC branch to inquire about when the next Your Future By Design workshop will be held.
We also have other tools to help you plan your retirement finances, and solutions to help you achieve your financial goals.
The content of this website is provided for the general guidance and benefit of our clients. This website is for informational purposes only and is not intended to provide specific advice. See full disclaimer.
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