For many newcomers, ensuring financial security in the present can take priority over longer-term financial goals like retirement planning. However, regardless of whether you currently have resources to set aside for retirement, it’s important that you start planning sooner rather than later.
There is no minimum age to start planning for retirement. But the earlier you start working towards that goal, the easier it will be to meet your targets. This article will give you an overview of the Canadian government benefits you may be entitled to during retirement, savings and investment products that can supplement your retirement income, and some retirement planning tips to help you live a comfortable, financially independent retired life.
In this article:
- Government benefits to supplement your retirement income
- Saving for your retirement
- Tips for retirement planning as a newcomer in Canada
What is the retirement age in Canada?
Unlike some countries, there is no mandatory retirement age for corporate employees in Canada and you cannot be forced to stop working on account of your age. Exceptions exist for judges, magistrates, and certain occupations where age is a bonafide employment requirement. However, the average retirement age in Canada is 65, and that is when you become eligible for most government benefits.
Government benefits to supplement your retirement income
One advantage of retiring in Canada is that the government provides financial support to every resident over a certain age. Here are some government-led pension plans and benefits that you may be entitled to upon retirement:
Old age security (OAS) pension
The Old Age Security (OAS) pension is a monthly benefit that Canadians start to receive at age 65. You’ll be eligible for an OAS pension if you’re a Canadian citizen or legal resident and have lived in Canada for at least 10 years. You can receive OAS benefits even if you continue working beyond 65 or have never been employed in Canada.
The amount you’re entitled to from the OAS pension depends on how long you’ve lived in Canada after the age of 18. As a newcomer in Canada, you may not be eligible for the maximum amount if you’ve lived in Canada for less than 40 years at the time of retirement.
The maximum monthly payment amount for OAS pension in the July to September 2021 quarter was $626.49. You can delay your Old Age Security pension for up to five years to qualify for larger payments. However, your annual income must be less than $129,581 to be eligible for the OAS pension.
Canada Pension Plan (CPP) or Québec Pension Plan (QPP)
If you’ve started working in Canada, you may have noticed deductions for the Canada Pension Plan (CPP) or Québec Pension Plan (QPP) on your payslips. These pension plans provide a monthly retirement pension to people who’ve contributed to the plans during their working years.
The amount you receive each month after retirement will depend on how long and how much you contributed to the plan and the age at which you start receiving your QPP or CPP benefits. You can choose to start taking money from these plans when you turn 60 or as late as 70. The sooner you take your retirement pension, the lower the monthly amount will be.
For 2021, the maximum monthly amount if you start getting CPP at age 65 is $1,203.75. However, the average monthly amount in early 2021 was $619.44.
Guaranteed Income Supplement (GIS)
The Guaranteed Income Supplement (GIS) is a monthly non-taxable benefit for low-income OAS pension recipients living in Canada. You may qualify for GIS if you are 65 or older, have an income below $18,984, and you’re single, divorced, or widowed. If you have a spouse or common-law partner, you may qualify if your combined income is between $25,104 and $45,504 (including OAS and Allowance). The monthly amount for 2021 ranges between $563.27 and $935.72 based on your income or combined income.
The Allowance is a non-taxable payment you can receive if you’re between 60 to 64 years of age, living in Canada, and your spouse or common-law partner is eligible to receive GIS. As of 2021, your combined annual income must be under $35,136 to qualify. The maximum monthly allowance for July to September 2021 was $1,189.76.
The amounts for government benefits and pension are subject to change and are typically revised each quarter or year to account for inflation and cost of living.
All of the numbers are accurate as of September 2021.
Saving for your retirement
While government pensions and benefits will bring you some income during your retirement years, they will likely not be enough to cover your expenses. Most Canadians need to supplement these payments with retirement savings of their own to maintain their lifestyle. Some common sources of retirement income are:
Registered Retirement Savings Plan (RRSP)
An RRSP is designed to help you save and grow your money for retirement. It’s a tax-deferred plan where you can contribute up to 18 per cent of your previous year’s income (up to a maximum limit). You can claim income tax deductions for RRSP contributions and don’t have to pay tax on your principal or earnings until you make a withdrawal.
Typically, upon retirement, your income, including withdrawals from your RRSP, will fall in a lower tax bracket. However, you can only own an RRSP until the end of the year you turn 71. After that, you must either make a lump-sum withdrawal or transfer your RRSP funds into a Registered Retirement Income Fund (RRIF) or annuity.
| Tip: While buying your first home in Canada, you can borrow up to $35,000 tax-free from your RRSP account.
Tax-Free Savings Accounts (TFSA)
Your TFSA can hold a wide range of savings and investment products. While contributions to the TFSA are not tax-deductible, any capital gains, interest, or dividends you accrue in the account are not taxable.
Withdrawals from TFSA are not considered income, so you will not be required to pay taxes on these funds at the time of withdrawal. Nor will this money affect any amounts that you’re entitled to from the OAS pension or GIS.
The contribution room for TFSA is cumulative and starts adding up the year you turn 18 or, in the case of newcomers, the year you become a tax-resident of Canada. The maximum contribution limit for TFSA changes every year, and for 2021, the annual contribution limit is $6,000.
High Interest Savings Accounts (HISA)
While savings accounts in Canada typically yield low interest rates, some people open HISAs to keep a part of their savings in the bank. The interest rate for these accounts depends on the financial institution and the terms of the banking product you’ve opted for.
You can also make personal investments in stocks, mutual funds, ETFs, or bonds to grow your money faster. As earnings from these products may be taxable, it’s best to speak to a financial advisor for investment advice based on your specific situation.
Employer-sponsored retirement and pension plans
In addition to your personal retirement savings, you may also be able to rely on income from a group Registered Retirement Savings Plan (RRSP) or registered pension plan (RPP). Such plans may be part of your employee benefits, where either you and your employer or just your employer make contributions.
Tips for retirement planning as a newcomer in Canada
Estimate how much money you need for retirement
There is no magic number that you’ll need to have in order to retire—your goal will depend on your specific situation. Typically, you’ll need to factor in your expenses, income streams, target retirement age, and benefits entitlement.
According to financial experts, you’ll need to replace approximately 75 to 85 per cent of your current income to cover expenses for each year of retirement. This number may be lower if you plan to live frugally or won’t have any ongoing mortgages or loans post-retirement.
Meet with a financial planner
A financial planner can help you review your current financial situation and create a retirement plan based on your income, benefits entitlement, and other financial requirements, such as buying a house or funding your children’s education.
They will also be able to give you advice on budgeting, savings planning, investments, and can recommend financial products to help you save for a comfortable retirement. You should speak to a financial advisor when you first start retirement planning to ensure that your goals are realistic and don’t put undue financial pressure on you in the present.
Account for possible life changes
Whether you’re planning to start (or grow) your family or buy a new home in Canada, be sure that your retirement plan accounts for any planned or unplanned life changes. Some unforeseen situations, such as disabilities or loss of employment, can also impact your retirement plan and force you to make changes to it. Make sure that your retirement plans and savings goals are flexible and that there’s room to adjust based on your circumstances.
Review your investment goals frequently and modify them when needed
Your savings and investment goals may change based on your income and expenses. Be sure to review your financial position at least once every year to make sure you’re not setting aside too much or too little for retirement.
You should also keep track of how your investments are performing. If the rate of return is below what you’d hoped for, speak to your financial advisor for advice on investment products that meet your risk-return expectation.
Know when and how to access your benefits and pension plans
Government benefits and pension plans have minimum age limits for when you can start receiving funds. In addition, for some benefits, the monthly amount you’re entitled to may change depending on when you start receiving it or your income.
Make sure that you’re aware of your retirement income sources, how much you can expect to receive, when you’ll start receiving the various benefits and pensions (including from employer-sponsored plans), and any action that you’ll need to take to access those funds. This will help you plan the ideal age to retire and income you’ll need to supplement to maintain your standard of living during retirement.
For most newcomers, retirement may seem very far off, and today’s financial needs, including supporting family back home, may take precedence over saving for a comfortable future. However, the sooner you start retirement planning, the easier it will be to cover expenses in your later years. A financial planner can help you plan your investments and savings in a way that will minimize long-term risk and ensure good returns on your investments.