To be clear, putting your money in a standard savings account won’t get the job done unless you are already a person of substantial means. If you are an ordinary Canadian, you need to think beyond having a standard savings account. What you need to do is develop an investment strategy and put your savings to work to create more income for retirement.Investing one’s money can be a bit tricky. If your knowledge of investing is limited, you would do well to do a little research before you start trying to create investment income. To help you make the right investment decisions, the ones that will best meet your retirement needs, you need to review the following types of retirement investment options you have at your disposal as a Canadian resident/citizen.
Canada Pension Plan (CPP)/Quebec Pension Plan (QPP)
Throughout your working career, you will be paying a certain percentage of your income into the National Canada Pension Plan (CPP). For residents in Quebec, the equivalent would be the Quebec Pension Plan. In addition to the contributions that you make into the CPP or QPP, your employer will also be required to contribute a percentage of your income on your behalf. The Canadian government will set aside and invest these funds until you retire.
Upon retirement (age 65), you can begin taking distributions. The dollar amount of your distributions will depend mostly on the amounts you and your employer(s) contribute over the years. On average, Canadian retirees get approximately $670 a month. The CPP and QPP also pay out death benefits, disability benefits, and certain benefits for children.
At $670 a month for basic retirement, you clearly can’t survive on that amount. These plans were never intended to be anything more than a way to help supplement other forms of savings to create your monthly income in retirement.
Old Age Security (OAS)
If you meet legal Canadian status and residency requirements, you might also be eligible to receive Old Age Security (OAS). The plan is available to anyone who meets the requirements, whether they have worked or not. No contributions are required as the plan is funded by the Canadian government. The dollar amount of your monthly distributions will depend on the following factors: time living in Canada after you turned 18, marital status, and level of income when you retired.
The amount usually comes out to around $250 a month at full benefits. You can get this money in addition to your CPP/QPP. Still, the amount of both plans would not be enough to support a reasonable lifestyle after retirement.
Registered Retirement Savings Plan (RRSP)
As an active investor investing in your retirement, you have a couple of different investment options. The most popular option among Canadians is a Registered Retirement Savings Plan (RRSP). With this option, it would be your responsibility to fund the account and manage the account unless you seek assistance with the management.
Each year, the maximum amount you can contribute to an RRSP will be determined by the Canada Revenue Agency. You can choose to contribute up to 18% of your prior year’s employment income not to exceed a stated maximum ($27,230 in 2020, plus any carry-forward contribution).
As motivation to make contributions, you will get to deduct the total amount of your RRSP contributions from pretax income. Effectively, you get to defer taxes on contribution amounts until you start taking distributions after retirement. Also, your investment earnings would not be subject to taxation until you start taking distributions. The effective tax rate will be the marginal tax rate you would be subject to during the years of your distributions.
There are no age limitations on this option, though you cannot start making contributions until you have filed your first tax return. At age 71, you will need to convert your RRSP to a registered retirement income fund (RRIF). Within this plan, you are permitted to invest in a wide range of retirement investment options, including stocks, bonds, mutual funds, exchange-traded funds, etc.
Tax-Free Savings Account (TFSA)
With a Tax-Free Savings Account (TFSA), you are permitted to invest in the same range of investment options allowed within an RRSP. That’s pretty much where the similarities stop.
The differences are many. First, your TFSA contributions cannot be made with pretax earnings. You would have to pay your full tax liability on income each year. However, any earnings you accumulate in your TFSA are tax exempt. The maximum you could contribute each year ($6,000 as of 2020) is determined by the Canada Revenue Agency. The total amount you can ever contribute to your TFSA will depend on when you reached 18 years of age. The max you can ever deposit if you were 18 before 2009 would be $69,500.
One of the great benefits of this account is you can take distributions at any time, no need to wait until retirement. However, you should get in the habit of earmarking these funds for retirement. If you do take early withdrawals, your contributions back in could have limitations.
Employer Sponsored Pension Plans
If you work for a major corporation, you could be eligible for an employer-sponsored pension plan. The plan would typically be funded and managed by your employer. Your rights to that retirement income would be determined by a vesting schedule as put forth by your employer. You would be given access to said funds upon retirement or after leaving the company’s employ.
Historically, real estate has always been a solid investment. If you bought a home or invested in income-producing property, it would be reasonable for you to expect an average return of between 5% and 8% a year. How to Manage Your Investment
As you contemplated putting together your retirement investment strategy, you will need to decide how to manage your investments. Below, you will find options you might want to consider.
If you have a decent understanding of investment options like stocks and bonds, you might be able to manage your retirement funds with an online brokerage account. By making your own decisions, you could save a lot of money.
Brokered Investment Accounts
If you lack investment knowledge, you might be better off enlisting the services of a financial advisor through a brokered investment account. In exchange for a fee, you could benefit from a broker’s advice and direction.
Instead of hiring a financial advisor, you might want to consider tying your investment account to a robot advisor. After filling out an investment questionnaire, a Robo advisor would responsible for managing your account based on the specs derived from your answers on the questionnaire.
Planning for Retirement
You are the one who has to find time to financially plan for your retirement. To start the process, you need to determine how much money you will need to live each year after retirement. You should plan for 20 years. If you need $50,000 a year, you would need to have retirement savings of $1,000,000 by the time you retire. Using that number as your guide, you can begin to direct your savings and investments towards that goal.