Laura McKay is the co-founder and COO of PolicyMe, Canada's fastest-growing digital life insurance company. In 2021, she was named one of the Women of the Year by Bay Street Bull. Laura has a Bachelor of Mathematics from the University of Waterloo. Her degree focused on Actuarial Science, which included learning about mortality risk, the basis of life insurance pricing and valuation. After her degree, she was employed by Manulife and Munich Re in Actuarial Science. Laura then worked at famed management consulting company Oliver Wyman in New York from 2013-2018. In this position, she worked with many Fortune 500 life insurance companies and helped them develop growth strategies and solve operational problems and regulatory issues.
December 17, 2019
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8 minutes
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Overwhelmed by the idea of saving for retirement? We’ve got great news—you’re not alone in saving for this next stage of your life.
There are many resources available to you once you’ve retired and as you’re saving up for retirement. We’re going to go through some of the most common ones below.
Let’s get started!
RRSP
Short for a registered retirement savings plan, this is a financial account where you put in a portion of your income before taxes for savings and investment purposes. The amount you put in every year can be used as a tax deductible against your income within an 18% limit. This means you can lower your income to help reduce the amount of taxes you need to pay the government back. However, there’s a limit to how much you can contribute each year. This limit is decided yearly and can be found on your CRA profile or on Form T1028.
An RRSP is the most common account you’ll use to save up for retirement, and you can open one at any bank or financial services company, such as Sunlife, Manulife, and Wealthsimple. Be warned though—when you retire and start taking money from it, you’ll be taxed on the amount you withdraw.
TFSA
A TFSA is a “tax-advantaged account,” meaning that the government provides tax breaks for those who use them as an incentive to save for retirement or some other large purchase like a home.
With a TFSA, you can put money in only after taxes. But here’s the awesome news: all capital gains, interest, and dividends that your investments earn are tax-free for life. Pretty sweet, right? You can also withdraw any amount at any time without any repercussions or extra fee payments.
However, you do have a contribution limit for your TFSA. If you haven’t opened a TFSA yet, your contribution limit can be higher because it’ll take limits from the previous years into account. Be sure to check your CRA account to see how much you can put in.
CPP
The Canada Pension Plan is a monthly, taxable benefit that replaces a part of your income when you retire. The amount you receive is based on your average earnings throughout your working life, your contributions to the CPP, and when you choose to start receiving these funds. You contribute to the CPP every year when paying income taxes. (It’s not something you need to consciously pay every year.) But you can track how much you’ve contributed by requesting a statement of record at any Service Canada location.
When you retire, you get a monthly stipend from the government. Although this amount will depend on your particular circumstances, these monthly stipends currently average $679.16, with a maximum of $1,154.58.
The important thing to keep in mind when applying for CPP or considering CPP contributions as part of your monthly salary is that the amount changes depending on when you decide to start withdrawing from the pension. If you delay this until you’re 70, the benefit you’ll receive will be much larger than if you retire at 60.
OAS
The Old Age Security (OAS) program is the Government of Canada's largest pension program. It’s funded by the government’s general tax revenues, so it doesn’t require a direct contribution like CPP does.
The OAS pension is a monthly payment available to seniors aged 65 and older who meet the Canadian legal status and residence requirements. It does require that you apply, like with CPP, and the amount you receive is based on how long you’ve lived in Canada since turning 18. In addition, to be eligible for OAS, your maximum retirement income can’t exceed $126,058/year. The maximum OAS monthly stipend, regardless of your marital status, is $613.53.
There are other benefits to OAS, including the Guaranteed Income Supplement, Allowance, and Allowance for the Survivor. But you have to be in a specific situation to be eligible for them, and you shouldn’t rely on them as income.
Employee Pension Plan
Another great resource available to you is your company’s employee pension plan.
There are two ways your employer can help you save for retirement:
Defined Contribution Pension Plan
In this plan, you know how much you’ll pay into the plan but not how much you’ll get when you retire. You and your company pay a defined amount into the plan each year, which then gets invested on your behalf. The amount you get when you retire depends on how your investments perform. You also have a choice in which plans/funds to invest in and can discuss your options with your plan administrator. Your final amount will be put into an account (likely an annuity, a locked-in RRSP, or a locked-in RRIF) when you retire.
Defined Benefit Pension Plan
Under this plan, your employer promises to pay you a regular income after you retire. Usually, both you and your employer make contributions to the plan that are pooled into a fund that your employer or plan administrator invests and manages. You don’t have to make any investment choices. The income you get when you retire is usually calculated based on your salary and the number of years you contributed to the plan. Unlike with a defined contributions plan, it's a set amount that doesn’t depend on how well the investments perform.
For both of these plans, you’ll have to speak with your HR advisor or pension plan administrator to determine which one you have.
Healthcare After You Retire
Another aspect of retirement to consider is healthcare. Your employer may already offer to extend your healthcare coverage into retirement (generous, right?), but you’ll need to check with them about this.
Whatever the case is, make sure that you look into it and plan for the future. If you know that your current private insurance plan won’t continue into retirement, be sure to apply for a new plan before you turn 70 to get the coverage you need at an affordable price.
TFSA vs. RRSP
To put it simply, it’s all about your tax savings.
In the end, an RRSP benefits you if your post-retirement income is less than your pre-retirement income. So, if your current salary is $70,000 and you retire with an annual salary of $40,000, the taxes you’ll pay during your retirement will be lower than the taxes you’ve paid while working because you’ll be in a lower tax bracket.
If you retire with the same salary or the tax bracket you’re in doesn’t change, you won’t benefit from any tax savings. You’ve just postponed paying the government by 30 years. Also, unlike with a TFSA, you’ll have to pay taxes on the dividends, interest, and capital gains your money has earned while being in the RRSP. Deferring tax payments comes at a price!
The best way to approach TFSAs and RRSPs is to recognize that they are both options that are available to you, and you can decide how to use each of them to your benefit. Putting a small amount into your RRSP to gain some tax relief now, regardless of your tax bracket when you retire, may be really helpful for you, especially if your company tops up this contribution through your pension plan.
You could also choose to put another small amount into a TFSA at the same time and, if you ever need that money, you can always withdraw it with no penalty (unlike with an RRSP).
As long as you eventually reach your retirement income goals, how you get there is entirely up to you. So feel free to choose your own adventure!
Women: Something to Be Aware Of
When calculating your retirement income, remember that women have a longer life expectancy than men do (80 years for men vs. 84 years for women). Although online retirement calculators provide rough estimates that take this into account, you’ll want to make sure your actual amount covers these extra few years.
There are also some additional barriers that women face when saving for retirement that men don’t. This can make it harder for women to reach their retirement savings goals. We know it may be discouraging to hear this, but we’re not trying to get you down. Ignorance isn’t always bliss, and we simply want you to be aware of the potential roadblocks so you can prepare for them.
We’re not investment experts, so we recommend taking the time to talk about these challenges with someone who is. This way, you’ll know what your options are for making up the gap so you can have the retirement you want at the age you want.
So what are we experts on? Life insurance. Read our handy guide, Life Insurance in Canada, to learn more about your life insurance needs.
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