4 steps to plan for retirement
Planning for retirement as early as possible has substantial benefits:
- Reduces financial stress;
- Simplifies your decision as to when to retire;
- Results in greater independence and freedom;
- Makes it easier to save enough money to have the retirement you want.
You can plan for your retirement by taking these four steps:
During your retirement, several sources of income may be available to you.
Income from government sources
Québec Pension Plan (QPP)
The base plan
The QPP provides a monthly taxable retirement pension that is paid by the Government of Québec. The pension amount depends on the number of years you contributed to the plan and the employment earnings you contributed on. You can begin collecting this pension between the ages of 60 and 70. However, the later you apply, the higher the pension.
The additional plan
This plan is being phased in gradually until 2025. Funded through increased contributions, the additional plan will result in higher pension benefits. Additional benefits will increase gradually, based on the number of years of contribution to the new plan, with the full effect on benefits to be achieved by around 2065. To find out more about the additional plan, refer to the related section This link will open in a new window of the Retraite Québec website.
Old Age Security (OAS) pension
The OAS pension is a monthly taxable payment made by the Government of Canada to people aged 65 and older.
You can defer receiving your OAS pension for up to five years after the date you become eligible for it. By opting to defer your OAS pension, you can increase your pension by 7.2% a year.
For details, see the Public pensions page This link will open in a new window of the Government of Canada website.
Guaranteed Income Supplement (GIS)
The Government of Canada may pay you a monthly non-taxable benefit if you have a low retirement income and are receiving the Old Age Security (OAS) pension. If you defer the OAS pension, you won’t be eligible for the GIS during the time you defer it.
For details, consult the Public pensions page This link will open in a new window on the Government of Canada website.
The Allowance is a monthly non-taxable benefit that may be paid by the Government of Canada to individuals whose spouse or common-law partner receives the Guaranteed Income Supplement (GIS). To be eligible for the Allowance, you must be an individual aged 60 to 64 who is living on a low income.
Allowance for the Survivor
The Allowance for the Survivor is a monthly non-taxable benefit that may be paid by the Government of Canada to individuals aged 60 to 64 who are widowed and living on a low income.
Sources of income offered by an employer
Supplemental pension plan offered by an employer (pension fund)
A supplemental pension plan (SPP) is a plan contributed to by an employer alone or by an employer and its employees who are members of the plan for the purpose of providing the plan’s members with a retirement income. Although this income will be taxable in retirement, contributions to an SPP are tax-deductible. As long as the contributed amounts remain in the plan, they grow tax-sheltered in a fund that is segregated from the employer’s assets. Maximum contribution limits apply.
The main types of pension plans are:
Defined contribution plan
In a defined contribution plan, the contributions you and your employer are required to make are determined by the plan. The plan rules specify who is responsible for making investment decisions: the plan administrator, you, or both the plan administrator and you. The retirement benefits you receive will depend on how much is invested and the plan’s performance.
Simplified Pension Plan (SPP)
An SPP is a defined contribution plan, like an RRSP, lets you choose the investments that are in the plan. However, there is one major difference between an SPP and an RRSP: the employer contributes to an SPP. A financial institution administers the plan.
Defined benefit plan
In a defined benefit plan, the benefits you will receive are determined in advance. For example, a plan may provide for a pension of 2% of your pre-retirement salary multiplied by your number of years of service. If you work 30 years for an employer that offers this type of plan, you’ll be entitled to a pension of 2% x 30 years, or 60% of your salary. If you earned $45,000 a year, then your annual pension would be $27,000.
The income you receive from a defined benefit plan does not depend directly on how well your investments perform. What’s more, you don’t decide how your money is invested. If the return on your investments is not sufficient to pay the defined pension, the employer is required to make up the difference. However, your annual contributions to this plan may be reviewed, if necessary.
Target benefit plan (TBP)
This type of plan contains features of both defined contribution and defined benefit plans.
Like defined contribution plans:
- The retirement pension depends on the financial position of the plan. It must not depend on the number of years of employment.
- The employer contribution is limited to the one set out in the plan text. If the contributions are insufficient to pay the pensions provided for under the plan, the pensions, including those for which payment has already started, may be reduced.
Like defined benefit plans:
- It indicates the amount of the pension provided for under the plan (target pension).
- The plan pays a life pension upon retirement.
Employer contributions and, where applicable, your contributions, or the method used for calculating them, are set in advance by the plan.
A group RRSP is like a collection of individual RRSPs. It is issued by a financial institution. Members of a group RRSP contribute through automatic payroll deductions and benefit from immediate tax savings. The employer may contribute to the plan.
Voluntary Retirement Savings Plan (VRSP)
A VRSP is a retirement savings plan that allows employees to save for their retirement through payroll deductions. The employer may contribute to the plan.
If your employer does not offer a VRSP, you can still enrol in this type of plan by contacting an authorized administrator.
Registered Retirement Savings Plan (RRSP)
An RRSP allows you to invest while reducing your taxes, usually in anticipation of retirement.
With some exceptions, an RRSP usually works as follows:
- Adding money (contributing) to your RRSP reduces your income taxes
- Investment growth is tax-sheltered
- You pay income tax on the amounts you withdraw from your RRSP
Learn more about RRSPs and the conditions that apply.
Tax-Free Savings Account (TFSA)
A TFSA allows you to benefit from tax-sheltered investment growth.
- Putting money in (contributing to) a TFSA does NOT reduce your income tax
- Investment growth is tax-sheltered;
- You DON’T pay income tax on the amounts you withdraw from your TFSA.
Learn more about TFSAs and the conditions that apply.
For more information, visit our section about annuities
For more information, visit our section about reverse mortgages
There are many other sources of cash, including non-registered savings (e.g., outside an RRSP, TFSA or pension plan), rental income and business income.
Knowing yourself so you can plan better
To plan properly, you need to know yourself. Among other things, you need to determine what standard of living you would like to maintain during retirement. This could have an effect, for example, on your decision as to when to retire.
Simply put, if you want to maintain the same standard of living in retirement, you will likely need about 70% of the average gross annual income you earned during your last three years of work. However, this is only a theoretical percentage (some need more; others, less). How much you’ll need will depend on several factors, including your personal financial situation.
To estimate your retirement expenses, enter the expenses you expect to incur in one year of retirement in the budget tables. Dividing your estimated annual expenses by your gross annual income will give you an idea of what percentage of your income you’ll need in retirement.
For example, if, using the budget tables, you estimate that you’ll need $35,000 for each year you’re retired and your current gross income is $50,000, then you will likely need 70% of your current income ($35,000/$50,000 = 70%) during your retirement.
The consequences of early retirement
The earlier you retire:
- the less time you’ll have to save the money you’ll need for retirement
- the less you’ll benefit from the performance of your investments
- the further you’ll need to stretch your savings to cover the longer retirement period
- the greater the impact of inflation on your retirement income
As a result, you’ll have to put a lot more money aside each year. It is also important to keep in mind that you can’t collect a Québec Pension Plan pension before age 60. And if you decide to collect the pension before age 65, it will be reduced by a factor of 0.5% to 0.6% for each month included between the date you start collecting your pension and your 65th birthday.
The Old Age Security pension, meanwhile, cannot be collected before age 65.End of the warning
You can use free Web tools, such as SimulR This link will open in a new window, to estimate how much you need to invest to achieve your financial retirement goals.
When calculating how much you will need to save for retirement, you should consider inflation and the possibility that you will live longer than expected.
Inflation is an increase in the overall level of prices for consumer goods and services. If your retirement income is not indexed and does not increase to keep pace with inflation, your purchasing power will decrease over time.
Take the example of Charles, who retires at 60 with a retirement income equal to 70% of his average gross annual income for the last three years of work. The table below shows the impact that an annual inflation rate of 2% will have on his purchasing power, assuming Charles’ retirement income is not indexed. Purchasing power is the ability to buy goods and services.
|Number of years of retirement||Charles’ age||Purchasing power (if his income is not indexed)|
|0 (start of retirement)||age 60||70% of his salary|
|10 years||age 70||57% of his salary|
|20 years||age 80||47% of his salary|
|30 years||age 90||39% of his salary|
For a rough idea of the impact that inflation will have on the return on an investment, subtract the annual inflation rate from the annual rate of return. For example, if you purchase a guaranteed investment certificate (GIC) that earns interest at a rate of 1.5% and the inflation rate is 2%, the actual rate of return (taking inflation into account) is approximately -0.5%.
In other words, in the above example, when inflation is taken into account, you “lose” money over time. Inflation, compounded over the years, will reduce your purchasing power. When your income grows at a lower rate than inflation, your purchasing power diminishes.
To see what the amounts you’ve accumulated look like when inflation is taken into account, use our calculator Investir en tenant compte de l’inflation (in French only).
How will inflation affect your savings?
Not only will inflation reduce the value of your income over the course of your retirement, but it will also decrease the value of what you save before retirement.
The following table shows the amount accumulated on an annual investment of $1,000. In this example, you will have saved $12,486 after 10 years. However, when inflation is taken into account, the actual value of those savings is only $11,144.
|Number of years||Without taking inflation into account||With inflation of 2%||Impact of inflation|
Are you familiar with the rule of 72+?
The rule of 72 is a formula used to estimate the number of years it will take to double your investment.
- Determine the annual return you expect to make. Let’s use 4% as an example.
- Divide 72 by this number. In our example, 72 ÷ 4 = 18.
- This will give you the number of years it will approximately take for your money to double. Therefore, if you invest $1,000 at a 4% return, your investment will be worth about $2,000 after 18 years.
- This is an approximation. If you had used our calculator, the answer would have been $2,026.
However, the rule of 72 does not take inflation into account. There’s a solution: the rule of 72+.
The calculation method is the same as for the rule of 72, but you subtract inflation from the annual return.
Assuming an expected rate of inflation of 2% and an expected rate of return of 4%, your actual return would be 2% (4% - 2%). Instead of dividing 72 by 4, you divide it by 2. The answer is 36. The actual value of your investment will therefore double in about 36 years.
Although the rule of 72+ is accurate enough to be useful, it has a margin of error of less than 5%. Therefore, if you get an answer of 20 years, you should consider the actual answer to be between 19 and 21 years.
Life expectancy and the possibility that you live longer than average
A 60-year-old male Quebecker has a 50% chance of living until the age of 89. A female Quebecker has the same chance of living until the age of 91 (source: Canadian Institute of Actuaries, Canadian Pensioners’ Mortality, 2014). Chances are good that you will outlive your life expectancy and have a long retirement.
To make sure you don’t run short of money during your retirement, you might plan for the possibility that you will live past your life expectancy—until age 94 if you’re a man and until age 96 years for a woman, for example.
You now know what sources of income will likely be available to you during your retirement. You’ve also set your retirement goals and know how much you need to save each year.
You can now:
- set money aside and invest it based on your investor profile
- get help from an authorized representative to find the best solutions for your situation
- manage all or part of your investment portfolio on your own, but make sure you have the skills and time needed to do it properly