What Income Sources will I have at Retirement?

Canadians are all worried about what money they'll have available when they retire. Let's look at the sources of income for most Canadians.

Government-Sponsored Programs

We all complain about the high taxes and social costs we have to pay, especially when we compare ourselves to the neighbours to the south. But those costs also come with benefits, some of the biggest ones at retirement. The government sponsors two important programs – Canada Pension Plan (CPP) which you’ve funded throughout your working career and Old Age Security (OAS) which is a government funded program that would pay you a small monthly allowance even if you haven’t been in the workforce your entire life.

For most people, these two sources of income would be insufficient for the lifestyle they’d like to live upon retirement. But it is nice to know that should everything else fail, we have these two programs to fall back on.

Company or Government Pensions

After these two government programs, some very lucky people have a company or government pension, called a defined benefit registered pension plan (RPP) because the amount the worker receives upon retirement is defined or fixed and not subject to the performance of the fund created to pay the benefits. According to Statistics Canada (New Facts on pension coverage in Canada), the proportion of the overall employed population covered by RPPs declined from 52% to 37% between 1977 and 2011 (see figure below).

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Simply put, most companies have phased out pension plans and it is now mostly public employees (government workers, teachers, police, etc) who can look forward to a pension upon retire. For these people, the combination of their pension plan and their social entitlements (CPP and OAS) can produce an income level that is similar to what they received during their working life. Companies in the private sector typically offer their employees the ability to contribute to an RRSP, with or without a company match.

Although company-wide pension plans are in decline, the use of an Individual Pension Plan (IPP) is on the rise, particularly for older, senior executives at larger companies. Essentially, the IPP is a defined benefit plan established for only one person (or sometimes two). For older workers (typically at least 40), the IPP allows contributions beyond the maximum permitted by the RRSP by over 50% at age 60.

Inheritance

We don’t like to talk much about it, but a majority of people will inherit at least something from their parents. A 2017 study from Natixis Global Asset Management found that 45% of Canadians expected to receive an inheritance with 77% saying that family resources would be a chief source of retirement funding.

So, it is likely that you’ll get something through inheritance during your lifetime but given advances in medicine, increases in the lifespan and the increasing cost of senior care, many children are finding that their parents need more of their nest egg than they thought. Therefore, unless your family has substantial assets, most people do not count on inheritance in their retirement planning but rather consider it “found money” if they end up getting something with the passing of their parents or other family members.

As with all topics on this site, if your situation is different and you expect to see significant assets through inheritance, talk to your financial advisor.

Other Investments

Most Canadians have a variety of other investments and assets that they will use to support their lifestyle during retirement. These include:

• House: For many, the primary residence is the largest asset they have. Some ways to get the equity out of your home for use in retirement include a reverse mortgage (that increases indebtedness over time and allows a stream of income), a refinancing to extract a lump sum of money immediately and put a new mortgage on the property and a home equity loan.

• Real Estate: In addition to the primary residence, many people also have rental properties. This is an attractive investment decision since in addition to the monthly rent, the investor usually gets capital appreciation in the property as housing prices rise.

• Investment accounts: Most people have at least one unregistered investment account holding a combination of cash, stocks, bonds, and other investments.