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  • Writer's picturePatricia A. Stewart | CFA

Estimating Your Retirement Income

Retirement is supposed to be a time for leisure. But with rising inflation more and more Canadians are actually dreading retirement. More than half (55%) say they’re worried they won’t have enough money to truly retire after quitting work.

Below, we explore some ways you can prepare for retirement and secure your financial future.

retirement income

How Much Income Will I Need for Retirement?

The general rule is that you’ll need about 70% of your pre-retirement income. Another way to determine how much you’ll need to retire is to multiply your annual income by 25, which is the average lifespan after retiring.

Then there’s the four percent rule, which determines how much of your retirement account you can use every year without fear of depleting it. If you saved $500,000, your annual retirement income would be $20,000.

These are just general guidelines; some people will need more others less. Everyone has different incomes, expenses, and goals, which means everyone’s retirement income goals will be different.

That said, there are other sources of income you will be able to use to supplement your retirement savings and ways in which you can maximize your income and minimize your taxes.

When Is the Best Time to Start Collecting My CPP?

The Canada Pension Plan (CPP) is the primary source of retirement income in Canada. Most people retire at 65 years of age, but you can start to collect the CPP as early as 60 or as late as 70. The earlier you start receiving your pension the lower the monthly amount will be. If you start later, the monthly amount will be larger.

The CPP payout is based on the amount you contributed to CPP while working. In 2021, the average monthly CPP benefit was around $620.00. If you’d like to get a better idea on how much CPP you’ll receive, you can ask Service Canada for your CPP statement of contributions.

What Is Old Age Security?

Old Age Security (OAS) is similar to the CPP in that it is a monthly payment available to Canadians who are 65 years of age or older. You can also defer OAS payments up to five years (60 months) after turning 65. The longer you delay, the larger the OAS will be each month.

Unlike CPP though, OAS is not dependent on your employment history, nor do you need to be retired from a job to collect it.

The amount you receive is based on how long you have lived in Canada after the age of 18 and what your annual income is. Considered a taxable income, the federal government adjusts the OAS every three months to factor in the cost of living, which is tied to the Consumer Price Index.

To get an idea on how much OAS you can collect, visit Service Canada.

What Is Income Splitting?

Another way to maximize retirement income is through income splitting. Income splitting is when the higher-earning spouse transfers (splits) part of their income to their partner who is in a lower tax bracket. Bringing the two incomes to a similar income level can significantly reduce the taxable income.

Married couples or those in a common-law relationship can split up to half of their eligible pension income.

Another big bonus to income splitting pensions is the Pension Income Amount. The Canadian government allows retirees with an eligible pension a $2,000 tax credit. This means the first $2,000 of the annual pension is tax-free.

Even if the one spouse doesn’t receive a pension, splitting the pension allows both to receive $2,000 in pension tax credits.

Sharp Asset Management for Your Retirement Planning

If you think it’s too early or even too late to start planning for retirement, it’s not. It doesn’t matter how old you are, the best time to start saving for retirement is always now. If you live in Toronto, Mississauga, or anywhere in the GTA and are looking for a portfolio management firm or asset management company to help you build a diversified retirement portfolio designed to suite your investment goals, Sharp Asset Management can help.

Sharp Asset Management Inc. is an independent portfolio management firm that is 100% owner-operated. We are not affiliated with any financial institution, securities firm, or mutual fund company. Nor do we earn any commissions or fees on investments we choose for our clients. That means our team of wealth management professionals is focused exclusively on helping you achieve your unique, long-term investing objectives.

To learn more about investing with Sharp Asset Management, contact us today.

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