Retirement: build income from three sources

RetirementThe years when paid work is no longer your main source of money and income after you stop working has to come from other sources. It can begin gradually, with part-time work or a career change, rather than on one exact day. is a cash-flow question before it is an investing question: what will you spend each month, and where will it come from? Start with the spending.

The course uses your take-home pay from Part 1. A target of 70% of it is about $2,937 a month in today's dollars. It is a starting point, not a rule. Housing, family, health and travel will move your number.

Most Canadian retirement income comes from three layers. Public pensions from the government. A workplace pension or group plan through an employer, if you have one. And personal savings: the money you set aside and invest yourself.

Each layer follows its own rule. Public pensions follow your contribution and residence records. Workplace plans follow the plan document. Personal savings follow how much you save, what it is invested in, the fees, the tax and how long it has to last.

The Canada Pension Plan, or CPPA contributory public retirement pension. Your amount depends on the contributions recorded for you and the age you start it. Quebec has the separate Quebec Pension Plan., is the one you paid into on every paycheque. The Quebec Pension Plan, or QPPQuebec's contributory public retirement pension. Its rules work with the Canada Pension Plan when your contribution history crosses the Quebec border., is Quebec's version. What you get back depends on how many years you contributed and how much. Few Canadian working years means a small payment, so get your official estimate instead of guessing.

You can start it any time between 60 and 70. Start early and every payment is smaller for life. Wait and every payment is bigger. The right age depends on your health, whether you are still working, your tax, and how long your savings can cover the gap.

Old Age Security, or OASA public pension funded from general government revenues. It is mainly based on age and years lived in Canada after age 18, rather than payroll contributions., has nothing to do with work. It depends on how many years you lived in Canada after 18. Ten years gets you a partial payment from 65; forty years gets you the full amount.

High income in retirement claws some of it back through the recovery tax. If you came to Canada as an adult, your residence years are a number to know from day one, because they cap this layer.

The Guaranteed Income Supplement, or GISA non-taxable payment that can support people who receive Old Age Security and have low income. Eligibility is checked through income and household circumstances., tops up Old Age Security for seniors with low income. It is tax-free and it is easy to miss.

If your income after 65 is low, it belongs on your checklist, and you keep it by filing a tax return every year. Other income, including RRSP withdrawals, can reduce it, so a retirement plan should show both what you want to spend and what income the government will see.

A workplace pension can be the most valuable line in a job offer. A defined benefit pensionA pension whose formula promises a benefit, often based on salary and years in the plan. The employer carries more of the investment risk than in a personal account. promises a monthly amount for life, based on your salary and years. A defined contribution planA plan where contributions go into an account and the eventual retirement income depends on contributions and investment results. builds an account instead, and what it pays depends on the markets. A group savings plan is a matched RRSP or TFSA without a pension promise.

An employer matchMoney an employer adds when you contribute, often up to a percentage of pay. It is part of your compensation when you use it. is an instant, guaranteed return. Take it before you put a dollar anywhere else. Before you change jobs, learn the plan's vesting rules, fees and what happens to the money when you leave.

The Financial Consumer Agency of Canada guide to employer pensions explains the types; your plan administrator has the exact formula.

Personal savings are the flexible layer. They bridge an early retirement, cover a big purchase, or top up the pensions. The final balance comes from the starting amount, the monthly contribution, the return, the fees and the time.

The example grows the contribution 1% a year and shows everything in today's dollars, so you can see what you paid in and what growth added, without pretending any return is guaranteed.

A dollar in 25 years buys less than a dollar today. inflationThe general rise in prices over time. It means a future dollar buys less than a present dollar unless your income or savings grows with prices. is why every retirement target needs two labels: what it buys today, and the bigger number that will show up on the bill.

Pick an inflation assumption, see the result, update it later. The real return is what is left after inflation, and the savings chart above is drawn in real terms, so read it as buying power.

Timing connects all three layers. Stop working at 60 but delay public pensions, and your savings carry the first years alone. Work longer and the same savings grow for longer while some pension amounts rise.

Test retirement age, pension start age and residence together. One average monthly number can hide a shortfall in the first five years.

The account is the tax rule; the investment inside is a separate choice. A Tax-Free Savings Account, or TFSAA registered account where contributions are not deductible, while eligible growth and withdrawals are generally tax-free. It can hold savings or investments., pays out tax-free and does not affect your benefits. A Registered Retirement Savings Plan, or RRSPA registered account where contributions can create a tax deduction and investment income is sheltered while it stays inside. Withdrawals are generally included in taxable income., saved you tax on the way in and adds to your taxable income on the way out.

A First Home Savings Account is for a first home, not retirement. A plain investment account has no special rules and no limits. Match the account to the goal in Part 4, then choose what it holds in Part 7.

A Registered Retirement Income Fund, or RRIFA registered account that receives money from a Registered Retirement Savings Plan and pays income out over time. After the conversion year, a minimum annual withdrawal generally applies., is what your RRSP becomes when it is time to draw from it. By the end of the year you turn 71 the RRSP has to close: cash it out, turn it into a RRIF, or buy an annuity. Each has different tax timing.

Once it is a RRIF, you must withdraw a minimum every year, a percentage that rises with age, and the withdrawal counts as taxable income whether you spend it or not. So the balance and the withdrawal schedule are one plan.

There is no single best order to take money out. Your withdrawal rateThe percentage of a portfolio withdrawn each year. A higher rate creates more income now but puts more pressure on the portfolio lasting through retirement. ties your spending to your balance. The order you draw from each account changes your taxable income, your benefits and the recovery tax.

Think in years, not one answer. Keep emergency money reachable, take the workplace match while working, and compare a taxable RRSP withdrawal with a tax-free TFSA one before choosing. The answer changes as your income, health and household change.

A market drop right before or after you retire hurts more than the same drop at 30, because now you are selling while prices are down. This is sequence riskThe risk that the order of good and bad investment returns changes the result, especially when withdrawals begin. Two portfolios with the same average return can support different incomes..

Nobody predicts it. You plan around it: a couple of years of spending in cash, a mix that matches your horizon and a withdrawal rate the portfolio can survive. Part 7's market-drop tool shows the same idea before retirement.

Housing can make or break the target. Rent stays a big monthly bill for life. A mortgage can end, but property tax, insurance, maintenance and utilities do not. A paid-off home lowers the monthly need while locking up money you cannot easily spend.

Compare the whole housing cost, not rent against a mortgage payment. Part 6 counts the down payment, transaction costs, maintenance, flexibility and the years you expect to stay.

If you moved to Canada, you have two records to collect. Years you contributed to the Canada Pension Plan or Quebec Pension Plan, which decide that pension. And adult years you lived in Canada, which decide Old Age Security. Working here does not create residence years, and living here does not create contributions.

Canada has social security agreements with many countries. An agreement can help you qualify by counting years abroad, and a pension from home becomes part of your Canadian income and tax picture. Bring both records to the plan rather than guessing from your salary.

Now turn the lesson into one action. Your target is $2,937 a month in today's dollars. The scenario below combines your salary, age, province, pension records, workplace layer, personal savings, inflation and a 4% withdrawal rate.

The result is a direction, not a promise. Swap the teaching assumptions for your real pension statements, plan booklet, balances, fees, debts and housing costs. Then change one input at a time and take the action that closes the biggest gap.