Funding Your Dream: Retirement Income Planning 101

Key takeaways:

  • Determine which sources of retirement income you will be leveraging during your retirement years, including any public pensions, workplace pensions, and personal savings and investments.
  • Make a retirement income plan taking into consideration your retirement income tax bracket, your pension income splitting eligibility, and the tax implications for each of your sources of retirement income.
  • Secure your wealth for your retirement and for gifting it to the next generation by diversifying your portfolio with long-term investments that can also provide regular cash flow, like certain private alternative investments.

The shift from a wealth accumulation strategy to a wealth decumulation strategy can feel like a seismic shift—your working life was spent earning as much as you could, both actively through employment and passively through investments, whereas your retirement life will be focused on drawing on and securing your wealth to support your golden years. Now is the time to review your portfolio and make sure you’re prepared for your dream retirement. A key part of this review could include creating a retirement income plan to help guide this next phase of your life. To help with this, we’ve put together three questions you can ask yourself today to ensure you’re in the best position to take advantage of the full breadth of opportunities your retirement years can provide.

1. Where is my retirement income going to come from?

When you’re planning your retirement income in Canada, there are a few options for the sources of that income. These can be generally organized into three different buckets:

  1. Public pensions
  2. Workplace pensions
  3. Personal savings and investments

Understanding how each of these income streams function can help ensure you’re maximizing all options for your retirement income to fund the golden years of your dreams.

a) Public pensions

There are two public pensions available to Canadians: Old Age Security (OAS) and the Canadian Pension Plan (CPP). These streams of retirement income provide monthly payments of taxable income to retirees but have different eligibility requirements based on how old you are and how long you have lived and worked in Canada, respectively. Additionally, both of these pensions require you to apply in order to start receiving them. To make sure you don’t miss out on taking full advantage of them, it’s recommended that you apply six to 12 months before you’d like to start receiving payments to avoid potential delays.

b) Workplace pensions

Employer pension plans are registered savings plans that are sponsored by your employer, where your employer, or you and your employer, regularly contribute money to the pension fund. There are generally two different types of workplace pension plans: defined contribution pension plans (DCPPs) or defined benefit pension plans (DBPPs). As with other registered plans, you won’t be charged tax on any of the investment earnings held within either type of employer pension plans, and you will only be responsible for income tax when you do start receiving payments, based on your marginal tax rate at the time.

c) Personal savings and investments

You can expect that a significant portion of your retirement income will come from personal savings or investments that you have made during your working years. These can be made up of registered accounts and non-registered accounts, both of which can generate passive income for you to draw on to live the retired lifestyle you’ve always dreamed of. While there are limitations and benefits to both types of accounts, strategizing which investments and savings should be held in which types of accounts, along with a comprehensive withdrawal plan, can help ensure that you are maximizing the amount of retirement income available to you. For example, you might consider incorporating investments with higher-taxed earnings, such as interest, in tax-advantaged registered accounts, while more tax-efficient investment products, like Skyline real estate investment trusts (REITs) and Skyline Clean Energy Fund, could be held in either non-tax-advantaged non-registered accounts, or for greater potential earnings, tax-advantaged registered accounts. Additionally, you can consider including an annuity in your retirement income plan, which can provide you with guaranteed income that can help you budget and tax plan with more confidence.

2. How can I maximize all my sources of retirement income?

Choosing and managing different streams of income for your retirement might seem overwhelming, but the key is to make a plan. Ensure you’re maximizing the potential value of your retirement wealth by establishing your sources of retirement income and strategically planning withdrawals for tax efficiencies. To help you with your retirement income plan, here are a few considerations:

a) Calculate your retirement income tax bracket

Taking the time to consider how much money you will need to live your dream retirement and what your new annual income will be can also help you establish what marginal income tax rate you will be paying. Knowing this rate is especially important while you are drawing on your saved funds instead of focusing solely on building up those funds because it can provide you with the insight you may need to make strategic decisions to take full advantage of every tax efficiency available. For example, if you’re near maxing out your retirement tax bracket and you need cash flow, you may want to consider drawing on low-tax or no-tax options, like withdrawals from your Tax-Free Savings Account (TFSA), in order to avoid bumping up to paying a higher tax rate. Conversely, if you’re in the middle or lower end of your marginal tax bracket, you could withdraw from taxable sources, such as your Registered Retirement Income Fund (RRIF), Life Income Fund (LIF), or other non-registered accounts, without increasing the rate of tax you’ll have to pay.

b) Review your eligibility for pension income splitting

If you and your spouse or partner make less than the other person, you can consider splitting pensions received from eligible retirement income sources to lower the higher-earning person’s marginal income tax rate. In fact, if you meet the requirements for pension income splitting, up to 50% of eligible income can be transferred to the lower-earning partner, which could make a significant difference in how much tax you’ll pay each year. Make sure to review the requirements carefully, though, as only certain types of income can be split and how old you and your partner are will impact what can and can’t be split between you.

c) Understand the tax implications of each type of retirement income

Some sources of retirement income are more flexible and tax efficient than others, so it can be important to plan when you’ll receive certain benefits and how much you’ll withdraw at one time.

For timing, the longer you can wait to apply for and trigger your public pensions, the higher the payments could be, giving you more income. Further, holding off converting your Registered Retirement Savings Plan (RRSP) to a RRIF and your Locked-In Retirement Account (LIRA) to a LIF until you are 71, can keep your investments growing tax sheltered and push off having to make minimum annual withdrawals, which will be taxed fully at your marginal tax rate.

And when it comes to assessing the amount you’re withdrawing, you may want to take into consideration not only the tax bracket you’ll hit with those withdrawals, but also if the withdrawals affect other benefits. Specifically, OAS can be reduced if you earn more than the minimum threshold and could be completely zeroed out if you earn more than the maximum threshold.

Finally, make sure to leverage tax-efficient income sources, when possible. For example, if you invested in Skyline private real estate investment trusts (REITs), the distributions that are paid out to you will either be classified as capital gains, Return of Capital (RoC), other income, or a combination of these. If you receive capital gains distributions, you will only have to pay tax on 50% of the amount. And with RoC, the distribution will be considered a returned portion of your initial investment and therefore won’t be taxable in the year you received it, nor will it affect any of your other benefits or overall income level. You should, however, pay attention to how any RoC distributions affect your Adjusted Cost Base (ACB), as you could trigger other penalties and taxation if the ACB gets to below zero.

Regardless of how you manage your withdrawals, remember that no two retirements are exactly the same and that a withdrawal plan that might work for someone else may not make sense for your situation. Contact a tax advisor to review all of your options and make an informed plan that will help position you for optimal retirement income and minimal taxation.

3. How can I diversify my portfolio to secure my retirement wealth and also foster future growth?

Diversifying your portfolio can be an effective way to protect your retirement wealth while also creating opportunities for future growth. A thoughtful approach can help you enjoy the retirement you envision while positioning you to pass on a meaningful financial legacy to the people you care about.

Ensuring you can meet this goal requires you to bolster the overall value of your retirement wealth, continuing to grow it throughout your retirement, while at the same time withdrawing income from it. Diversifying your portfolio with a variety of investments across different asset types and across both your registered and non-registered accounts can help balance wealth decumulation with retirement wealth growth.

Private alternative investments such as Skyline REITs—namely Skyline Apartment REIT, Skyline Industrial REIT, and Skyline Retail REIT—can contribute to this strategy. These real-asset investments have historically delivered stable returns and provide tax-efficient distributions in the form of capital gains and RoC, in addition to other income, which may be taxed. For a long-term strategy, you can take advantage of the Distribution Reinvestment Plan (DRIP) available for each Skyline REIT, which allows you to reinvest any distributions into additional units, rather than paying them out in cash, giving you the opportunity to potentially compound your earnings over time, increase the overall potential value of your retirement wealth, and help preserve more wealth for the next generation. Skyline Clean Energy Fund follows a similar approach by automatically reinvesting all earnings back into the Fund. This structure has historically supported steady increases in unit value and can strengthen the long‑term growth potential of your portfolio, helping you build a financial legacy that extends beyond your retirement years.

Next steps

After saving and growing your wealth over your earning years, you deserve to enjoy the retirement that you dream of. Making sure you have the income you need for this next phase of your life can include the following steps:

  1. Selecting and maximizing different sources of retirement income so you can support the retirement lifestyle you deserve.
  2. Reviewing and strategizing withdrawals for maximum value, including tax planning and timing when and how much you withdraw from which accounts.
  3. Diversifying your portfolio to include a wide range of investment and income types, including those that can provide consistent and steady returns, like the historically stable Skyline private REITs, and consistent value increases, like Skyline Clean Energy Fund.
  4. Understanding the tax implications of your retirement income plan so you can maximize the value of your wealth without being overtaxed.

Shifting from wealth accumulation to wealth decumulation can be filled with concern about how best to maximize the earnings from your working years, while taking advantage of your retirement years and income. Making a plan today can help allay those fears and set you up for success in your new, well-earned future.

Make your retirement dreams
a reality.
Explore how Skyline can help you achieve yours.

Retirement income planning FAQs

What is the difference between a wealth accumulation phase and a wealth decumulation phase?

The wealth accumulation phase of your life is during your working years, where you are actively earning income via employment and accruing wealth passively through strategic investments and savings. The wealth decumulation phase of your life is retirement, when you shift gears to securing the foundational wealth you have built during your earning years, while drawing on that same foundation to fund your retirement with passive income.

How much money do I need to retire comfortably in Canada?

The general recommendation is that you have enough money from all sources of retirement income to provide 60-70% of your current income to sustain your current lifestyle. Of course, this amount may be more or less depending on how you want to spend your retirement. For example, if you want to include more travel or hobbies in your golden years that you aren’t currently funding during your working years, you may need to have more retirement income available to you.

How does Old Age Security (OAS) work?

OAS is available to Canadians 65 or older who have lived in Canada for at least 10 years after turning 18, and how much you receive is generally based on the age you start collecting OAS and how long you have lived in Canada. There is a limit, however, to how much other income you can earn while receiving OAS benefits, so you may want to consider planning when and how much of other streams of retirement income you receive in order to avoid the OAS clawback, or Old Age Security pension recovery tax, which could reduce your OAS payments to $0 if you hit the maximum threshold.

How does the Canadian Pension Plan (CPP) work?

Eligibility for CPP is also based on your age, but it’s only available to Canadians who have made at least one valid contribution to the CPP during their working years, which is generally taken off your gross pay through your employer on your regular salary. You have to be at least 60 years old before you can start collecting CPP, but the longer you wait to start receiving benefits, the larger the payment you will receive will be. For example, if you start receiving CPP when you turn 60, your payment will be significantly smaller than if you waited until you were 65 or even 70. The total amount you are eligible to receive is based on how old you are, how much you contributed to CPP, how long you contributed to it, and your average earnings throughout your life. Unlike OAS, the amount of income you earn from other sources does not reduce the amount of CPP you will receive. In fact, if you keep working when you start collecting CPP, and you’re under the age of 70, you can keep contributing to CPP, which may increase the amount you could receive monthly after you stop working and contributing, or when you turn 70.

What is a defined contribution pension plan (DCPP)?

With a DCPP, you know how much you and/or your employer will contribute to the plan, but it’s not clear or guaranteed how much money you will receive when you retire. The fund is invested on your behalf in financial products that you may or may not be able to choose, and the amount of retirement income you will receive will depend on how well those investments grow over the course of the fund’s life.

What is a defined benefit pension plan (DBPP)?

A DBPP provides you with a guaranteed income when you retire, regardless of how the investments in the plan perform. Both you and your employer generally contribute to the DBPP, you aren’t required to make any investment decisions for the funds, and you may be eligible for increased payments annually to align with the rate of inflation.

What registered accounts are available in Canada?

Personal registered accounts that provide retirement income can include Registered Retirement Income Funds (RRIFs), Life Income Funds (LIFs), and Tax-Free Savings Accounts (TFSAs). Each of these types of accounts have different limitations, but they all come with tax advantages that can help increase the total amount of retirement income you will have access to.

When you retire, or by the end of the year in which you turn 71, your Registered Retirement Savings Plan (RRSP) will have to transition to a RRIF in order for you to start withdrawing payments from it. Like an RRSP, you will still be able to invest your savings and earnings within the fund as you see fit to continue to grow your retirement wealth, but unlike an RRSP, you will not be able to make any more new capital contributions to it.

Similarly, a LIF is a registered account that is the result of another account transition: the Locked-In Retirement Account (LIRA) to LIF conversion. LIRAs usually hold pension plans from employers that you have moved on from, which you convert to a LIF when you retire, or by December 31 of the year you turn 71. Like with a RRIF, you aren’t able to make new capital contributions to your LIF, but you can invest the funds held to continue to grow them, tax deferred, until you’re ready to withdraw income from them.

Both RRIFs and LIFs have minimum withdrawals that you must make from them depending on your age or the age of your spouse. RRIFs have no maximum withdrawal limit, whereas LIFs do have a maximum limit. In both cases, withdrawals are taxed as income based on your marginal tax rate.

TFSAs are the most flexible registered account since there are no minimum or maximum withdrawal limitations, you can still contribute new capital to the account up to the cumulative annual maximum, and there are no maximum age limits on the account. And, as with the other registered accounts, you can stock your TFSA with investments to grow your savings and increase the amount of retirement income available to you.

How are non-registered accounts used for retirement income?

Non-registered accounts work similarly to registered accounts, as they are generally stocked with savings and investments, are able to grow, and can be withdrawn from for retirement income. Unlike registered accounts, there are no tax advantages built in, as any gains on investments or savings are taxed based on the type of earnings you receive, and there are no contribution or withdrawal limitations.

There are generally three different types of income you can earn from non-registered accounts: interest, dividends, or capital gains. When you receive these types of returns from your investments, you will be taxed based on the type of earning you’re receiving. Generally, interest is taxed at the highest rate, so you might consider avoiding investments that pay out interest during your retirement years in order to ensure you’re collecting the maximum amount of income you can. Dividends are also taxed, but there are tax credits that ensure the dividends are not being taxed twice (via the corporation they come from and then personally when you receive them). And capital gains are generally the most tax-efficient investment earning type, as only 50% of the capital gains are taxable at your marginal tax rate. The other 50% is received completely tax-free.

How do annuities fit into your retirement income plan?

Annuities are a type of product you can purchase with a lump sum either from a registered savings account, like a RRIF or LIF, or from a non-registered savings account. They provide a guaranteed stream of income for a period of time that you generally receive monthly. The benefits of an annuity include knowing exactly how much you will receive each month, which works well when budgeting, and, if you receive payments for long enough, your annuity will become worth more than the amount you paid for it. Annuities have some drawbacks, though, including the possibility that you may not receive payments long enough to recoup the amount you initially purchased it for.

There are taxation considerations as well, with annuities. When you purchase an annuity with funds from a registered account, you won’t pay tax on the withdrawal of the lump sum from the account, but you’ll pay income tax on the payments you receive from the annuity. Conversely, you’ll only be responsible for paying tax on a portion of the amount received from an annuity purchased with a lump sum from a non-registered savings or investment account, as you would have paid tax on that initial withdrawal from the account, ensuring you’re not being double taxed.

 

Contact Skyline Wealth Management Inc.

Interested in learning more about our investment opportunities? Our team takes the time to help you make smart decisions that best meet your investment needs.

Skyline Wealth Management strives to provide the best service at every touchpoint.

Please fill out the contact form and we will be in touch with you shortly. Join our mailing list to be notified about future investment opportunities.

All fields are required unless indicated.

Please do not include links, emails, or URLs in your message.