Several financial actions should be taken to arrange your retirement funds when you reach the ripe golden age of 71 or 65.
In Canada, the typical age of retirement is 65, at which time complete pension benefits such as the CPP and OAS begin payable.
One of the foundations of Canada’s retirement income system, your RRSP account, is affected by some significant changes after age 71. An in-depth discussion of these modifications follows.
How Much Do You Need to Retire in Canada?
Let’s quickly look at this vital question that people frequently ask me before we get into the particular financial actions you should think about doing at 65 and 71.
Everybody cannot use the same number.
A majority of Canadians surveyed in 2018 reported an average of $765,000; it might however be $1 million or several million dollars.
Starting with the 4% withdrawal rate and working your way down to your pre-retirement income at a multiple of 10, there are several widely used methods to determine retirement income needs.
Choose a formula, then subtract your anticipated government benefits to find out how much you need to save.
Financial Steps For Age 65
Here are the income streams you really should look at if you are 65 years old and planning to retire:
Old Age Security Pension (OAS)
Among the foundations of Canada’s retirement income system is OAS. Seniors become qualified to receive this universal pension at the age of 65.
Only people who have lived in Canada for at least 40 years after turning 18 can expect to get the entire OAS benefit, which was intended to replace around 15% of your pre-retirement earnings.
If you are 65–74 years old, the maximum monthly OAS benefit in 2024 will be $713.34, or $8,560.08 annually. Maximum monthly OAS compensation for seniors 75 years of age and above is $784.67, or $9,416.04 annually.
Like the CPP, you can put off taking OAS in order to get a 0.6% monthly increase and, at age 70, a 36% gain (0.60% x 60 months). OAS benefits have to start by the time one is 70.
Some reasons why you may choose to defer OAS payouts for later include:
– If you are still working and do not want to move into a higher tax bracket.
– If your other incomes put you in the OAS claw-back income range between ages 65-70
As of 2024, your OAS starts to get clawed back if your income exceeds $81,761 and reduces to $0 once you surpass the $134,626 / $137,331 income threshold.
Find out on ten specific tactics to reduce OAS clawback.
As you can only get GIS if you are receiving OAS, you should not postpone OAS if you are qualified to receive it.
Canada Pension Plan (CPP)
The second-pillar of retirement income in Canada is CPP. Once they turn 65 and have made contributions to the program during their working years, seniors are eligible for the full CPP payment.
By 2024, the highest monthly CPP will be $1,364.60. Not many will get the full CPP payment.
CPP can be taken early, at age 60 (less 0.60% each month before age 65), or later, at age 70 (plus 0.70% per month after age 65).
Taking CPP Early: The following are a few reasons you could wish to accept CPP benefits early:
- Shorter life expectancy
- Limited alternative sources of income
- If you have stopped working
Taking CPP Later: The following situations might involve taking CPP later:
- You are still working
- Have average or better than average life expectancy
- Have other sources of cash flow, etc.
These are only a few of the many considerations for CPP selection. Having a financial expert examine your particular numbers closely could be beneficial.
RRSP Conversion Options
Soon, when you age 71, your Registered Retirement Savings Plan (RRSP) will undergo certain mandatory modifications. In the meanwhile, you should begin planning for how you wish to use your RRSP to provide retirement income.
Since RRSP withdrawals are taxable, you should begin considering the tax implications while you are drawing down.
If you have available contribution room from prior years, think about using it up—either by donating to your personal RRSP or a spousal RRSP—as you can still make contributions to your RRSP until you are 71 years old.
Funding your TFSA first makes sense (most of the time) if you also have a TFSA contribution room. Click this link for further information on selecting a TFSA over an RRSP.
Workplace Pension Benefits
Among these are plans with defined contributions and benefits.
While defined contribution plans provide you income depending on what the plan assets are when you retire—no guarantees—defined benefit plans will pay you a pre-determined monthly income for life.
These monies, which you may currently have in a Locked-in Retirement Account (LIRA) or Locked-in RRSP (LRSP), may not be accessible to you until you reach the minimum pension age for your province, which is typically 55 years old if you have left a job where you had access to a pension plan.
You can convert your LIRA to several accounts, including a LIF and Life Annuity, to produce retirement income starting at age 55 (or 50 years in Alberta).
Further Points to Think About:
Pension Income Tax Credit: The income from an RRIF, LIF, or life annuity can be claimed for the Pension Income Tax Credit starting at age 65.
The effect of this is that, up to $2,000 of qualifying income, you could not have to pay taxes, saving up to $300 annually.
Splitting of Pension Income: Couples can divide up to 50% of pension income (such as RRIF and LIF) in a way that reduces their total tax liability.
Financial Steps For Age 71
You cannot defer OAS and CPP benefits past age 70, therefore by 71 you will already be receiving them.
Noteworthy financial information includes:
Compulsory RRSP Conversion
You have to end your RRSP accounts at age 71 by cashing out the cash, turning it into an annuity RRIF, or a combination of these.
Cash – When you withdraw your RRSP in cash, taxes are due immediately, and withholding taxes up to 31% are held back by the bank.
Registered Retirement Income Fund (RRIF) – An RRIF pays you a regular income from your RRSP assets, and you can invest in pretty much the same investments you had in your RRSP.
A minimum withdrawal amount is set based on your age, account size, and percentage determined by the government.
You can withdraw more than the minimum if you want. You can also delay RRIF withdrawals until the year after you open your RRIF account.
Annuity: An annuity is an insurance product that pays you regular income either for a fixed term or for life.
At age 71, you can make a final RRSP contribution if you have contribution room left or have earned some income during the year. If your spouse is younger than 71, you can continue to contribute to a spousal RRSP.
Similar to the RRSP, a LIRA must also be converted at age 71 to a LIF or Life Annuity.
Wrapping Up
Choosing what is best for you in retirement planning means considering the big picture.
Consider how to reduce taxes, make sure you never run out of money, plan for your estate, and how government advantages enhance your own savings and investments.
Many times, creating your retirement financial plan may benefit from discussing many situations with your financial advisor or retirement planner.
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