- October 19, 2021
- Posted by: timothymaceachern
- Category: Retirement Planning
Are you planning for retirement? Did you contribute towards retirement from day one of your first job? For a majority of Canadians, the answer to question 2 is “no”. Still, that is nothing to be worried about. There are many different ways you can successfully prepare to meet retirement goals.
Our ancestors might have been entitled to a pension from their employer. In the modern world today, employers are no longer responsible to handle employees’ retirement funds because retirement plans are now self-driven.
Understanding Retirement Goals In Canada
A majority of Canadians retire at the age of 65. While some choose to retire earlier most Canadians plan their lives around the basis of working until the age of 65. Physical disabilities and health conditions are some of the reasons why someone would choose to retire at an earlier age.
Canadians are entitled to receive government benefits at the age of 65. Some of these benefits include lower tax rates and government pensions.
What Is Old Age Security and How Does It Work?
Canada’s Old Age Security (OAS) pension has been prepared to help seniors supplement their income. The OAS pension is a part of the country’s public retirement income system. One of the major benefits for seniors is that they do not have to contribute to the program because it is funded by tax revenues. The OAS does have strict eligibility criteria for the people who can receive benefits from the OAS.
What Are The Eligibility Requirements For OAS?
The first eligibility requirement is that the individual should be at least 65 years of age. The requirement for individuals living in Canada is that they must be legal residents or Canadian citizens living within Canada for at least 10 years from their 18th birthday. Individuals living outside of Canada must have resided within Canada as legal residents or Canadian citizens for at least 20 years from their 18th birthday. These are the basic eligibility criteria for the OAS.
Applicants can get a higher OAS pension if they have lived longer in Canada. The payment rates are revised in January, April, July, and October. The government can decide to increase payments if the cost of living increases. The payments will never decrease.
What Is The Canadian Pension Plan?
The Canadian Pension Plan (CPP) is a social insurance benefits program that is formulated to reinforce income during retirement. The CPP can restore about 25% to 30% of a person’s earnings from employment. The income received from the CPP is taxable and is only available to Canadians over the age of 60. Canadians living in Quebec are eligible to receive similar benefits as the CPP with the Quebec Pension Plan (QPP).
Understanding The Working Of The Canadian Pension Plan
Canadians that want to receive an income during retirement must contribute to the Canadian Pension Plan during their employment. Let’s look at the two different parts of the CPP.
Contributing To The CPP
Canadians above the age of 18, must regularly contribute a portion of their salary towards the CPP if they earn more than $3,500 annually. Similarly, employers must also contribute to their employee’s CPP. The employer and the employee must both contribute towards the CPP. This chart provides details of how much each entity must contribute towards the CPP.
Employed Canadians must contribute to the CPP until they reach the age of 65. Their employers will contribute a similar amount. You can choose to contribute to the CPP or not if you are still employed between the ages of 65 and 70.
Receiving CPP Benefits
Canadians can start receiving their CPP benefits in the first month after they turn 65. You can also start receiving CPP benefits after the age of 60 but there will be a 0.6% penalty for each month before the age of 65. This way you will receive total benefits that have been permanently reduced by 36%. The total amount of CPP benefits you can receive depends on the age you started making contributions to the CPP and the total contributions made to the plan.
You can choose to receive your benefits from the age of 70 only to get a bonus of 0.7% each month after you turn 65. This way you will receive total benefits with a permanent increase of 42%.
What Is A Registered Retirement Savings Plan?
A Registered Retirement Savings Plan (RRSP) is one of the most popular types of retirement savings accounts. One of the reasons for its popularity is that it is exempt from taxes until withdrawal. Another advantage of the RRSP is that you can deduct your annual taxable income by making contributions to the savings plan. You can contribute towards your RRSP until the age of 71.
You can open up an RRSP account with many different kinds of financial institutions. Some examples of these financial institutions are bricks-and-mortar banks, credit unions, insurance companies, online banks, or a trust. You must start making contributions to the registered retirement savings plan with the help of direct deposits to the account. The total monthly or annual deposits you can make towards the RRSP are based on your income.
Minors can also open up a registered retirement savings plan with the consent of their parent or legal guardian. You can make total contributions of up to 18% of your previous year’s income or a prescribed maximum amount set by the Canadian Revenue Agency (CRA). The prescribed maximum contribution amount is updated annually by the CRA. At the age of 71, you must close your RRSP.
You have three options to shut down your RRSP at the age of 71. The first option is to use the RRSP to purchase an annuity. Another option is to withdraw all of the money from the RRSP by paying taxes on the full amount. The third option is to convert the registered retirement savings plan into a registered retirement income fund (RRIF).
Finding The Best Retirement Solutions
Retirement is a unique experience for everyone. There are many financial advisors like Worthy Financial that provide clients with personalized financial advice. The consultation provided by these financial advisors takes into consideration unique factors such as health expenses, living conditions, or issues with the applicant’s family and relatives.
There is no harm in getting a second opinion to let you know that you have made the right choices for retirement. Consult with a financial advisor today to learn more on how you can better prepare for retirement!