Retirement Income Streams… The Expected – Part 1

Retirement Income Streams… The Expected, the Possible, and the Wild and Crazy

This article will appear in three parts over the next three days. There is lots to cover so I thought it best to break it all down into consumable bits. This should make it a lot easier for you to read and digest. First up, “The Expected” sources of income in retirement.

The idea for this particular article came while I was in the midst of striking our family budget for the fiscal year 2021. If you have read me previously, you know that I use Quicken to budget and track all of our expenses. Works for us.

As I was doing it, I was struck by the number of individual sources of income that we now track annually. When I added them all up I noticed that there were nine in total. In fact, I am budgeting for 10 this year, but the tenth will only last for this year as I am assuming that we will run out of “stuff” to sell on Facebook Marketplace at some point. 🙂

The conclusion I came to is that income generation in retirement is very different from when you are working. While working, a couple may really only have two sources of income, each of their individual salaries. Now this may not be true for many people, because they will be enjoying income from other sources, but it would be the basic number for any couple where both are employed. In this article the discussion tends to be focussed on couples, but those of you who will be or are single in retirement understand that this is all applicable to you as well.

In retirement there are several more we can count on… or develop.

What I will not be doing in this article is trying to provide an in-depth examination of all these income streams. Most of the regular or expected ones you should be fairly familiar with at this point. If you want in-depth information about some of the major ones I would suggest you do your own online research. There are much better websites to consult than mine for that information. What I do hope to present here though, is some lesser-known facts about a few of these that you are familiar with.

“The Expected” – The Usual Suspects

Let’s begin by looking at the usual suspects. In no particular order.

Government Pensions – Most Canadians will receive the Canada Pension Plan (CPP) and Old Age Security (OAS). And, some very low-income Canadians will receive the Guaranteed Income Supplement (GIS), basically an expanded OAS safety net.

A word or two on OAS. OAS is means-tested. Which basically says, if you’ve got lots of money, and have a healthy retirement income, “you ain’t getting much, if anything at all”. For taxation year 2021, the point at which “clawback” begins is when you make more than $79,845. Pretty generous when you think about it. After that point, you lose increasing amounts, beginning with 15%, until you get to $129,075 in annual income, at which point you will lose 100% of your OAS. For taxation year 2021, clawback will take place during the July 2022 to June 2023 period.

Given that there has been a lot written about the possible establishment of a Basic Income in Canada… And because the Love-goddess is involved locally and nationally with various Basic Income groups, and will be severely annoyed if I don’t mention this … I feel I should point out that, in fact, OAS is a form of Basic Income for seniors. We did not contribute into the fund like we do CPP, and it comes based upon the premise that many seniors do not have sufficient financial resources during their senior years. I am not sure that is universally true for we Boomers, but It is a freebie. Enjoy it.

CPP and OAS continue for your lifetime in retirement and all are fully indexed. For a couple, they provide four streams of income. Good start.

Employer Pensions – There are two types of employer-sponsored pension plans that are typically offered. The first is the defined-benefit plan and the second is the defined-contribution pension plan. From the Government of Canada website:

“In a defined benefit pension plan, your employer promises to pay you a regular income after you retire.

Usually both you and your employer contribute to the plan. Your contributions are pooled into a fund. Your employer or a pension plan administrator invests and manages the fund. You don’t have to make any investment choices.

The income you get when you retire is usually calculated based on your salary and the number of years you contributed to the plan. It’s a set amount that does not depend on how well the investments perform.

The amount you get may be increased on a regular basis to help you cover your living expenses when the overall cost of living increases. This is often called an indexed pension.“

Second up is the defined contribution pension plan.

“In a defined contribution pension plan, you know how much you will pay into the plan but not how much you will get when you retire.

Usually, you and your employer pay a defined amount into your pension plan each year.

The money in your defined contribution pension is invested in one or more products on your behalf. You may be able to choose how your money is invested. The amount you get when you retire will depend on how your plan is managed and how these investments perform.

You will usually have to choose where to put the money in your defined contribution pension plan when you retire.
Your options will often be to put your money in:

* an annuity
* a locked-in registered retirement savings plan or locked-in registered retirement income fund
* a combination of these two options

You may be able to take the money from your pension plan in cash if it is below a specific amount. Depending on your age and the terms of your pension plan, you may also be able to reinvest some of this money into another financial plan, such as a Registered Retirement Savings Plan (RRSP) or Registered Retirement Income Fund (RRIF) that is not locked-in.”

Employer defined-benefit pension plans are a bit of a Holy Grail in retirement. They are gold plated life-long annuities. Sadly, the number of companies that offer defined-benefit pension plans to their employees are constantly in decline. Primarily, it is public sector workers who get to enjoy them these days. Defined contribution plants are great to have as well if you’re not covered by a D-B plan, but, defined-contribution pensions can potentially run out of money, or over time, steadily reduce the amount available for drawdown.

The Love-goddess and I are lucky enough to have defined-benefit pensions. I got a big kick out of my one of my buddies a couple of years ago. He was generally displaying some unhappiness about the fact that we had these great pensions. As I explained to him, and as everyone should know. Defined benefit pension plans are not complete freebies.

First of all, everyone who receives them has paid into them along with their employer, so they are forced savings. Secondly, if you are paying into a registered pension plan the amount you can contribute to an RRSP is often greatly reduced. That negatively impacts a means for retirement savings that is available to all others, and indirectly interferes with the building of personal wealth that would form part of your estate after you die. In some instances, they are integrated with CPP so that when you turn 65 the amount of pension you receive, if you had been receiving it up to that point, is reduced when you start to collect CPP.

Registered Retirement Plans – the most used registered retirement plan, of course, is the RRSP. Most of us have them, and they continue to be a great way to build tax-free savings towards retirement. At age 71, we have to convert them into an RIF, and then begin to draw down on the funds they hold the following year. There is a minimum amount that you must draw out each year, but there is no maximum. In theory, you could draw all of your RIF money out in your first year, but you would take a very heavy-duty tax hit – assuming your RRSP holds a substantial amount of savings.

The second type of plan is the LIRA. This one does not have the flexibility of an RRSP in that under “normal’ circumstance you cannot take your money out at any time you want. Most folks would not have one of these.

The LIRA is pension money from an employer with whom you have since parted ways and have taken your pension money with you. Because it is pension money, you have limited flexibility with what you can do with it. Under normal circumstance, all you can do when you start to draw on the funds in retirement is take out a narrow range of minimum to maximum yearly amount until the fund is used up. One of the nice aspects of the LIRA is that when you convert it to an LIF after you turn 71 and start to draw on it, you can typically transfer half of the funds from it into your RRSP. This of course gives you much better control over the money.

The One I Really Like – The TFSA

And now we come to my favourite registered financial savings product, the TFSA. It isn’t always thought of as being a potential income stream, but in retirement it can be an outstanding one.

If you have read me previously, you will have a clear understanding of how much I love the TFSA concept, and our related investment approach… income or dividend investing. All the funds in our two tax-free savings accounts are invested in dividend paying Canadian blue-chip stocks. We committed to this approach in 2014, and in 2021 they will turn out $11,000 in tax free dividend income… Which we will withdraw at the end of every month. Nothing to sneeze at.

There are other approaches you can take to produce income in your TFSA, like purchasing bonds, if you are concerned about tying up all of your money in equities. But it is a really easy way to generate new income if you are able to contribute to your TFSA on a regular basis.

You can read what I wrote previously about tax-free savings accounts, and how they work for us, here. Recontributing what you have drawn out every year is the key to building this income stream into a powerhouse.