Whether you’re nearing retirement or taking the initiative to plan ahead, it’s important to consider future cash flow to ensure you have a reliable income stream.
A common question around retirement income is determining how much you will require. The answer is as individual as you are, since everyone’s circumstances, preferences and needs are unique. As you consider the questions below, you’ll get a better idea of your approximate income needs in retirement.
How do you know what’s right for you? A good starting point is to assess your current lifestyle and compare it to your planned lifestyle when retired.
- What is your housing/living arrangement now and what will it likely be in retirement?
- Are there personal expenses (e.g., child care) and work-related expenses (e.g., commuting) now that won’t apply later? Are there other expenses (e.g., related to health care or home care) that may commence in retirement?
- Will you likely be travelling more frequently in retirement, or less often than now?
- What current hobbies do you envision continuing with, and which may you give up? Do you anticipate any new hobbies?
There are other questions to consider, but answering these will give you a sense of your basic income needs. Next, assign an approximate dollar value to your answers so you can understand how your income requirements may change when you retire. Remember to account for inflation (3% annually is a decent estimate) as the cost of goods and services generally rises over time.
Also bear in mind that people are living longer and will need cash flow to last for life, as one of the biggest fears is outliving your money. Statistics Canada reports that average life expectancy for Canadian women is 84.1 years, and 79.9 years for men.1
Sources of income in retirement
It’s helpful to make regular contributions to a Registered Retirement Savings Plan (RRSP) – and contributing as much of the annual limit as you can – but RRSPs alone aren’t enough to sustain you through retirement. Document other potential sources of retirement income:
- Workplace pension plan
- Canada (Quebec) Pension Plan
- Old Age Security
- Guaranteed Income Supplement
- Personal savings (e.g., bank accounts, GICs)
- Tax-Free Savings Account
- Non-registered investments
- Income from rental properties
- Employment income (if you continue working in some capacity)
- Potential inheritance
This is not an exhaustive list but covers common sources of income in retirement. On the other hand, consider money you might owe, as it will reduce your cash flow. Some people carry a mortgage or other large debt (e.g., credit card, car loan) into retirement, but if at all possible, eliminate large debt before you retire. You don’t want these payment obligations lingering as you try to enjoy your post-working years, and you certainly don’t want them to disrupt your income stream.
Spousal RRSPs may increase your income stream
Having a spousal RRSP may unlock additional retirement income. Here’s how it works. If one spouse/common-law partner earns much more than the other, then that person may contribute to an RRSP of the lower income earner. Without a spousal RRSP, the higher income earner would save much more money and, when it came time to start withdrawing this money, the income would be taxed at a higher rate. Splitting income using a spousal RRSP helps balance the savings between the two partners and will allow for withdrawals at a lower overall tax rate and more combined income for the couple. There are many rules specific to spousal RRSPs. If the concept interests you, let’s talk about it.
Contact our office if you’d like to discuss how your financial plan is built to meet your income needs in retirement.
1 Source: Statistics Canada, Jan. 2020