Retirement Planning 101- How To Plan For Retirement in Canada

Retirement Planning 101- How To Plan For Retirement In Canada

This post may contain affiliate links. I may receive a small compensation when you click on such links at no cost to you. Read my disclaimer for more info.

Last Updated on January 31, 2021 by Yetty Akindele

Retirement planning in Canada is a long-term process. To prepare for the ideal retirement, a long laundry list of tasks needs to be completed. Then, each aspect of retirement planning requires its own research.

How much do I need to save for retirement? What is the ideal retirement portfolio? Can I retire early if I plan ahead?

The answer to these questions and dozens more deserve a lot of time and effort.

So, in this quick guide, we will go through the Canadian retirement process. We will go over the aspects of preparing for an ideal retirement.

Along the way, we will also give you some pro tips to make retirement planning easier.

The best retirement plans take years to build up and implement. However, every journey starts with a financially sound foundation.

So, let’s start with the basics and then get into the steps you can take to prepare for your dream retirement.

Canada’s Retirement Planning Options 

There are several retirements and other long-term savings accounts you can take advantage of. While it may seem easier to choose one of the several available account types, It is more advisable you opt for a mix of several accounts.

Generally, these retirement planning options can be divided into 3 categories;

  1. Registered savings plans
  2. Government/employee pension plans
  3. Personal savings

Registered Savings Plans

1. Registered Retirement Savings Plans (RRSPs)

Of all the options available to you, this is the one you’re most likely to have already heard of.

The RRSP is a retirement savings account designed by the Canadian government.

The money you place in your RRSP continues to grow tax-free until you start making withdrawals during retirement.

This tax deferral option makes it a simple, popular plan for Canadians.

Contributions to your RRSP are capped based on your income for the previous tax year. However, you can also contribute unused contributions for past tax years.

In 2020, the maximum RRSP contribution was $27,230. The 2021 limit was raised to $27,830.

RRSP Tax Benefits

One of the most attractive features of the RRSP is the tax benefits that it provides. Contributions to your RRSP are deductible from your taxable income.

What this means is that you receive the double benefit of paying lower taxes now, while growing your savings tax-free until you beginning withdrawing ideally at retirement. 

Investment Types For RRSPs

An RRSP can hold:

  • Cash (savings account)
  • Stocks
  • GICs
  • Mutual funds
  • Exchange-traded funds (ETFs)
  • Bonds
  • Gold & other precious metals

Each of these options offers different benefits and comes with its own level of risk.

For example, simply saving in cash is a safe option, but you want to make sure you are getting an appreciable interest rate to compensate for the lack of dividends.

Your RRSP isn’t limited to just one investment type. It’s advisable to learn about all the financial instruments you can contribute to an RRSP and choose a diversified portfolio that balances safety and growth.

Savings (Cash) Accounts

Savings accounts are a simple way to contribute to your RRSP. They don’t provide large growth opportunities, but they are not subject to the same risks as your other options. 

Cash savings can suffer from currency devaluation and inflation. Apart from your bank’s interest rate, they won’t appreciate over time.

However, these risks aren’t as pressing as the ones your alternatives would be. The good news is that you can easily fight the effects of inflation through a high-interest retirement savings account.

To save every dime, it is advisable you open a no monthly fees, no minimum balance high-interest savings accounts. This will ensure you get higher annualized interest rates than typical bank accounts.

They are thus a very straightforward option for saving your cash. With higher interest rates, your money can better keep up with inflation while you wait to withdraw it when you retire.

A great example of high-interest retirement savings is the EQ Bank RSP account. The account has zero fees and no minimum balance requirement.

At the time of writing this article, EQ Bank RSP account offers a 2.30% interest rate on every tax-deferred dollar.

Robo-Advisors

Robo-advisors are an alternative portfolio management option. As the name suggests, your portfolio of stocks or ETFs is managed automatically. For this service, Robo-advisors typically take a small percentage-based management fee.

The main benefit of robo-advisors is that they provide a lower bar of entry for beginner/amateur investors. Typically, the investor simply inputs several factors such as risk tolerance, investment types, and how much money to invest. The robo-advisor then does the rest of the job.

Robo-advisors are more complex than we can give them credit for here. Some of them can also help you with extra tasks like tax-loss harvesting. For now, you should consider robo-advisors if you want:

  • A more hands-off approach to investing
  • Automated tax compliance
  • Somewhat “passive” investments you don’t need to manage every day

WealthSimple Invest is a popular robo-advisor account provider for retirement accounts. WealthSimple offers robo-advisors for:

  • RRSP
  • TFSA
  • PRIF
  • LIF
  • LIRA

With WealthSimple Invest, you can open an RRSP or other Canadian retirement account for a 0.40%-0.50% management fee.

Unlike a lot of their competition, WealthSimple does not charge commissions, which is an important fact for a non-professional investor. Additionally, there is no minimum account deposit to get started on Wealthsimple.

Investments with WealthSimple should be researched and rebalanced regularly. So, if you want more control over your portfolio but still want a relatively hands-off approach, a no-commission platform like WealthSimple offers a great start.

Self-Directed Investing 

Self-directed retirement investing accounts allow you to determine what asset mix is placed in your portfolio. You call the shots, but that means you take on more personal responsibility as well.

You can invest in stocks, ETFs, mutual funds, and other financial instruments directly online.

Self-directed investing could be more of a hassle than just opening a standard RRSP. However, it can be comforting to know that you have more control over your financial future.

If you take the time to understand your investments carefully and take calculated risks, it can be a financially and emotionally rewarding experience.

What You Need To Remember

Self-directed investing must be done through an intermediary service. That means you have to open a new self-directed account through your bank or another financial platform. Your choice in self-directed investing accounts is important, as it determines:

  • Which instruments you may invest in
  • Management fees
  • Commissions (if any)
  • Transaction fees
  • Many other potential fees

Normally, self-directed investing comes alongside fees for annual service, account registration, stop payments, and whatever else the account provider lists.

Apart from fees and commissions, if you don’t have a lot of time to handle your portfolio, you will either need to make the time or enlist a financial advisor.

If you’re opening a self-directed investment account yourself, you have several ways to minimize your expenses while maximizing savings. Self-directed RRSPs still offer tax advantages. 

Apart from the tax advantages self-directed RRSPs offer, they are about the same as regular investing accounts.

That means you are responsible for meeting the CRA’s legal requirements. If you don’t follow CRA requirements, you will lose your account’s tax advantages.

Top Self-Directed Investing Platforms In Canada

A more rounded online brokerage platform suitable for self-directed investing is Questrade. It offers a diverse number of stocks, ETFs and bonds over Wealthsimple.

Questrade is also known for low trading commissions and low fees across the board and is one of the best when it comes to online brokerage platforms in Canada. Additionally, you get $50 in free trades when you open a Questrade account.

We’ve already gone over what WealthSimple offers as a Robo-advisor account provider. However, the platform also offers self-directed investing through Wealthsimple Trade.

You do not need to create multiple logins to use all of Wealthsimples’ services. Its one login details for all services.

While your robo-advisor makes the day-to-day trading decisions for you, with Wealthsimple Trade, its a hands-on approach.

2. TFSA

A Tax-Free Savings Account (TFSA) is an open-ended savings account. You can use a TFSA to save for any major financial goal, including retirement.

 The main benefit of a TFSA is that all earnings made through investments are tax-free for life. That means you pay zero taxes for life on:

  • Interest income
  • Dividend income
  • Capital gains

An important area where TFSAs differ from RRSPs is in their flexibility. Withdrawals can be made from a TFSA and re-contribute the following year. However, contributions to TFSAs lack the tax benefits that RRSPs provide.

Investment Types For TFSAs

TFSAs allow you to invest in:

  • Stocks
  • GICs
  • Mutual funds
  • ETFs

TFSA Contribution Limits

TFSAs have simply-defined contribution limits. For both 2020 and 2021, the contribution limit is $6,000.

Who Qualifies To Open A TFSA?

Qualifying for a TFSA is no more difficult than qualifying for an RRSP. You just need:

  • To be at least 18 years old
  • Be a Canadian citizen or resident with a Social Insurance Number…that’s it!

You don’t need to do anything special to open a TFSA except meet your account provider’s needs.

TFSA Options

1. High-Interest TFSA  

EQ Bank

High-interest TFSA accounts allow you to save without having to pay taxes on your interest earned. EQ Bank offers the same great 2.30% interest rate for TFSAs. You also don’t have to pay any fees.

2. Online Brokerages

WealthSimple

WealthSimple also has options to hold your TFSA using either Wealthsimple Invest or Wealthsimple Trade.

Questrade

Questrade’s self-directed TFSA allows you to control your investments and pay zero taxes. You can also get your first $10,000 managed for free when you opt for Questwealth portfolios– Questrades Robo-advisor.

Government Pension Plans

The Government of Canada offers pension/social insurance plans for some individuals.

CPP

The Canada Pension Plan (CPP) is funded by contributions made by employees, employers, and self-employed Canadians. It covers almost all employed (including self-employed) people in Canada, except for Quebec.

Your enrollment in the CPP is a privilege of citizenship, but you must apply for it to receive payments.

This retirement plan is a taxable monthly benefit that will replace part of your income when you retire. If you qualify, you will receive the pension for the rest of your life. 

The CPP forms one of the pillars of Canada’s social security system alongside the Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). It’s a required account that is jointly governed by the federal government and the provinces.

On top of being a ‘pension plan’, the CPP also provides income replacement to the plan’s contributors and their families if someone:

  • Retires
  • Becomes disabled
  • Dies

Qualification For The CPP

Qualifying for the CPP is easy. You just need to be at least 60 years old and must have made at least one valid contribution to the plan.

You must register for the plan through Service Canada. Online applications may take 2 weeks to process under normal circumstances. Applications mailed to a Service Canada Centre may take 4 months to process.

How Much Will I Receive In CPP Payments?

Your benefits will be based on several factors. 

First, it takes into account your average earnings throughout your working life. Then, your contributions to the CPP will then add to your payments in retirement.

Additionally, the age you start contributing to your CPP has a large effect on your retirement payments.

You will start receiving your first payments between 60 and 70 years of age, with the standard being 65. Of course, if you wait until you’re 70 to start receiving your pension, you will have maximized your payments.

OAS

The Old-Age Security (OAS) Pension is another pillar of Canada’s social security system. It provides monthly payments to retirees. 

Unlike the CPP, the amount you receive is based on how many years you’ve spent in Canada after your 18th birthday. Your payments should cover about 15% of your salary prior to retirement.

Qualifications For OAS

To be eligible for OAS, you must;

  • Be a Canadian citizen or permanent resident
  • Be at least 65 years old 
  • Have resided in Canada for at least 10 years as an adult

GIS

The Guaranteed Income Supplement (GIS) is a component of the OAS. It’s available to seniors with low incomes and is not taxable.

You must already be eligible for OAS to receive GIS benefits. Additionally, your annual income or that of you and your spouse/common-law partner must fall below the maximum annual income.

GIS payments may supplement your income by up to $917.29 per month.

Employer-Sponsored Pension Plans

Employers can sponsor pension plans for their employees.

An employer-sponsored pension plan is registered through your employer. Under the plans, your employer will regularly contribute. Sometimes, you may contribute to an employer-sponsored plan as well.

However, in either case, the contribution burden normally falls towards the employer.

There are two employer-sponsored plans available:

  • Defined Contribution Plans
  • Defined Benefit Plans

The main difference between the two is that with a defined contribution plan, you know how much you’ll pay into it, but not how much you’ll receive when you retire.

You and your employer agree on how much is paid into the plan each year by both you and your employer. Your savings in these accounts depend on how much you invest and your investments’ performance.

With a defined benefit plan, your employer will pay you a fixed, regular income after you retire. Normally, you and your employer both contribute to the plan.

Your income in retirement is determined by how much you make and how long you and your employer contributed to the plan.

Non-registered Investment Options

Retirement investing and savings accounts are tailored to your retirement savings needs. They provide tax advantages that make it easier to save for retirement.

If you exclude registered retirement accounts, you still have endless investment options to prepare for retirement. Just keep in mind that non-registered accounts do not provide the tax advantages of the accounts we’ve gone over.

Some of the various options available to you are listed below;

Real Estate

Investing in real estate is a great way to prepare for retirement. Property investments make a great addition to a retirement portfolio.

With the right investments in real estate, you could own a property to use as a principal residence. Then, you can partially rent out space in your principal residence or an investment property to maintain a steady stream of retirement income.

Crypto

Cryptocurrencies are a young financial instrument. But if the last decade shows anything, it’s that they aren’t going anywhere soon.

You can further diversify your portfolio by tapping into the cryptocurrency market. However, you should remember that this is a highly volatile investment, with a lot of risks.

Here are some of the best crypto trading platforms available in Canada;

  1. Netcoins (No deposit and withdrawal fees, 0.5% trading fees)
  2. Coinsmart (Option to buy crypto with crypto)
  3. Blockfi (Up to 8.6% APY on Blockfi interest account)

What Is The Best Retirement Savings Plan?

Any financial advisor will tell you a diverse portfolio is the best kind of investment/savings plan.

Also keep in mind that in some cases, you will need to tap into your savings before you leave the workplace. So, if you’re trying to decide between an RRSP and a TFSA, you may want to consider using both!

Typically, an RRSP benefits high-income earners more greatly. However, a TFSA allows all income earners to save and invest tax-free while still saving for retirement.

In an ideal world, you would be able to insert a little piece of everything we’ve gone over into your portfolio. Of course, time and financial constraints don’t always allow for that. So which course of action is best?

While you’re young, you can typically afford to engage in riskier investments. A direct-investment TFSA will allow you to better realize your potential. However, if you neglect to contribute to your RRSP, you’re still losing out on a steady stream of income in retirement.

How Much Do I Need To Retire In Canada?

This is a hard question for anyone to answer definitively. The cost of living in Canada has been rising for a long time. No one knows what the economy of tomorrow will look like.

Don’t let uncertainty get to you though. It’s just a simple fact of life!

In general, you can get a rough idea of what you need to retire with. Try using the Government of Canada’s Canadian Retirement Income Calculator to establish a realistic goal.

Taxes

Most retirement portfolios consist primarily of assets that will be taxable upon withdrawal. Unfortunately, you need to consider taxation when you’re calculating how much spending money you will have in retirement.

There are several ways you can reduce the impact of taxes on your retirement. Tax-saving strategies like income splitting allow you to reduce your family taxes, increasing your real income.

Talk to a financial advisor about the tax-saving strategies you can start employing.

Estate Planning 

Estate planning is a crucial part of retirement planning. If you don’t have a Will already, you should consider drafting up one. You’ve worked hard to acquire your assets.

Estate planning through a Will and life insurance simply allows you to make sure they go where you want them to.

Fortunately, there are easy ways to handle your estate planning needs. You can use LegalWills to create a Will online. While you’re at it, you should also consider life insurance. PolicyAdvisor can help you create a life insurance policy from the comfort of your home.

How To Get Started

There’s really no time as good as now to start planning for your finances in retirement. Sign up with one of the platforms we’ve gone over to start saving.

Fortunately, retirement planning has become easier as information and investing has become more accessible. However, it still takes time to make sure your retirement is well-planned.

While this much information may seem intimidating, remember that retirement planning is a step-by-step process. Once you get started, you’re one step closer to a happy retirement.

Leave a Comment

Your email address will not be published. Required fields are marked *

Scroll to Top