How do I calculate my retirement income?

There are traditional and non-traditional retirement income sources to provide income during your retirement.

If you can’t pay for your retirement expenses using traditional methods, consider some of the non-traditional methods to produce retirement income.

Traditional Income Sources

1. Canada Pension Plan
2. Old Age Security
3. Employer Pension
4. Selling Assets
   • Investment Accounts (RRSP, TFSA, Non-Registered)

Non-Traditional Income Sources

1. Part-Time Work
2. Renting out your basement
3. Moving in with your adult children
4. Accessing your home equity

Traditional Retirement Income Sources

In a traditional retirement where you or your spouse are not working at all, there are three sources you can receive income from

Government Pensions

Canada Pension Plan (CPP)

Canada Pension Plan is a defined benefit pension plan provided by the Canadian government. The average monthly payments are ~ $750 each month, but the amount you receive depends on your specific situation.

You can learn everything you need to know about CPP in this article

Old Age Security (OAS)

Old Age Security is another defined benefit pension plan provided by the Canadian Government. The average monthly payments are ~ $700 each month, but the amount you receive depends on your specific situation.

You can learn everything you need to know about OAS in this article

Employment Pensions

Employment pensions are another common component of Canada’s retirement income.

These are pension plans provided through your work and they come in two forms

1. Defined Benefit Pension Plans
2. Defined Contribution Pension Plans

For employees defined benefit pension plans are usually preferred to defined contribution pension plans.

But from an employer’s perspective, they prefer defined contribution pension plans.

Defined Benefit Pension Plans

Defined benefit pension plans are common for public employees. They take into account three main items that determine how much you’re retirement pension will be

• Number of years with the employer
• Your Salary
• Your Age at Retirement

Defined benefit pension plans are usually better because the “benefit” (your pension income) is defined by a strict set of rules and it is the responsibility of the employer to ensure it can meet the funding requirements of your pension.

Defined Contribution Pension Plans

Defined contribution pension plans are more common today, especially for private employers.

The amount of pension you’ll receive from these plans is determined by

• How much you contribute to the plan
• Your Employer’s matching contributions (if any)
• The investment returns within the pension plan

With a defined contribution pension plan, the employer has no responsibility to meet a “defined benefit” (a specific pension income) for their employer.

While the employer will provide access to the plan and sometimes provide matching contributions it is up to the employee to make the investment decisions.

The result of the investment decisions and contributions to the plan will determine how much the employee’s pension income will be at retirement.

RRSPs, TFSAs, and Other Investment Assets

The final area where retirees can produce retirement income is the investment assets they’ve built up over the years.

By the time people hit retirement they likely have the following assets built up

• RRSP
• TFSA
• Non-registered or “Cash” account

There are two ways these assets can be used for income

1. The interest earned on the investments
2. Withdrawing the principal value from these investments

If you have $200,000 in investment assets earning 5%, there’s $10,000 of income being produced on those assets that you can use each year.

In addition, you can also withdraw part of the principal value.

Using the same example if you take $20,000 per year from your investments, $10,000 will be from interest and $10,000 will be from principal.

Non-Traditional Retirement Income Sources

Part-Time Work

While some envision are hard-cut off from work during retirement some people don’t want to be fully removed from the workforce.

Before fully retiring it may be worth exploring partial retirement by reducing your hours or working as a consultant for your old employer.

This provides the flexibility associated with retirement, but at the same time can provide a sense of purpose and extra spending money.

Renting out Your Basement

Generating additional income from your primary residence is also an excellent option to bolster your retirement income.

At retirement, it’s common for all the adult children to be moved out of the family home which opens up the opportunity to rent a portion of your home.

While some may view this as a non-starter, generating an additional $1,000 – $2,000 per month of income from an asset you already own can be a great way to supplement your other types of retirement income.

Moving In with your adult children

Again, this isn’t for everyone but either moving in with your adult children or having them move in with you helps spread the financial load across more people, making the costs more manageable.

Similar to renting, this may help you save $500, $1,000, or $2,000 per month, and in addition to that you’re helping your children save that amount too.

Accessing your home equity

There are 3 ways you can access your home equity for retirement income

1. Sell Your Home and Rent, invest the proceeds of your home sale
2. Sell your home and downsize, invest the proceeds of your home sale
3. Don’t sell your home and take out a reverse mortgage

One of the things we discuss often with clients is whether your home is a retirement asset. We’ve written an article dedicated to this question.

But the simple answer is if you need it to use your home to fund your retirement it’s a retirement asset. That doesn’t mean you need to sell your house tomorrow, but it does mean at some point in the future you’ll need to explore the option of selling your home.

In fact, you don’t always need to sell your home. There are other ways to access the equity in your home, such as reverse mortgages.