If you have rich parents who are planning on giving you a large inheritance, you can probably skip this post.
Future lottery winners, people who will never have health issues and people who think they will be 65-year-old movie stars, you guys can probably also move along.
For the few of us that are still left, I wanted to run down the basics of retiring in Canada and how the different sources of income fit together. Remember, because we are self-employed artists, we won’t receive an employer pension like some people with government or corporate jobs.
Government pension benefits provide a modest base on which to build your retirement income. To maintain their pre-retirement lifestyle, most Canadians will require the majority of their retirement income to come from other sources. I have broken the income types into four categories, CPP, OAC, Investment Income and other.
The Canadian Pension Plan (CPP) provides a monthly taxable benefit to retired contributors. You can start receiving CPP anytime after age 60. Your monthly payment is smaller if you begin receiving it before age 65 and larger if you take it between 65 and 70. The average benefit paid out in 2011 for someone age 65 was $512.33.
Old Age Security Pension (OAS) is a monthly taxable benefit available to most Canadians 65 years of age and older. You must be a Canadian citizen (or legal resident) and have lived in Canada for 10 years. The average benefit paid out in 2011 was $498.22.
This includes savings accounts, stocks and bonds, RRSPs and Tax-Free Savings Accounts. Realistically this is where I would plan on the majority of your retirement income coming from. I personally wouldn’t bank on the Canadian government increasing pension payments and lowering income tax in the future. I also wouldn’t count on the cost of living being cheaper in the year 2030 or 2040.
This is the most creative and the least reliable category. Maybe you will still be receiving residual checks from your wonderful film and TV work of the past? Maybe you won’t. Or maybe you will have a home-based business of some type, or still be booking the odd day on set as a performer. Who knows? Maybe you have a home with a little rental suite in the basement. The income from this category will be as unpredictable as your future medical costs.
Here is a chart I made to show you how these different income sources would fit together to provide a modest $30,000 pre-tax income in retirement. You can see by the chart the vital importance that investment income plays in retirement.
Note that you would need an investment of $240,000 paying out a 5% rate of return in order to earn the $1,000/month figure I used in the chart.
Also note that some of you may be planning to work part-time during retirement and feel you will earn more than the $500 amount I have listed as “other income”. Be aware that your other benefits could be clawed-back if you receive enough earned and investment income. This is a very simple, low-ball example of an extremely complex and important area of financial planning.
Always seek professional advice when planning your own investments and retirement.