Will you have any guaranteed income in retirement?

EPISODE SUMMARY

Today’s episode is the first in a series highlighting the items from my retirement readiness checklist.  Get your copy by downloading the checklist from the link below!

Having guaranteed income from a pension, annuities or government benefits can be critical to your success in retirement.  These items will form your "income floor,” putting a lower bound on your lifetime income.  Understanding your income floor is a good place to start when planning for a confident retirement!

✅ DOWNLOAD FREE RETIREMENT READINESS CHECKLIST


TOPICS IN THIS EPISODE

1. Quick outline of the retirement readiness checklist 
2. Possible sources of guaranteed income in retirement 
3. Pensions, annuities, CPP, OAS 
4. Understanding your income floor 

RESOURCES MENTIONED

Government of Canada - CPP Overview

Government of Canada - OAS Overview

OTHER EPISODES

30. How Much Will You Get From the Canada Pension Plan?

31. That Other Government Pension Plan…OAS (Old Age Security)


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Transcript

Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld.  Well, we are back from summer and we're going to start a new series here following along with my retirement readiness checklist. Today's episode is the first one out of the retirement paycheck section, talking about guaranteed sources of income.

As you might've picked up in my intro, this next set of episodes, I anticipate probably close to 20 episodes here actually, will be on my retirement readiness checklist items. You can find that on my new website, www.evanneufeld.com and you'll be able to find it right there on the homepage. So if you want to download that and follow along as we go, that would be awesome.

But just so I can explain it for you a little bit, the retirement readiness checklist has five different sections. Your retirement paycheck, your money, living, giving, and your estate. And the estate is just a way to say that what happens after you pass away?  So all of these things are items that you might want to consider before you take the leap into retirement.

Now that could be several years away, but the sooner you think about them, the easier they are to plan for. But as we go through the checklist, there's three sections. Yes, no and I don't know. My goal with the podcast here is to make sure that no one is clicking the “I don't know” box. Sometimes there might be an “I don't know” because it's too many years away, but as long as you understand what they are, you're to get closer to understanding whether that's a yes or a no for each of these things. So today's episode, I'm going to be talking about guaranteed sources of income in retirement. So this can show up in a number of ways and you don't necessarily have to have any guaranteed sources of income, but I'm going to talk about a couple of things where you might actually have some that you don't even know about.

So the first one that most people think of when they think of guaranteed sources of income in retirement is a pension. Now defined benefit pension plans are few and far between these days. Jobs like being a teacher or a nurse or police officer or firefighter, those types of public sector jobs are most likely to still have defined benefit pensions, but some of them are changing over to something called a defined contribution.  So let me go through those briefly here so you understand that. A defined benefit pension is something that is determined based on typically the number of years you've worked versus your age versus a multiple of your salary. Let's just use a hypothetical here. So say you were a nurse for 35 years at the end of your 35 years, you would qualify for a set payment for the rest of your life.  Call that $4,000 a month and then that continues on for as long as you're alive and in many cases, a percentage of it would go to your spouse if you were to predecease them.

Every pension has a different calculators, so you might see something like a rule of 80 or a rule of 82 and that's typically a combination of your age plus the number of years you've worked and that would qualify you for a certain amount for your pension. Now the confusing part is that there's another type of pension that's much more common that is not guaranteed. It's called a defined contribution pension and typically that shows up for people if there's like a matching program or things like that, where essentially what happens is you invest some of your money and your employer puts some money in, and now you've got a pool of money.

So when you retire, you have that pool of money that needs to be invested and withdrawn from, but once it is gone, it's gone. So when most people hear the word pension, they think “I'm going to be set for life because I've got money coming in forever.” Not necessarily. So if you have a defined contribution, you have to be careful and understand that money is not guaranteed forever, but you have to invest it accordingly and withdraw from it appropriately to make sure that it survives longer than you do.

Another type of guaranteed source of income in retirement is something called an annuity. We don't talk about annuities too much, and I won't really get into that here, but I'll just explain what they are.  Annuities a contract with an insurance company. So essentially you would trade your money today for a stream of income in the future.

So I don't have a recent annuity quote in front of me here, so I'll just use hypothetical numbers, but say you're a 55 year old male and you have a hundred thousand dollars. You could give that to an insurance company and in exchange for that, they would give you say $600/month for the rest of your life.

When it comes to an annuity, there are many pros and cons of course, but that is another source of guaranteed income that you can have. And every contract looks a little bit different, so you can add things like guarantees. So that would say, for example, you purchase an annuity and then you pass away very soon.  You'd want to have a guarantee that some money would be paid out for at least a number of years, 10 years is quite common for a guarantee with an annuity. More often than not, annuities are not inflation protected. So if you notice the cost of living goes up a little bit every year. So things like groceries and gas and clothing and everything that we buy increases a little bit. So that's inflation. Annuities typically would provide a payment that's flat and doesn't necessarily increase with inflation.  Now there might be some products out there, I’m not very well-versed in the annuity market, but there might be some inflation protected annuities. But of course, if you have something that's going to increase in value over time, you're probably going to get a lesser amount to start out with. 

Going back to the pensions for a second here.  As far as inflation goes with pensions, some pensions will increase with inflation and some will not. You might see that on a pension statement as a cost of living adjustment, which essentially means as things get more expensive, the pension will increase your income accordingly. If it does not, that is a huge factor that you need to account for, especially if you're retiring early and early retirement is typically anytime before age 65, because your life expectancy versus the inflation rate could really impact your long-term retirement potential.

So all I'm saying there is that if the cost of living continues to go up. But all of your income is flat in dollar amounts. So you get $4,000 a month, but that $4,000, 20 years from now doesn't buy you nearly enough. You might be in trouble. So understanding what you have will allow you to plan in advance for that.

Now the last two items that I'm going to talk about here in terms of guaranteed sources of income in retirement, these are pension plans and government benefits that most people here in Canada would qualify for. I'm going to have dedicated episodes for these later on, so I won't get into the details here, but the Canada pension plan(CPP) is one. If you are employed in Canada or previously employed in Canada, at least you can take a look at your pay stub and you can see that there's a deduction that comes off to contribute to the Canada pension plan. Your employer is actually doing the same amount in there as well, but just like a defined benefit pension, like I described before, there's a complicated calculation that goes into determining how much you could get. But right now, a 65 year old Canadian would qualify for about $1,200 a month from the Canada pension plan. If they have contributed the maximum, I won't get into that right now, but you can be on the lookout for that episode in a few weeks. 

The other one that I mentioned there is old age security(OAS). But this is not based on you working, OAS is based on you being a 65 year old, Canadian and that is a payment that you would receive for the rest of your life. And that's provided by the government just to make sure that seniors have enough income to live on.  Again, there's many other factors there that would determine that, but typically old age security will show up for you at age 65.

So to summarize here, even though you might not have a defined benefit pension, again that's the amount set and consistent for your whole life or a defined contribution pension because that one's not actually guaranteed. So I wouldn't call that a guaranteed source of income, but if you don't have a pension plan and you don't have an annuity, you will actually have some guaranteed income in the form of CPP.

If you've worked in Canada or old age security, if you've been a Canadian citizen. So now when you download the retirement readiness checklist again at www.evanneufeld.com, if you go to that first section and it says, will you have any guaranteed sources of income. For the vast majority of you, you can click off “Yes”.

If you're looking for more information or blogs or other podcasts that I've done, head over to that website. Again, I've worked really hard on building this out and there should be really good content, should be easy to find and all the transcripts are available for this podcast and others. So head over there and have a look, download the checklist and you can get on my email list as well where you’ll get regular updates. I've got a few exciting things coming down the pipeline here. So if you're on my email list, you should be able to be first in line to hear about those things. But again, thanks so much for listening today and we'll see you in a couple weeks.

Thanks for joining me today on the Canadian Money Roadmap podcast. If you enjoyed today's episode, I'd really appreciate if you left me a review on apple podcasts with your biggest takeaway. If you have questions or ideas for topics you'd like me to discuss on future episodes, please reach out via my contact info in the show notes.

This podcast is intended to be educational in nature, and you should always consult your financial, tax and legal advisors before making changes to your financial plan. Any rates of return discussed are historical or hypothetical and are to be used for educational purposes only. Evan Neufeld is a Qualified Associate Financial Planner and registered investment fund advisor. Mutual funds are provided through Sterling Mutuals Inc.