Retirement is a phase of life that many of us eagerly anticipate. It’s a time to relax, pursue hobbies, travel, and spend quality time with loved ones. However, ensuring a financially secure retirement requires careful planning and a well-thought-out income strategy. One effective approach to achieving this is through the concept of layering retirement income.
Layering retirement income involves diversifying your income sources to create multiple layers of financial security during your retirement years.
The layers may include:
- Government and Pensions: These include CPP, OAS, GIS and private pension plans. This is the bottom layer because the income is the most secure but also the least flexible, and fully taxable. The amount is the same each month and year for the rest of your life. These provide a predictable and steady stream of income throughout retirement.
- Annuities: Annuities are insurance products that provide regular payments in exchange for a lump sum or periodic contributions. Annuities can offer a guaranteed income stream that lasts throughout your retirement; in that sense they can be considered as stable as pension plans.
- Personal Savings and Investments: The income from your RRSPs, TFSAs and other personal investments will provide the next layer. With the help of your financial and tax advisors, you can decide the best—and most tax efficient–way to take income from these sources over time. For example, it’s important to note that income from your RRSP counts as regular income for income-tested supplements such as GIS, while that is not true of money you withdraw from your TFSA. Considerations such as this will impact withdrawal decisions, so it’s important that you consult your advisory team for planning advice.
- Rental Income: If you own real estate properties, you can generate rental income, either through long-term leases or short-term rentals. Real estate investments can provide a steady cash flow and potential appreciation over time.
- Part-time Work or Consulting: Many retirees choose to continue working part-time or offer consulting services in their area of expertise. This not only provides additional income but also allows retirees to stay engaged and maintain a sense of purpose.
Let’s say that Susan requires $4,000 of gross income per month in retirement. Her income layers may look like this:
CPP/OAS – $1,000
Private pension – $2,000
RRSP withdrawals – $1,000
If Susan does not have enough savings in her RRSP to manage that amount, she has a choice: she will either need to find a way to lower her monthly expenses, or she will need to find another source of income. This could be other investments (if she has them) or a part time job. Her government and private pensions cannot be changed. On the other hand, if she has surplus savings then she has more options.
Layering retirement income is a smart and effective strategy for securing a comfortable future. By diversifying income sources, retirees can achieve financial stability, adapt to changing circumstances, and enjoy the retirement they envision. Remember, everyone’s financial situation and goals are unique, so it’s essential to consult with a financial advisor who can guide you through the process planning your retirement income based on your specific needs. With careful planning and implementation, layering retirement income can help you build a solid foundation for a fulfilling and worry-free retirement.