The three pillars of retirement
Picture yourself in retirement: who will you be spending it with? Will you be devoting time to a favourite not-for-profit with your best friend? Spending summers with your partner at a cottage? Going back to school to learn something new with your kids? However you picture your retirement, the reality is that you’ll need to save for it.
Saving for retirement seems to be a strange thing to suggest when you probably have other priorities right now like paying off your student debt or paying down a credit card or mortgage. But not making plans now may rob you of your retirement dreams for the future. Experts estimate that millennials will generally need more retirement dollars than their parents given their potential longevity, larger student debts and much higher housing prices.
So despite other priorities you need to start saving for retirement now. Understanding the different ways there are to save for retirement is the first step.
In Canada, saving for retirement consists of three main avenues, or as we like to call them the “three pillars of retirement”: government-administered plans, employment-based pension plans, and personal retirement savings plans.
Government-administered plans like the Canada Pension Plan (CPP) are not designed to be your sole source of income during your retirement. If you want to retire comfortably you will need to supplement your retirement income through employer and/or personal retirement savings plans.
Pillar 1: publicly-funded plans administered by the government
There are publicly-funded plans administered by the government that you may be eligible for when you retire. These plans include the Canada Pension Plan, the Old Age Security Program and the Guaranteed Income Supplement Program. Some you contribute towards while you are working, and others you don’t.
Canada Pension Plan (CPP)
The CPP provides retirees with income during retirement. Almost all working Canadians contribute towards the CPP, except those living in Quebec, who contribute towards the Quebec Pension Plan (QPP) . The amount you contribute is automatically taken from your paycheque, and it varies depending on your income. The amount you receive will depend on how much and for how long you have contributed to the CPP and on the age you want your pension to start. You must apply to receive CPP.
In 2018 the CPP maximum benefit was $1,134.17 each month, or roughly $13,600 per year. However in 2016 on average only about six per cent of Canadians actually received the maximum amount and in 2018 the average CPP benefit was about $7,700 per year. By comparison, the maximum is even less than what a full-time minimum wage worker in Ontario would receive in a year. To learn more about the CPP, visit the Government of Canada’s Canada Pension Plan Overview website.
Old Age Security program (OAS)
The OAS program is funded by the Government of Canada, and you do not contribute directly into it. The amount of your OAS pension will be determined by how long you have lived in Canada after the age of 18. To learn more about the OAS program, visit the Old Age Security program website.
Guaranteed Income Supplement program (GIS)
The GIS program provides a monthly non-taxable benefit to OAS recipients who have low income and are living in Canada, and you do not contribute directly into it. This program needs to be applied for. To better understand eligibility for the program, visit the Guaranteed Income Supplement program website.
Guaranteed Annual Income System (GAINS)
GAINS is an Ontario program that ensures a guaranteed minimum income for low-income seniors. It provides monthly payments to qualifying retirees who are already receiving the OAS and GIS payments. To learn more, visit the Ontario Ministry of Finance's web page on the Guaranteed Annual Income System program .
Pillar 2: Employment-based pension plans
The second pillar of retirement includes registered pension plans and other types of retirement savings plans such as group Registered Retirement Savings Plans (RRSPs) and Deferred Profit Sharing Plans (DPSPs) that you may be entitled to because of your employment. Not all workplaces have these plans, but if yours does and you are permitted to join, it means that your employer is probably paying towards your retirement at the same time as you are.
Registered pension plan
Workplace pension plans can be established by employers. The pension benefits paid out from these plans must follow the regulations in the governing pension legislation. Your employer is required to contribute towards your pension plan, and you may also be required to contribute, in which case the amount is automatically withdrawn from your paycheque. Each workplace pension plan has its own rules, eligibility requirements and benefits. To learn more about registered pension plans, visit Workplace Pension Plans or ask your employer for details.
Retirement savings plan
A workplace retirement savings plan such as a group RRSP or DPSP will usually have lower fees and operational expenses than if you were to invest money on your own. Your contributions towards your workplace retirement savings plan are automatically withdrawn from your paycheque. In many cases, the employer will also contribute towards your retirement savings plan, and may even match your contribution. To learn more about group retirement savings plans, visit Workplace Retirement Savings Plans or ask your employer for details.
Pillar 3: Personal retirement savings
The third pillar of retirement are personal savings that you set up and contribute towards on your own. These might include tax-assisted arrangements such as Registered Retirement Savings Plans (RRSPs) or Tax‑Free Savings Accounts (TFSAs) as well as non-registered savings and investments like annuities, bonds, guaranteed investment certificates (GICs), stocks or mutual funds. More information about non-registered savings and investments can be found on the Financial Consumer Agency of Canada’s The basics of investing .
RRSPs are offered through financial institutions such as banks, credit unions, trust and insurance companies, and are approved by the Government of Canada. Contributions to RRSPs can be used as a tax deduction, which reduces the amount of tax you will pay on your income. There is a contribution limit each year of 18 per cent of your earned income, or up to the maximum limit set by the Canada Revenue Agency (CRA). In 2017 the maximum limit was $26,010. It is a good idea to know what your contribution limit is, and you can do that by checking your tax return from last year. Depositing more than your contribution limit means you will be taxed on the extra money you put in. If you deposit less than your contribution limit, you can carry forward the unused room to next year.
Any investment income you earn in the RRSP is usually exempt from tax as long as the money remains in the RRSP. Generally, you will have to pay tax when you withdraw from your RRSP at retirement. However, for most people their tax rate will be lower in retirement since they won’t have a lot of income, so you’ll end up paying less tax. There are special circumstances when you can withdraw money from your RRSP before retirement without paying tax, such as using it to buy your first home or for educational purposes. You will be required to repay this money over a 15-year period if you borrow under the Home Buyer’s Plan, or 10 years for the Lifelong Learning Plan.
To learn more about RRSPs, visit the Government of Canada’s website .
TFSAs are another way for you to save for your retirement. If you have a short-term goal, you can save for that using a TFSA as well. You have to be at least 18 years old and have a valid social insurance number to set money aside in a TFSA. Contributions you make to your TFSA cannot be used as a tax deduction, but any withdrawals or earnings are completely tax‑free.
Be cautious as there is a limit to how much you can contribute annually towards your TFSA. In 2018, the limit was $5,500. If you over contribute, you’ll pay a penalty on the extra amount until you remove it. If you don’t contribute to the maximum this year, you can carry forward the unused room to next year. To learn more about TFSAs, visit the Government of Canada’s website .