The Canadian retirement saving and pension system is complicated and full of acronyms. At different stages of life, you will encounter different programs that are beneficial to you. To break it down, let’s look at the case of a couple named Jack and Jill.
Jack, 32 is an engineer. Jill, 30 works as an fashion buyer. They both earns good income and contribute to their personal RRSPs. Jack’s company matches 3% of his salary to company pension plan. Jack utilizes the offer to its full extent as he considers it as free money or 100% return. After working for 3 years, he decided to make a career move to a more senior position at a national engineering firm. This new position will give him more exposure to different projects, better pay and potential for management role. However, since Jack has passed the 2 year mark with his former company, his pension benefits are now vested or locked in. He can only withdraw when he retires or under extenuating circumstances. Given the very high management fee that the current pension has, he decides to transfer all of his funds to a LIRA (Locked In Retirement Account) where he can self direct invest in low cost index funds and some in technology stocks.
Jill’s company benefit also have employer matching program either to her RRSP or TFSA or both (to a maximum). After considering her and her husband retirement goals and some of the big ticket purchases they have planned, she allocates most of her contribution to RRSP and the rest to TFSA.
Jack and Jill want to save for their son’s college fund so they decided to open a Registered Education Savings Plan (RESP) with their son as beneficiary. Based on their combined income, they are qualified for Canada Education Savings Grant (CESG) with 20% annual contribution matched by the government to a maximum of $500 a year or $7,200 lifetime.
As their investments grow considerably over the years, they have decided that they can now retire comfortably. They open Registered Retirement Income Fund (RRIF) at their bank by transferring their funds from RRSP. Since Jack has LIRA, he has to transfer it to Life Income Fund (LIF) or Locked in Retirement Income Fund (LRIF) or buy a life annuity. There is a maximum that he can withdraw whereas RRIF does not have a limit. For both LRIF and RRIF, Jack and Jill want to have self directed funds as they want to have more controls of their investments. Their portfolios are now more conservative with more weights on bonds, money market funds and short term investments rather than stocks.
Since their retirement funds are in a good position, they want to delay their Canada Pension Plan benefits until after they turn 65 to receive additional payments. If they take their pension late, the payment amounts can increase by 0.7% for each month after age 65. For similar reason, they also defer their Old Age Pension for another year to receive extra benefits.
With some planning and general knowledge of different savings and benefits plan, Jack and Jill save significant amount of money over an extended period of time. It has allowed them to have financial liberty in their retirement.