April 22, 2025 | 7 min read
Part of preparing for retirement involves working out a financial strategy long before you plan to retire. That way, when your usual salary eventually stops coming in, you’re ready with other income inflows to take its place. But building a financial strategy takes time. You first need to understand the approach that may work best for you. It’s never really too early to start thinking about how you’ll manage future living costs when you retire. And, with a retirement income strategy in place, you’ll know you're prepared for when your working years are behind you.
Three approaches to consider when building a retirement income strategy include annuities, systematic withdrawal plans, and guaranteed lifetime income benefits plans.
To determine which one may work best for you, first consider the differences between each one, associated risks, and potential impacts on your investing strategy.
Retirement income strategies can get complicated. Based on your specific needs and preferences, it's highly recommended to speak with a financial advisor to determine how much to invest in each category, considering the costs, benefits, and potential interactions between them.
Annuities are financial products that provide steady income, depending on how they are set up and the terms of how they're created. There are several types of annuities to consider. Annuity income would be in addition to any Defined Benefit Pension Plan you receive from an employer, plus any Canada Pension Plan (CPP) benefits or Old Age Security (OAS) benefits you may be entitled to.
Annuities in Canada can provide guaranteed regular income. Other features include the following:
Similar to Annuities, Systematic Withdrawal Plans (SWPs) provide income, although the income is not guaranteed. A systematic withdrawal plan in Canada is different from annuities in that they're linked to portfolios of mutual funds, stocks, bonds, GICs, cash, etc. They can provide you with:
Guaranteed Lifetime Income Benefits products (GLIBs) and Guaranteed Minimum Withdrawal Benefits (GMWBs) are variable annuities. They're types of living benefits, can be attached to annuity products, and contain a combination of investments and insurance. Other traits include the following:
Each retirement investment strategy carries within it inherent risks over which we have little to no control. But depending on the strategy you choose to employ, there may be other risks to be aware of. The tables below gauge those risks in relative levels from low to high.
The chart below gauges risk for each approach concerning:
| Retirement planning investments | Inflation risk | Market returns risk | Longevity risk |
|---|---|---|---|
| Annuities | Low | Medium | High |
| Systematic withdrawal plans (SWP) | High | Low | Low |
| Guaranteed Lifetime Income Benefits (GLIB) | Medium | High | Medium |
The chart below gauges risks with each approach concerning:
| Retirement planning investments | Liquidity preference | Estate goals | Behavioural risk |
|---|---|---|---|
| Annuities | Low | Low | High |
| Systematic withdrawal plans (SWP) | High | High | Low |
| Guaranteed Lifetime Income Benefits (GLIB) | Medium | Medium | Medium |
Generally, most income you receive in retirement will be taxable at your marginal tax rate. That includes Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits, Old Age Security* (OAS) Pension benefits, RRSP withdrawals, RRIF withdrawals, employer-sponsored pension plans, payments made to you pursuant to an annuity, and investment income (e.g., interest, dividends, capital gains).
But how income in retirement gets taxed depends on several factors, including the income source, and your personal tax situation. It's also important to remember that federal tax rules can change, impacting the amount of tax you need to pay. To get the most precise answer about your individual financial position, it's highly advisable to seek advice from a tax professional or financial advisor.
* Note concerning CPP and OAS that if your income exceeds a certain threshold, you may be required to repay some or all of your OAS benefits back through the OAS clawback, officially known as the OAS pension recovery tax.
To get a clearer picture of the retirement income you'll need for a financially secure retirement, consider the following:
While we don't have a crystal ball to help us know exactly what our financial needs will be when we retire, it's still adviseable to consider the many variables that could impact our income and expenses. That way, one can start to get an idea of what your financial needs may be, and how you might meet them.
Even though your retirement may seem a long way off, it goes without saying that it's never really too early to get in the habit of saving, for retirement or to achieve any larger financial goal. For retirement, you'll need to determine what your estimated costs of living will be, and how much you'll need to meet any other lifestyle goals in retirement. The following steps may be a helpful guide to support you as you look to get a clearer estimate of the income you'll need to retire comfortably:
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