For most Canadians, retirement income starts with the Canada Pension Plan (CPP) and Old Age Security (OAS). The question is not whether to take them, but when.
CPP can begin as early as age 60, but doing so permanently reduces your monthly benefit. Waiting increases your payment, all the way to age 70. The tradeoff is straightforward. Claiming early gives you more years of payments but smaller monthly cheques. Delaying means larger payments, but only if you live long enough to benefit from them.
OAS is another important pillar, although higher-income retirees need to watch out for the OAS recovery tax, better known as the clawback, which gradually reduces benefits once taxable income exceeds an annual threshold.
Because of these tradeoffs, many retirees choose to bridge the years between leaving the workforce and beginning CPP or OAS. That allows them to maximize future government benefits while still generating enough cash flow to cover living expenses.
To do that successfully, a well-funded Tax-Free Savings Account (TFSA) paired with the right exchange-traded fund (ETF) can become an invaluable part of a retirement plan.
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Why the TFSA shines in retirement
The biggest advantage of the TFSA is flexibility. Withdrawals are completely tax free and generally do not count toward taxable income. That means TFSA withdrawals do not contribute to the OAS clawback, making the account particularly attractive for retirees trying to manage their taxable income.
The TFSA is also more flexible than a Registered Retirement Income Fund (RRIF). RRIF withdrawals are taxable, and once a RRIF is established, minimum annual withdrawals eventually become mandatory whether you need the money or not.
A TFSA has no mandatory withdrawal schedule. You can withdraw as much or as little as you like, whenever you choose, and any amount withdrawn is added back to your contribution room the following calendar year.
That flexibility makes the TFSA an excellent account for bridging retirement income before CPP and OAS begin or supplementing those benefits later in retirement.
One ETF to consider for retirement income
For investors looking to generate steady income from a TFSA, the BMO Monthly Income ETF (TSX: ZMI) is worth considering.
ZMI maintains a balanced portfolio with a target allocation of approximately 50% equities and 50% fixed income, using a collection of underlying BMO ETFs.
The portfolio includes global dividend-paying stocks, option-income ETFs, preferred shares, and investment-grade corporate bonds, creating multiple sources of income rather than relying on any single asset class. The ETF currently offers an annualized distribution yield of approximately 3% while charging a 0.20% management expense ratio.
No investment is guaranteed, and distributions can change over time, but ZMI offers retirees a diversified, professionally managed portfolio that can help support tax-free withdrawals when held inside a TFSA.
