Wednesday, February 5, 2014

The retirement income gap: How much can you expect in CPP and OAS?

Fewer Canadians will contribute to their Registered Retirement Savings Plans this year (or plan or save for retirement at all).  A Scotiabank survey finds that just 31 per cent of Canadians plan to contribute this year, compared with 39 per cent last year.

Canadian households spend about $1.65 for every dollar earned, according to Statistics Canada, a ratio among the highest of any country belonging to the Organization for Economic Cooperation and Development.  The median household after tax family income in Canada was $76,000 – more than $6,000 a month.  The median individual income was about $30,000.  Median is the point where half earned more and half earned less.  

Canada Pension Plan (CPP*)  

You may be able to count on up to $1,038 a month from the CPP at age 65 if you qualify for the maximum.  If you take your CPP at age 60, that amount is reduced to approximately $664 per month.  Many people will not qualify for the maximum if their earnings during their working years were less than the yearly maximum pensionable earnings.  In fact, the average CPP benefit paid out in 2013 for new CPP beneficiaries at age 65 was $594 per month.  If a spouse dies, the other spouse is entitled to 60% of their late spouse’s benefit amount.  (*all figures used in this article are at today’s rates in today’s dollars)

Old Age Security (OAS*)

You may qualify for up to $551 per month at age 65 if you qualify for OAS.  You need 40 years of residence after age 18 in Canada to qualify for the maximum.  OAS will be gradually scaled back to begin benefits at age 67 between 2023 and 2029.  So if you are 56 or younger now, you will have to wait longer to collect your OAS.  If your individual net income is above $70,954 for 2013, your monthly Old Age Security (OAS) pension payment amount will be reduced or “clawed back” by 15% for every dollar over that amount, beginning in July 2014. If your income is $114,815 or above, your entire OAS pension will be “clawed back”.

Guaranteed Income Supplement (GIS*)

If your individual income from all sources is less than $16,700 or your combined income is less than $22,000 you may qualify for the GIS.  This amount could be between $500 and $1,000 per month depending on your situation.  

Adding it all up

Adding these programs up, the approximate amount a median Canadian could expect from government is between $500 and $2500 per month.  Most Canadians will fall somewhere between those two numbers – say $1000 per month depending on their eligibility, age at which their pensions are taken, and other factors.  

Will a couple used to living on $6,000 per month with little or no retirement savings be able to live on $2000 or less per month (A single person on half that amount)?  

Filling the $4,000 per month gap

The accepted wisdom is that you will not need as much to live on when your kids are gone, you don’t have to commute to work, you don’t need as many new clothes, you may downsize your house, etc.  Offsetting some of those things, however, is an increased desire to travel, dine out and socialize, and the probability of increasing health care costs as you age.  So let’s say you could live on $5,000 a month.  

To generate the additional $3000 per month would take about $600,000 in savings (using a joint last-to-die annuity for a 65 year-old couple – or about a 6% return).  If the income comes from inside a registered plan (RRSP or RRIF), you will have to pay tax on the full amount of income you take out.  For those who plan to continue working, it may be a viable solution for a while, but there is the issue of deteriorating health that may make it impossible for you to continue working.  And of course, what if one or both or you gets sick or needs long-term care in your later years?  

So what can you do?

• Review your budget and put together a financial plan.
This isn’t necessarily fun, but it’s necessary. You’ll be surprised at where your money is going. Financial advisors can help you begin your financial planning for free. 

• Make your savings automatic.
One of the advantages of an RRSP is that once the money goes in, it’s not so easy to take it out. If you take money out of your RRSP before retirement, there’s paperwork and the government takes a withholding tax.

• Start saving as early as you can.
Optimally, start as soon as you have an income and file a tax return. If you are starting late, there is still hope, but see a financial advisor to determine your most optimal saving and investing strategy.  

• Consider other tax-saving programs, such as the TFSA (Tax Free Savings Account).
You can put funds into both an RRSP and a TFSA; with the latter, the money can grow in the account and will not be taxed again. Individuals can contribute up to $5,500 this year to a TFSA, and if you’ve never opened one, you can contribute for the years you’ve missed since the program was started in 2009.

Thinking ahead is hard work for some.  If you want to enjoy the last third of your life, take action now.  The examples used in this article are general in nature and not intended to be used as specific to any one case.  For an accurate diagnosis of your personal situation, please contact us.  Our consultations are complimentary.  

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