Monday, July 30, 2018
Will the Government Take Care of Us in Retirement?
Depending on who you ask, here in Canada we either have a good public retirement fund or it doesn’t even exist at all. This variance in response shows the lack of knowledge about the subject. I bet if you went around your workplace and asked 10 people what the government gives you in retirement you would probably get 10 different answers. The dynamics of the Canada Pension Plan (CPP) look more confusing than they are, but they do require some research. While I often preach that we should not rely solely on government benefits during retirement, they are a rock-solid foundation for your later years. In today’s post, I will describe how the Government Retirement Plans work and what you can expect from them. When you are younger this information seems less important but waiting until you are older might just leave you even more confused. If you are entering retirement you should pay attention as this is vital information.
What does our Government Offer?
The Canada Pension Plan was introduced in 1965 to complement the already in existence Old Age Security (OAS) which was introduced in 1927 and reformed in 1952 and 1965. There is also a third pension benefit provided by the government called the Guaranteed Income Supplement or (GIS), which is provided to those who receive little to no other retirement benefits. Here is a brief breakdown of each plan:
Old Age Security (OAS):
All Canadians get this benefit, given they fit certain residency requirements. It is a flat rate for all and can be “clawed back” or reduced should the recipient make too much money in retirement.
OAS Eligibility – Government of Canada
Guaranteed Income Supplement (GIS):
This plan is provided to those who make very little in retirement to complement OAS. Again, this can be clawed back should the recipient earn too much.
GIS Eligibility – Government of Canada
Canada Pension Plan (CPP):
This is a contributory plan, meaning you pay into it during your working years. It is deducted at source or paid by self-employed persons, and it has both an employee and employer portion. The important part to understand is that it is contributory, meaning you get out what you put in.
CPP Eligibility – Government of Canada
So, what’s the deal?
It gets hazy when you dig into how these plans work. They all have requirements to qualify. It makes sense that we cannot have people move here at the age of 64 and then collect out retirement benefits the next year. The sad truth is that most people do not understand what these rules are. Let’s go over them briefly.
Old Age Security:
Your employment history is not a factor in determining eligibility: You can receive the Old Age Security (OAS) pension even if you have never worked or are still working. If you are living in Canada, you must be 65 years old or older; be a Canadian citizen or a legal resident at the time we approve your OAS pension application and have resided in Canada for at least 10 years since the age of 18.
If you are living outside Canada, you must, be 65 years old or older, have been a Canadian citizen or a legal resident of Canada on the day before you left Canada; and have resided in Canada for at least 20 years since the age of 18.
If neither of the above scenarios applies to you, you may still qualify for an OAS pension, a pension from another country or from both countries if you have, lived in one of the countries with which Canada has established a social security agreement; or contributed to the social security system of one of the countries with which Canada has established a social security agreement.
If you qualify for the Guaranteed Income Supplement you will be automatically enrolled once you apply for your Old Age Security benefits. It is an income-tested benefit that you must meet certain minimum thresholds for.
The History of OAS – Maple Money
Canada Pension Plan
The maximum amount of income provided: $1114.17 per month ($13,370.04 annually) 2017
Age of Eligibility: CPP can be taken as early as 60 or as late as 70
Income Eligibility: CPP benefits rely on your contributions throughout your lifetime. CPP essentially takes your best 39 working years to create the average of what you receive in retirement. To receive the maximum, one would have to contribute to what is called the “Yearly Maximum Pensionable Earnings” or YMPE. The YMPE is the amount you need to make to contribute enough to get the maximum CPP benefit in retirement. ($55,300 2017, up from $54,900 in 2016). You would have to contribute that amount for 39 years to receive maximum CPP benefits. Those who have low earning years for various reasons, (child-rearing, education, job loss, etc.) fall short of this YMPE. Many others never reach the income level of YMPE. It is essential to know that most people do not receive the maximum amount of CPP benefits during retirement.
Let’s get to the point……
All this retirement talk is confusing I know, but here are the straight goods that you need to know.
OAS: (Easy to receive, as long as you have lived in Canada your whole life)
Amount of Income Provided: $570.52 per month ($6,846.24 annually)
GIS: (Easy to receive, if you are poor in retirement, you don’t want to have to get this)
The maximum amount of income provided: $864.09 ($10,369.08 annually)
CPP: (Hard to receive the maximum, most people receive partial CPP)
The maximum amount of income provided: $1114.17 per month ($13,370.04 annually) 2017
This shows you that the maximum you receive should you get the most out of Government sponsored plans is about $20,000 annually. I don’t know about you, but this is a very little amount, not nearly enough to survive on. That is especially true if you are carrying debts including a mortgage into retirement or if you don’t own your home. Many of our seniors are in that boat and live in poverty. Therefore, it is important to save during your working years. Even something as simple as an extra 10K a year in retirement can be the difference between a comfortable and destitute standard of living.
Full CPP benefits are a tough goal to reach – The Globe and Mail
Solutions to the Retirement Gap
Reduce debt and live debt free
I speak a lot about reducing and eliminating your debts. There is a very important reason why I do. Carrying debt into retirement is very troublesome. You will already be living on a reduced income and adding interest payments to that will crush your monthly cash flow. During your working years, having debt hurts your opportunity to save for retirement. Every dollar you give away in debt payments is one less dollar you could have growing in a retirement fund. It is truly that simple.
Open a retirement savings account
I speak about saving for the long term a lot as well. Why do I speak about this so much? The reason is simple: There is a cloud of uncertainty around our government sponsored retirement plans. Only about 6% of retirees received full CPP benefits in 2016. That means that only 6% received a measly $1100 a month. Most received partial or no CPP benefits at all. Any savings you create will be the difference maker for you in retirement. Even something as simple as $100 every 2 weeks from age 35-65 will yield you over 250K by the time you are ready to retire. That added to your CPP and OAS can provide you with a comfortable living.
Protect along the way
You are staying debt-free and saving for the future, but you also have to protect those savings against disaster. When people get hurt or sick or die, the first place they and their loved ones pull from is their investments. This includes their retirement accounts and even their home equity. Pulling from these places delays your retirement goals and stretches out debt repayment. Long story short, having coverage in place to cover the what if’s is important so you can leave your investment plan’s intact. Nothing causes more people to be poor in retirement than unexpected health issues.
The 1 Financial Product Everyone Should Have – Budget Boss
Understanding your government retirement benefits is important to me for one reason: You need to see how inadequate they are. If you look at it from that perspective you will see the need to prepare yourself for retirement. Having a paid off home, long-term savings, and adequate protection will get you there. Not having those things will lead to you living in relative poverty at an age where you have little opportunity to do anything about it.
“Whether you are just entering the workforce or nearing retirement age, planning for the future is critical.” – Ron Lewis
Email – joe@budgetboss.ca
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