Perhaps you’ve heard about the Canadian Pension Plan, but have you also heard about Old Age Security and the Guaranteed Income Supplement? The average Canadian probably doesn’t know what they are, how they works, and what else is available. Some people assume the government will cover them, and often these people don’t bother with retirement savings. Is this a good idea? Lets dig in and investigate:
All numbers below are for a single person retiring in 2018, the amount will increase with inflation. And the amount will change based on some other circumstances that I’ll mention below
The CPP provides a small (taxable) monthly payout based on your contribution during your working years. You’ll have an individualized payout when you turn 65. How much could you get?
AVERAGE MONTHLY PAYOUT: $666.56
MAXIMUM MONTHLY PAYOUT: $1,134.17
The CPP was started because Canadians weren’t save any of their employment income for retirement. The government decided to force Canadians to save with CPP. It works because contribution is mandatory. So when you see that deduction on your income don’t think of it as a waste. You’ll be getting that money back in retirement. Just try not to die before you retire.
Payments can start as early as age 60 (with a reduction in monthly payments) or as late as age 70 (with an increase in monthly payments). If you stopped working to raise children you may be eligible for an additional “Child Rearing Provision”. The government provides a calculator for estimating your retirement income including CPP.
For Canadians who had a mostly full working life in Canada CPP will be their largest government source of retirement. But how much can you really do with $666/month? Moving on:
Old Age Security is another pension based on how long you’ve lived in Canada. If you’ve lived in Canada (i.e. been a Canadian resident) since you were 18 you should get the maximum amount. Been living abroad? You’re getting less. How much could you get?
MAXIMUM MONTHLY PAYOUT: $596.67
OAS is a little different than CPP. Most Canadians are eligible regardless of how much they’ve worked, as long as they were Canadian residents. However there is an income limit. Rich people need not apply! If you earn more than $123,302 in the previous tax year(during retirement) you are not eligible for OAS. Furthermore you’ll be subjected to a recovery tax if your income is greater than $75,910:
Recovery tax? Aren’t there enough taxes already?
No. –the government
The 15% recovery tax begins at taxable income above $75,910. For example:
Annual income $90,000
Difference: $90,000 – $75,910 = $14,090
15% tax payable: $14,090 x 0.15 = $2,113
Thus if you earned $90,000 in retirement income you’d have to pay $2,113 in recovery tax. The clever math nerds in the audience will have realized that the recovery tax will eventually cost you more money than OAS could possibly provide. Just kidding. I know there aren’t any clever math nerds out there. Or maybe you’re all math nerds?
At an income of $123,302 the recovery tax equals the maximum payment from OAS. $123,302 also happens to be the upper income limit that I mentioned above!
On the flip side, if you earn less than $18,096 you may be eligible for yet another government program:
The Guaranteed Income Supplement is meant for low income retirees who already receive OAS. How much could you get?
MAXIMUM MONTHLY PAYOUT: $891.18
The payment will change based on your total income for the year. If you receive a yearly income of $10,000 from OAS you’ll be eligible for $342.42 from GIS. And if you earn $100 in the year you receive $893.42 from GIS according to the table on this page.
Think of GIS as a safety net. As your income falls GIS payments will increase, hopefully covering your most basic expenses.
Other Considerations – Married/Common-law/Disabled?
CPP has included extra payments for dependents including spouses, common-law, the disabled, and even the children of disabled or deceased contributors. OAS and GIS also include a survivor benefit. If you fit one of these demographics be sure to include that information when you apply for these benefits.
MAXIMUM MONTHLY CPP + OAS: $1,730.84
AVERAGE MONTHLY CPP + OAS: $1,263.43
As you can see, monthly payments from all these programs are pretty low. The majority of Canadians would likely have trouble covering their rent (or mortgage) with the average payout. And what about your other expenses? Food, car, clothing, cell phone, medical, etc. They say that people normally spend less money in retirement, but lets be honest, as a young retiree you’ll want to get the most out of your newfound freedom. Traveling immediately comes to mind, and most retirees aren’t staying in youth hostels to save money.
This is why it’s important to have multiple sources of income in retirement. Don’t count on the government to support your current lifestyle. Continue saving and investing. You don’t want to spend your retirement doing back breaking part time work or endless coupon cutting (or maybe you do?). I’d recommend not counting on these programs at all. Fund your own retirement. And any government pension will be gravy.
Spam your friends:
The government, they promised me a a measly little sum, but I’ve got too much pride to end up just another bum!