This post continues the theme I started yesterday about the basic tools and practices to reduce or even eliminate financial stress in retirement.
The basic income source (pensions, which I wrote a post about yesterday) can be supplemented by retirement saving options both taxable and tax free and potentially government allowances.
Today I will cover the last pension type (I did not get to yesterday) and retirement saving options both taxable and tax free.
In future posts I will talk about how these savings can be used to create income funds and/or purchase annuities, resulting in additional income streams to those of your pensions.
Pension Continued/ Allowances
Old Age Security (OAS) Pension
OAS has wide eligibility and requires neither that you have worked nor contributed. Associated with this pension are a couple of government allowances with more restrictive conditions.
If you are living in Canada and a citizen or legal resident who has resided in Canada for at least 10 years since age 18, at age 65 you are eligible to receive the Canadian Old Age Security Pension.
To get the full pension amount, which is currently paid monthly to a total of about $6,800 a year, you need to have resided in Canada for 40 years; otherwise it is reduced based on the number of years you resided since age 18. (The eligible age changes to 67 in 2023). You can also defer OAS up to 5 years and get a higher payout based on long you deferred the start after you reached age 65.
Note: If your annual income exceeds $72,000 the OAS payment is clawed back in increments up to annual taxable income of just over $118,000 when it is %100 clawed back.
Guaranteed Income Supplement (GIS) and Allowance
At age 65, if your single or joint income is lower than prescribed thresholds and you are receiving OAS you are eligible for an additional supplementary amount (GIS).
If your spouse is receiving OAS and GIS then you are eligible to receive the “Allowance”.
Check out Service Canada website for the prescribed income thresholds, amount paid, etc. Service Canada OAS, GIS Allowance Info Page
Retirement Saving Options
Registered Retirement Savings Plan (RRSP)
The Government of Canada encourages residents to supplement pension income with savings.
The encouragement is in the form of a refund of tax paid on the amount saved in the year it is saved. In the year the savings are withdrawn, tax is collected.
For example, if you save $10,000 in a year when your marginal tax rate for all your income is 30% the government will refund you the $3000 tax paid on the $10,000. If you withdraw those $10,000 in savings 20 years later when your income and marginal tax rate is lower overall, say 25%, you would only pay tax of $2500.
So, the incentive is that you get “present value” from a tax refund (20 years of investment opportunity) and potentially reduce the tax on the saved amount when you withdraw it (the theory is your income is lower in retirement than while working).
Additionally, all capital gains, interest and dividend income earned on the registered savings is tax free until withdrawn.
There are tons of rules covering registered retirement savings plans in Canada. These include things like; how much can be put in a registered retirement savings plan, withholding tax for lump sum withdrawals, penalties for over contributions, documentation and filing requirements, spousal plans and so on. If you want more info on these things, the Government of Canada web site is a great source or if you are not so much a self serve person there is always a financial services professional, accountant or such. I might do a future post about it but would need to be on request.
Regular Retirement Savings
Saving money to supplement your pension income probably should start with an RRSP ( because of the great incentives noted). However, given the restrictions to how much you can allocate to an RRSP additionally saving some amount of after tax money as part of your retirement nest egg can make sense as well.
The things to consider are what are my post retirement income sources and about how much will they be? Based on this analysis you can get an idea how much savings is desirable to supplement your government, company pensions and registered plan savings.
Example:
Here is a hypothetical case assuming someone with both a defined benefit pension and from a second employer a defined contribution pension used to buy an annuity and RRSP savings of $120,000 :
CPP – $12,800 OAS – $6,800 Defined Benefit Pension – $30,000 Annuity – $6,000 RIF (from RRSP) – $6000 Total – $61,600
If $61,600 before taxes is going to provide enough income you are done (this of course is dependent on estimated expenses).
If you want more income after tax savings come into play. In the above example if the target income was $75,000 the $13,400 shortfall per year could be covered by purchase of a $200,000 annuity (individual, no guarantee, at today’s rates) or savings of say $500,000 savings assuming an annual return of 3% (probably a realistic assumption).
If additional after tax savings is needed to get the retirement income target you seek the next question of course becomes how to invest it to minimize risk and maximize return. You guessed it, the subject of future posts.
A final note about retirement savings:
You can always withdraw your money from your RRSP or other retirement savings to spend on things you need at any point in time (e.g., a vacation, car, etc).
In the case of an RRSP though this requires paying withholding tax where applicable (I should also note there are special rules about using your RRSP funds to make a down-payment on a house without triggering tax). And of course, early withdrawals reduce savings and the money won’t be available for something else later should you need it (e.g., cosmetic surgery to make you look better as you age).
That being said, I do want to end this topic with a lead in to my next post which will be about options to get a regular income streams from your RRSP or non registered savings through fixed income vehicles (i.e, registered income funds or life annuities).
