In yesterday’s post I walked you through how to come up with a yearly income requirement for retirement in today’s dollars. Now today we are going to look at government benefits.
In Canada there are a few different programs you can tap into during your retirement. The most common programs people have to account for is Old Age Security (OAS) (which is vaguely similar to Social Security in the US) and the Canada Pension Plan (CPP).
Both are important to account for in your plans in some form or another. Some people don’t believe the programs will continue when the baby boomers hit retirement. I think you can’t estimate inflation for twenty years either, but we still try. So for now keep them in and we will add some buffer to our calculation later. Also if you really have problems with the OAS program you can drop it out of your calculations, but I would suggest leaving the CPP in as it is a pension plan run by a government. Let’s face it you’ve got a higher risk of your work pension going belly up that the CPP running out of money.
1) Canada Pension Plan
You’ve seen the deduction on every pay cheque for years and now here is the good news. You get to cash in on some of that forced savings. The earliest you can collect is age 60. Since you don’t know when your going to die I suggest that most people just take the cash and accept that your going to have a pension reduction of 30%. The 30% reduction is worth it when you consider you are being paid for any addition five years.
I suggest you request a statement of your CPP contributions to date to determine where you currently are. If you take that you can plug it in to an online calculator and get an estimate of what you are going to earn. If you don’t have a statement still check out that online calculator link as you can get an estimate based on your income. Also you have the option of adding an age where you stop contribution to simulate early retirement. In my case I got $7100/year for me while I’ve been playing for the numbers for my wife and I’m going to drop back her amount to $1200/year. The reason is it is becoming apparent that after doing my taxes that she won’t be contributing much for the next few years. This year’s total contribution for her was under $100.
I know that doesn’t look like a lot but combined, the $8300/year is still a useful base for your retirement income. The added tax benefit of a CPP pension is income splitting is allowed. Please note that if your from Quebec you fall under the Quebec Pension Plan (see here for information).
2) Old Age Security
Just about everyone qualifies for the OAS. All you have to do is live in Canada for 10 years prior to your retirement but after you turn 18 (and be a Canadian citizen or legal resident). If you’ve lived in Canada for 40 years or more after you turned 18 you will qualify for the full pension. If your not there I suggest you go read the fine print to find out if you can expect anything or if you qualify for other benifits such as the Guaranteed Income Supplement or the Allowance. Based on the current rates, I expect my wife and I will collect an additional $5900/year each after we turn 65. So that would add another $11,800 to our retirement income.
Therefore in total OAS and CPP will pay me and my wife $20,100/year of inflated indexed money in today’s dollars. Depending on if required retirement income is fairly modest you might find yourself most of the way towards your goal after you turn 65.
Tomorrow we will continue our series and see how a work place pension and RRSP’s fit into the mix.