The Other Way to Retire

Ok after Colleen’s comment on yesterday’s post I can’t help but do a post on what happens to you when you do nothing to plan your retirement. Some people refer to this as the default retirement, I refer to it as the other way to retire.

In Canada there is the general belief that we should have a minimum standard of living each person should have regardless of their lives. As such even with no savings it is possible to retire, but your putting yourself complete at the mercy of the government programs which could be changed at any time. Let’s do an example of a couple with no retirement savings.

First off, if you did any work at all you will get a small CPP (Canada Pension Plan) pension. Since this can vary highly depending on how much you earned and how long you worked. Yet I have to assume something for an example, so let’s do a worst case here and assume they are getting nothing.

That leaves the OAS (Old Age Security) program to pick up most of the slack for you. You can apply for OAS when you turn 65, so early retirement isn’t a option when you don’t plan. The OAS has three parts which help those out with no plan: the pension, the guaranteed income supplement (GIS) and the allowance.

The OAS pension is given to just about everyone, all you need to be is 65, a citizen and you have been living here for at least 10 years since you turned 18 to get something. To get the full pension you have to have lived here for at least 40 years since you turned 18. Fairly simple. The full benefit is $502.31/month as long as your income is below $64,781. Each person in a couple can get this amount so in total if our couple gets the full pension they will take home about $12,000/year.

The OAS GIS is for low income seniors to provide a minimum standard of living, so if your income is below a certain level you get it once you have applied for it. Please note the limits vary depending on your situation see here for details and current rates. For our example, let’s assume both of our couples have have no other pensions so they can get up to $634.02/month each as long as their income stays below $36,528. Therefore the GIS will provide about another $15,000/year.

The Allowance is for those who are married to someone receiving the OAS and is between the ages of 60 to 64. See the program page for details. For our example, I’m going to assume our couple is the same age so they are not using it.

So between the OAS pension and GIS a couple with no planning can get $27,000/year or $2250/month of inflation indexed money. Not too bad considering I didn’t see anything on the GIS information page about assets, so as long as a couple have paid for their house prior to age 65 they should have a modest retirement paid for by the government even with no planning. Please note this also doesn’t include any provincial programs people can apply for such as low income housing or income supplements.

Yet there are some significant draw backs to the other way to retire.

  1. You can not retire early. You are stuck working until your 65th birthday regardless of your health or any other situation (Ok, if there is an age gap between the couple you might be able to use the Allowance program for one of you to leave a few years early).
  2. The OAS comes out of general revenue from the government. Meaning the government can alter benefits at any time and your stuck with the income change. Keep in mind how many baby boomers will be retiring before you.
  3. You have no lump sums of cash to pay for any unexpected expenses. All you have is your monthly deposit.

So in the end, yes, it is a option, but one with lots of limitations I don’t want. So I’m going to save for my retirement, thank you very much.

This post is now part of the Carnival of Personal Finance.

13 thoughts on “The Other Way to Retire”

  1. I am single, do not own my home, and have no assets. Because I’d be paying most of my income just for rent, I wouldn’t even be able to retire.

    What happens to these people when they can no longer work?

  2. I don’t think it was your intention but all I could think reading this was that it seems a better strategy to not have an RRSP income at all but bury your savings in assests and reverse mortgage etc.?

  3. That’s a lot more than I thought and you could also get a part-time job (possibly one that pays well if you have lots of experience) to add a little more to it. I still won’t be considering these options though, since there is risk with this plan and I think I can do better.

  4. Min Wage,

    Actually your not going to do that bad. I know a member of my extended family in a similar situation. She only has a small amount of RRSP and nothing else but CPP/OAS and lives by herself. She had to stop working a few years ago and has been living on disabiltiy insurance until she got to her CPP.

    She just applied and got some low income housing, so her rent is around $425/month and then she takes advantage of every program she can to get discounts. Overall she is very happy in retirement. It’s a modest one, but she lives within her means.

    So it is possible to retire on no savings. I don’t suggest it, but if you can’t do any better you should be ok if you keep your lifestyle simple.

    Tim

  5. “The Other Way to Retire” is a good article, but you need to be careful using the word “your” in place of “you’re”. They’re not interchangeable. Think about it – if people see you making spelling or grammatical errors over and over again they might decide that you don’t pay attention to details. If readers think that of you then they’ll be less likely to value your opinion, and therefore less likely to visit your site. Get it? Bad writing equals fewer visitors which equals fewer ad clicks.

  6. Excellent post!

    An interesting point of view.

    I have realized lately that the government’s “normal retirement age” appears to be age 65. For example, if one retires at age 45, and takes CPP at age 60, this means there will be 60-45 = 15 years with zero contributions used in the CPP amount calculations. If they wait until age 65 to take it will be 20 zero years.

  7. Great post! This really reassured me that in a worst case scenario I could be living ok as long as the government programs stay in place…

    Min Wage: I’m singe, renting and living off a little bit more than this (~$1300 / month), so it is doable. I’d be able to tighten my belt and live within this range if necessary. If there are other programs available, as Tim mentions, then I could have a better lifestyle then I currently have off of this (man, is Canada a great place to be poor or what? 😉 ).

  8. Greps,

    Not a horrible idea (and not what I had in mind), but I don’t think it would work. The CRA counts just about anything as income, so even if you try to get convert your assets to income you will likely get burned. Also keep in mind you can control your RRSP withdrawals and therefore your income in retirement (until you turn 71 at least).

    Mr. Cheap,

    It was rather interesting to look at the worst case and realize it really isn’t that bad. Not great, but depending where you live it can be reasonable.

    Tim

  9. Be watchful whenever drinking too much beer since it may end up in alcohol dependency. Ofcourse if you’re an enjoyer of life just like i am then you might not care!

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