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Saturday, November 22, 2014

Retriement Calculations – Part IV

Posted by Tim Stobbs on February 12, 2009

Well before we look into the hard core math tomorrow on when I can leave work let’s have a look at some government programs which can help my plans along.

First up is the Old Age Security (OAS) Pension, which my wife and I should both qualify for the full amount see here for details.  The current payment rate is $516.96/month per person.  So in total for both of use that is $12,407/year (it is indexed for inflation).  Now this program is out of general government revenue so there is the risk it could be cut or reduced.  So depending on your personal feelings on the idea you might want to reduce the benefit in your own calculations.  I’m really not sure what they are going to do, but I’m just leaving the full amount in.  I think this one is going to be a big issue with the baby boomers so you could see some stiff resistance to cutting this back.

Next is the Canada Pension Plan (CPP), which in a nut shell is paid for with our contributions and is held in an arm’s length fund from the government (see here for more info).  So it doesn’t face the same risk as OAS, there is more than enough money in that fund to cover pensions until I’m very old.  Now your CPP benefit is calculated in a complex manner so if possible request an estimate of your pension.  It at least gives you a baseline to work with.  Something to keep in mind if you retire early is you are going to reduce your CPP pension by doing it.  You see when they calculate your benefit they drop out 15% of your lowest earning years from 18 till 65 (plus drop out years if you were raising young kids).  Keep in mind you also can take CPP early at 60, but doing so reduces your pension by 0.5% per month permanently.

So what does this all mean to me?  Well I’m expecting a low pension amount.  You see there are 42 years between 18 and 60, and I’m going to have zero incomes for 15 years (45 to 60) when that 15% drop out will only cover 6.3 of those.   Then I’m getting a 30% reduction for taking the pension at 60.  In the end I’ll have a low number.  So the best way to get an estimate of your pension is to plug your data into this calculator and adjust your income level down later on to simulate your early retirement.  It takes some work but it does give you a number.

I’m being lazy here and just carrying forward my previous numbers of $5460/year for me and $1200/year for my wife that I calculated last year.  I don’t expect these numbers to change much so I’ll just keep them for now.

Therefore in grand total I expect these programs will provide $19,067 of income after age 65.  So if you added that into my normal budget that’s like almost $59,000/year for retirement income after 65.  Wow, I not sure I could even spend that in a year.  I’m just too used to a frugal life.

Oh well tomorrow I’ll do some math and see what my options are.

Comments

3 Responses to “Retriement Calculations – Part IV”
  1. I was always one for including a healthy safety factor in my retirement income forecast.

    I recently received notice that my government pension may be subject to a decrease if the markets continue to tank. I was well aware of that possibility prior to deciding to retire.

    At this time I continue to forecast this market scenario as a very likely one.

    So far I have not applied for CPP and OAS is still years away.

    Roughly speaking, I always viewed our CPP and OAS income as part of our safety factor/luxury spending component.

    I had what most people would consider a very good paying job with excellent pension etc. I seldom got my hands dirty.

    When I made the decision to pull the plug on employment I asked myself…If I only ever see 50 % of CPP and OAS (for both of us) would that be acceptable? I also used a nominal sum of 3% per year for return on our savings.

    Just some thoughts from the other side of the retirement canyon.

    CM

    ps…I would really enjoy seeing your review of the validity of the Buy and Hold Thesis.

  2. Canadian Dream says:

    CM,

    Thanks! I appreciate the input. I think I’m going to have to do some other ‘what if’ runs on these numbers to get a feel for how sensitive they are.

    Actually the Buy and Hold is a good topic. I’ll try to get to it soon.

    Tim

  3. Patrick says:

    Afraid its worse than you’ve planned for the penalty for taking your CPP at 60 is changing to be 36% – gov’t trying keep us working longer and that goes into effect over the next 18 months.

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