The biggest change, once one retires, is the lifestyle change: what do you do when you used to go to work. This can be a hard adjustment. Another big change is in the area of finances and taxation and that is what we will look at here.
Debt is simply much more difficult to deal with in retirement. Prior to retiring you will want to get your debt eliminated. This will provide you more financial flexibility and reduce financial stress. If you can’t eliminate all your debt prior to retiring, set a goal of reducing it as much as possible (particularly high cost debt like credit cards) and never letting it increase.
Old Age Security (OAS)
OAS starts between 65 and 70 and you get to choose the starting date. OAS entitlement is based on residency (how long have you lived in Canada). Currently it’s about $7,500 a year. It is paid monthly and it’s indexed – meaning it goes up a little (adjusted quarterly) based on the cost of living. It’s a government program and unlikely to be changed. You get it every month until you die.
Canada Pension Plan (CPP)
CPP starts between 60 and 70 and again you get to choose the starting date. Your CPP entitlement is based on the contributions you made to the plan after the age of 18. Contributions are based on your employment and self-employed income each year. Currently the annual maximum is roughly $14,000 a year but very few people get the maximum. Currently the average is about $7,500 a year. CPP is paid monthly and it’s indexed as well (adjusted annually). You get CPP monthly until you die and a death benefit is issued to your estate (maximum $2,500). Upon your death your spouse may receive some of your CPP as a monthly survivor benefit. (Check www.canada.ca CPP and OAS Benefits if you want a rough estimate of your CPP entitlement).
When should I start receiving my CPP and OAS benefits?
This is not something to stress over! You chose when to start receiving the benefits. The longer you wait the higher the monthly benefit will be. Both are indexed and last until you die so if you expect to live a long time, then waiting may help. If you need the money right away or have poor health then start it right away. There is no right or wrong – just decide and then don’t give it another thought!
If you are receiving (or will receive) an employer pension just say thank you! If the pension is indexed say thank you very much! Most pensions are paid monthly and are paid until you die. You don’t have to worry or stress it simply arrives each month. It is possible that an employer pension fund will run short of money (think Nortel) and your pension will be reduced. This does not happen very often and you always get at least part of your pension. Many pensions also provide for a monthly survivor benefit to a surviving spouse.
When you are working RRSPs (registered retirement savings plans) are a way to save for retirement. You get an upfront tax break and tax-free compounding of your invested funds while building up your nest egg. When you are retired you start to live on your savings and typically withdraw from the RRSP. You can withdraw any amount from your RRSP at any time, but remember that withdrawals are taxable income (as were pension receipts above).
When you turn 71 you must convert your RRSPs to RRIFs. The investments stay the same and not much really changes except that you must make a calculated minimum withdrawal each year. (You can still take any amount over the minimum that you want.) The minimum amount is based on your age and is a % of the fund balance on January 1 of each year. The percentage (there is a table listing the % for each year) ranges from about 5.4% in the year you turn 72, to 20% when you are 95 or older. The plan holder (bank or whomever) will provide you with this amount.
RRSPs/RRIFs do not last forever and you must manage your withdrawals and determine the types of investments to be held in the plans. This can lead to stress and worry about making your funds last your lifetime.
An annuity is an agreement between you and an insurance company where you give them a certain amount of money and in return, they agree to provide you with a monthly income for life. They often come with a guaranteed payment period like 10 years. You give up control of the funds and the annuity lasts for your lifetime. You don’t worry about how to invest funds.
Once you determine what your upfront payment to the insurance company will be, they tell you what your payments will be depending on your age. Assuming you used RRSP/RRIF funds to purchase the annuity, the funds received are taxable. (Currently for $100,000 a 65-year-old man would receive approx. $525 a month and a 65-year-old woman approx. $490 a month).
Guaranteed Income Supplement (GIS)
Low income seniors may be entitled to the GIS which is a non-taxable benefit received with your OAS. This benefit is for very low-income seniors and any entitlement is based on taxable income not including OAS. For a couple with combined income over $44,000 no benefits would be received.
Other Government Benefits
There are a few other benefits again designed for low income seniors. Quarterly HST rebates and monthly Ontario Trillium benefits and the annual Ontario Seniors tax credit are applied for by filing your tax return each year. These are income tested and again you need a low taxable income to qualify.
There are some advantages to age (not very many) and getting a break on your income tax is one of them. Where you have qualifying pension income (income from a pension or if over 65 a RRIF) there is the pension income credit worth about $400 per person. This type of income also makes you eligible for Pension Income Splitting with your spouse. This benefit allows you to transfer pension income (up to 50% of it) from the higher income spouse to the lower income spouse. This can be a big money saver! Once you are 65 you get the “Age Credit” worth about $1,500 per person but this is reduced when your income goes over approx. $38,000. With this good news comes some bad news. At an income level above approx. $80,000 your OAS is clawed back (meaning you must pay back your OAS) at a rate of 15% per dollar over the limit.
It seems like everyone hates to budget but as you age you need to have a general idea of what funds are available and what expenses you have so you can see if you can support your hoped-for lifestyle for the rest of your life. So, take the time to determine where the money for your expenses is coming from (OAS, CPP, RRSP/RRIF, annuities, GIS, other benefits, investment income etc.) and what your annual expenses are and make sure you can sustain yourself for the rest of your life.
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We provide independent (we receive no commissions and sell no financial products) financial and tax planning advice. If you have questions or concerns, we are here to help!
~Ross Latter CPA, CA