A pensioner receiving partial OAS will receive more GIS than someone receiving a full OAS pension, to make up for their lesser amount of OAS.
A pensioner receiving partial OAS will receive GIS up to a higher income, compared to someone receiving a full OAS pension.
Jonathan Chevreau on Findependence Day Hub profiles a 28 year old Winnipeg-based investor named Saxon Funk who has a firm plan for achieving financial independence through various passive streams of income. But his real play for findependence comes through real estate. He was attracted to real estate when he discovered he could buy properties at 10% down, and he caught the Winnipeg real estate cycle at just the right time.
Do you know How Your Daily Commute Affects Your Finances? Dan Wesley from Our Big Fat Wallet reports that the average time Torontonians spend commuting is 80 minutes – the longest time in the world. In contrast, Saskatchewan Jobs says the average commute time in the province’s two largest cities is only 20 minutes. Another reason to count your blessings!
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
A recent policy paper from the C.D. Howe Institute[I] documents how the current mandatory minimum withdrawals from registered retirement income funds (RRIFs) and similar accounts have not kept pace with the increased life expectancies of Canadians – a problem for retired Canadians trying to balance their need for current income against the risk of outliving their savings.
Since 1992, the Income Tax Act has obliged holders of RRIFs and similar accounts to withdraw annual amounts, dictated by an age-related formula, that rise until holders must withdraw 20% each year. But in 1992, the federal government was in a deficit position and needed cash. Now it is close to surplus and the timing of the receipt of those taxes is less critical for the government.
To the RRIF holder, however, the minimums pose a threat. They oblige the holder to run tax-deferred assets down rapidly. Today, people can expect to live much longer after retirement, and real returns on investments that provide secure incomes are much lower. RRIF holders now face serious erosion in the purchasing power of tax-deferred savings in their later years.
Back in 1992, a 71-year-old man who withdrew the annual mandatory minimum from his RRIF could expect to deplete 25 per cent of his initial balance’s real value upon reaching his life expectancy, and had virtually no chance of seeing its real value drop more than 90%. Now, he can expect to live to see his initial balance drop about 70%, and faces a 1-in-7 chance of seeing its real value drop more than 90%.
In the same year, a 71-year-old woman making minimum RRIF withdrawals could expect to deplete about 40% of her initial balance’s real value upon reaching her life expectancy. Now, she can expect to deplete about 80% of it. And she faces a 1-in-4 chance of seeing its real value drop more than 90%.
The study authors William B.P. Robson and Alexandre Laurin admit these are stylized examples that will not apply to everyone. Some seniors, especially those who do not anticipate living long, will want to withdraw tax-deferred savings faster than the RRIF minimums. In the coming decades, more seniors, enjoying better health and working at less physically demanding jobs than their predecessors, will work longer and replenish their savings notwithstanding the disadvantage of losing tax deferrals after age 71.
Couples can delay the impact of the drawdown rules by gearing their withdrawals to the younger spouse’s age. High-income seniors whose incremental withdrawals do not trigger OAS and GIS clawbacks will find the burden of paying ordinary income taxes on them tolerable. As room to save in TFSAs grows, more seniors will be able to reinvest unspent withdrawals in them, avoiding repeated taxation.
For other seniors, however – even if they do have room to reinvest in TFSAs – these forced drawdowns make no sense. These seniors include those whose withdrawals – reinvested in TFSAs or not – trigger clawbacks and other income and asset tests; who find tax planning and investing outside RRIFs daunting; who cannot easily continue working; or, who anticipate sizeable late-in-life expenses such as long-term care.
Moreover, foreseeable demands on individual and public resources suggest we should be encouraging saving, rather than discouraging or at best complicating it. Roughly 203,300 Canadians are now age 90 and older; in about 25 years that number will roughly triple. To the extent future seniors have ample assets to finance their needs – especially those such as health and long-term care that rise with age – all Canadians will benefit.
Therefore, the authors of the paper argue minimum drawdowns from RRIFs and similar vehicles should start later and be smaller, or even disappear entirely.
They say that since tax is payable on RRIFs upon the death of the last to die of the account holder and his/her spouse, in a present-value sense, elimination of mandatory minimum withdrawals would have no significant fiscal impact for the government. Elimination would also have the additional benefit of removing the need for future updates as longevity, yields and possibly other circumstances change again.
Table 1 below illustrates how the RRIF minimum drawdown schedule could be modified to reflect both the increased longevity of Canadians in 2014 and revised interest rate assumptions.
[I] This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
Current RRIF Prescribed Minimum Withdrawal
RRIF Minimum Withdrawals to Replicate 1992 Account Depletion Probabilities
Source: Outliving Our Savings: RRIF rules need a Big Update: C.D. Howe Institute
 This blog contains excerpts from the C.D. Howe Institute report Outliving Our Savings: RRIF Rules Need a Big Update:
In the first two parts of this series on how to save money for retirement we focused on how to get started and some of the registered and unregistered savings plans available to Canadians.
This final segment looks at some other ways (in no particular order) you can both grow and preserve your retirement savings. And making sure your children are educated to effectively manage their finances is a big part of this discussion.
Keep fees low: You ignore investment fees at your peril, says Toronto Star personal finance editor Adam Mayers in a recent article. The simple chart below illustrates what happens if you invest $6,000 a year for 40 years in a registered retirement savings plan. It assumes your RRSP earns a little over 5% a year and ignores taxes.
In a utopian fee-free world, your money is worth $785,000 in 40 years.
In a 1-per-cent fee world, you’ll have $606,000 (23% less).
In a 2-per-cent fee world, you’ll have $435,000 (45% less).
Annual fees in the Saskatchewan Pension Plan (SPP) average 1%.
Understand your risk tolerance: You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments. Investors who take on too much risk may panic and sell at the wrong time. Other factors affecting your risk tolerance are the time horizon that you have to invest, future earning capacity, and the presence of other assets such as a home, pension, government benefits or an inheritance. In general, you can take greater risk with investable assets when you have other, more stable sources of funds available.
Develop an asset allocation plan: Once you understand your risk tolerance, you can develop an asset allocation strategy that determines what portion of your retirement account will be held in equities (stocks) and fixed income (bonds, cash). The investment allocation in the SPP balanced fund is illustrated below.
Rebalance: The asset allocation in your portfolio will change over time as dividends are paid into the account and the value of the securities you hold goes up or down. Rebalancing helps you reap the full rewards of diversification. Trimming back on a winner allows you to buy a laggard, protect your gains, and position your portfolio to benefit from a change in the market’s favorites.
Auto-pilot solutions: Balanced funds including the SPP balanced fund are automatically rebalanced. In your RRSP or company pension plan Target Date Funds (TDFs) are another way to ensure your investments reflect your changing risk profile. Developed by the financial industry to automatically rebalance as you get closer to retirement. TDFs are typically identified by the year you will need to access the money in five year age bands, i.e. 2025, 2030 etc. They are available in most individual registered retired savings plans and in your employer-sponsored group RRSP or pension. However, all TDFs are not alike so consider the investment fees as compared to the expected return before jumping in.
Educate yourself: Personal finance blogs contain a wealth of information about everything from frugal living to tax issues to how to save and invest your money. You can find out about some of them by listening to our podcast series of interviews on savewithspp.com or reading the weekly Best from the Blogosphere posts. Some posts are better than others so caveat emptor. But blogs like Retirehappy and Boomer & Echo have huge archives so you can find answers to virtually any virtually personal finance question.
Choose your retirement date carefully: We are living longer so your money has to last longer. And starting in April 2023, the age of eligibility will gradually increase: from 65 to 67 for the Old Age Security (OAS) pension. Even if you are among the minority who have a defined benefit pension, retiring early means you will get a reduced amount. Whether you keep working because you need the money or you love your job, you will have a more affluent retirement if you work full or part-time until age 65 or longer.
Develop other income streams: One of the things that stayed with me after reading Jonathan Chevreau’s book Findependence Day is the importance of having multiple income streams in retirement. So even if you are saving at work or in an individual RRSP, don’t put all your eggs in one basket. While you may not want to work at your current job indefinitely, you may be able to use your skills or hobbies to do something different after retirement. For example before I retired I was a pension and benefits lawyer. Now I augment my retirement income by writing about workplace issues.
Start RESPs for your kids: The following two Globe and Mail articles by financial columnist Rob Carrick brought home to me the impact that your children’s debt and failure to launch can have on your retirement.
Registered educational savings plans allow you to accumulate money for your children’s education tax free and receive government grants that add to your savings. When the money is paid out, your child pays taxes, typically at a lower rate. Saving for your kids’ education now so they can minimize student loans down the road is one of the best investments you can make in your future ability to retire sooner rather than later.
Raise financially literate children: And last but not least, educate your children about money so they grow into financially responsible adults. Every event from the first allowance you give your kids to buying Christmas gifts to planning for college is a teachable moment. Someday your offspring may be managing your money and ensuring you are properly taken care of. That’s when all of your great parenting skills will definitely come home to roost!
The Real Retirement by Morneau Shepell Chief Actuary Fred Vettese and Bill Morneau, Executive Chairman of Morneau Shepell was released and extensively reviewed by the media in 2013.
However, I decided to circle back to this book over a year later because it is much more optimistic than many of the personal finance books I have reviewed since January.
Most financial writers seem to be trying to guilt readers into forgoing consumption during their working lives in order to accumulate sufficient RRSP savings to generate 70% of pre-retirement income.
In contrast, Vettese and Morneau present well-reasoned arguments to illustrate that income replacement of 50% or even less post-retirement will result in a “neutral retirement income” (NRIT), i.e. similar patterns of consumption for retirees.
Initially, they note that there are three phases of retirement:
Phase 1: From retirement age to the mid or late 70s or even later if you are healthy you are most likely to travel to exotic locations and pursue expensive hobbies. Therefore your income requirements will be highest in this phase.
Phase 2: In the second phase of retirement you may have diminished physical or mental capabilities. If so, you will travel less and cut back on strenuous activities. Therefore you will spend less money.
Phase 3: In the last years of your life you may be more physically or mentally impaired. You may need to be in a nursing home, or if you are wealthy enough, in an upscale retirement home with nursing care.
As a result, planning to spend more in the first decade of retirement will not necessarily mean that you will run out of money before you run out of time.
I thought it was particularly interesting that when considering available resources that can generate retirement income for Canadians, unlike many other personal financial writers, the authors also factor in the value of “Pillar 4 assets” including real estate, business equity and non-registered savings.
They use the following population breakdown in their calculations:
Average total income (couple)
The bottom quartile is dropped out because it is assumed that government benefits such as CPP, OAS and the GIS will provide better than average income replacement.
For the most part, Quartile 5 is also excluded since a couple with an income of over $200,000 has typically saved in RRSPs and has other Pillar 4 assets that can augment retirement ravings.
Vettese presents an example of a couple in Quartile 3 with $78,000 in annual income at age 65 and assumes they saved 6.5% annually in an RRSP from age 30 until retirement, Once their RRSP balance is converted to a RRIF at age 65, including government benefits they will have an income after retirement of $48,600/year.
Although retirement income for this couple is just 62% of their pre-retirement income, they no longer make RRSP and CPP contributions; have EI deductions and other employment costs; and pay a mortgage or child-raising costs. Their income taxes are also much lower.
The net result is that they have $14,000 more in disposable income to spend post-retirement! Although each family’s financial situation differs, the authors conclude that an NRIT which equalizes consumption before and after retirement generally only requires about 50% of pre-retirement income.
A calculations using a couple in Quartile 4 ($116,000 before retirement) reveals that the NRIT is just 44%. Furthermore, they can achieve their NRIT with 35 years of RRSP contributions equal to 3.5% of household income. And in general the higher the income level, the lower the NRIT.
This book is an interesting read because it presents a different perspective on the perennial questions, “How much will I need in retirement?” and “How much do I have to save to accumulate the amount I will require?”
While Vettese and Morneau suggest the answers to these questions may be “less than you think,” it doesn’t mean you don’t have to save at all. And all of the scenarios assume you retire free of mortgage and other debt. They also presume a drop in employment expenses and taxes payable that may not apply in your situation.
But if you thought the only thing you have to look forward to is Freedom 75, reading this book will cheer you up. Retiring at age 65 may in fact be a perfectly reasonable objective and you might even be able to afford a nice annual vacation or two while you are still well enough to travel.
Every family has multiple financial priorities. If you have small children and a big mortgage it is often daunting to think about saving for anything more than a family night out at a local fast food restaurant.
But one way to manage your money is to pay yourself first by allocating specific amounts to savings and having these amounts moved into different jars (or accounts) as soon as your paycheque is deposited into your account.
In Part 2 of the series “how to save for retirement” we will focus on several of the tax-assisted or tax–deferred savings plans available to you and some tips for using them effectively.
Government benefits: Every working Canadian must pay into the Canada Pension Plan or the Quebec Pension Plan until age 65. In addition, Old Age Security is payable to Canadians or legal residents living in Canada who lived in the country at least 10 years before age 65 and Canadians or legal residents living outside Canada who lived in the country at least 20 years before age 65. Lower income OAS recipients may also be eligible for the Guaranteed income Supplement (GIS). But changes to government benefit programs mean you can take benefits later or in some cases earlier (with a penalty). When developing a retirement savings plan you should understand how these programs work and the benefits you can expect to receive. You also need to decide when it makes the most financial sense for you to start collecting CPP and OAS.
Saskatchewan Pension Plan: The Saskatchewan Pension Plan is a defined contribution pension plan open to all Canadians with registered retirement savings plan (RRSP) room. You can contribute up to $2,500/year or transfer in up to $10,000/year from another unlocked RRSP. Low fees (one percent/year on average) and consistent returns (average of 8.13% over 28 years since inception) make SPP an excellent investment. The program is very flexible because how much you contribute and when is up to you. Funds are locked in until your selected retirement date, between ages 55 and 71.
Registered Retirement Savings Plan: In 2014 you can contribute 18% of your previous year’s income to a maximum of $24,270 to your RRSP minus specified amounts contributed to other registered savings accounts. Unused contribution room can be carried forward. You can find your RRSP limit on line (A) of the RRSP Deduction Limit Statement, on your latest notice of assessment or notice of reassessment from the Canada Revenue Agency.
RRSP withdrawals: One weakness of an RRSP as a retirement savings vehicle is that you can withdraw money at any time. If you do withdraw RRSP funds you will pay tax on withdrawals at your normal tax rate, the contribution room is lost and you lose the benefit of future tax-free compounding. However, the Home Buyers’ Plan and the Lifelong Learning Plan permit you to withdraw amounts from your RRSP in specific circumstances without triggering a tax bill and require you to repay the money, usually over 15 years.
Tax deductible: Contributions to SPP, RRSPs and other registered pension plans are tax deductible. If you participate in one or more of these plans and have not already arranged to have less tax taken off at source, you may get a hefty income tax return. There are lots of ways to spend this windfall including taking a vacation or paying down debt. However, in his book The Smart Debt Coach, author Talbot Stevens says reinvesting your tax returns into an RRSP is the best way to get the full benefit of compounding in the plan.
Deferring tax deduction: There is no minimum age for an RRSP. In order to make contributions to an RRSP account, a minor needs to have earned income the previous year and have filed an income tax return. If a thrifty young person or anyone with a low income makes RRSP contributions, deferring taking the tax deduction until they are in a higher tax bracket means they will get a bigger bank for their savings bucks. The last RRSP contribution a taxpayer can make is in the year they turn 71.
Tax Free Savings Account: A Tax Free Savings Account (TFSA) allows you to currently save $5,500 a year. Contributions are not tax deductible, but investment earnings accrue tax free in the account. If you withdraw money, you can re-contribute the amount to the account in the next or subsequent years without any penalty. You can only begin making contributions at age 18 but there is no upper age when you have to stop contributing. How do you decide if a TFSA or an RRSP is best for you? Gordon Pape says TFSAs are better for short-term savings goals and if you don’t want to undermine possible eligibility for government benefits like the GIS. But if your income will be lower in retirement he suggests saving in an RRSP.
Automatic withdrawal: Whether you participate in a company pension plan, SPP, RRSP, TFSA or a combination of all or some of the above, set up automatic withdrawal so a specified percentage of your income is moved into these accounts every payday. David Chilton made “pay yourself first” a popular mantra in The Wealthy Barber, first published in 1989. If savings are skimmed off the top, you will learn to live on less while you get on with the business of day-to- day living. And when you do retire, you will have a significant part of the nest egg you need to live on.
Automatic escalation: To find out how much you need to save for retirement, you need a financial plan. But in a recent column in the Globe and Mail, personal finance expert Preet Banerjee suggests that in the absence of a plan, the rule of thumb should be at least 10% or as much as you can save. In other words, you are not going to have enough if you keep saving a flat dollar amount each year. But if you select a percentage of income and ensure you increase your contributions every time you get a raise, it is more likely that you will reach your retirement savings goal.
Consider insurance: Nobody expects to become disabled or die young, but it happens more often than you think. Regardless of how much you are saving for retirement, an unexpected loss of income can derail all of your short and long term goals. You may have some life insurance, disability insurance and maybe even critical illness insurance at work. Review your coverage with a financial advisor to determine if you need more individual coverage or if you can afford to self-fund the risk.
In Part 3 of this series we will focus on some basic investment principles that will help you grow your retirement savings.
Today in savewithspp.com we continue our series of interviews with personal finance bloggers. Dave Dineen’s blog “Dave’s retirement journey” appears on Sun Life’s brighterlife.ca
Dave retired in December 2010 in his mid-50s. Before retiring, he spent 30+ years in marketing for several financial services companies, most recently, for Sun Life.
He writes about what it actually feels like to be retired – the pitfalls, as well as the joys. He shares many real-life experiences and what they’ve taught him about how to retire successfully.
Thanks for joining me today Dave.
My pleasure Sheryl. Great to talk to you.
Q: More and more people are now saying they are aiming for Freedom 70 or older. You’ve achieved Freedom 55. Why did you decide to retire so early?
A: Well, a few reasons really. My parents were dairy farmers and my dad died at age 62 before he could retire. And before that, my parents’ vacations actually fit between milking the cows in the morning and milking them again at night, 365 days a year. So I decided to retire while I was young enough, healthy enough and vital enough to do the things I wanted to do.
My career choices along the way, also really led to my retirement. My first career was as a journalist. My second career was in marketing with big financial companies like TD Canada Trust and Sun Life where I created retirement websites and wrote retirement newsletters, blogs and brochures. So I know quite a bit about retirement.
And my third and kind of final career – if there is such a thing as a final career in life – was in market research. In that position I created Sun Life’s Canadian Unretirement Index, which has really contributed to how we understand the idea of retirement and the reality of how retirement is changing in this country.
Q: How are you funding such a long retirement?
A: I’m going to be 58 this year, so I can’t apply for CPP any earlier than two years from now. I can’t apply for OAS for over seven years. And I don’t want to start my workplace pensions too early and get really small payments.
So for now, my wife and I are living off two sources of income. Our basic day-to-day living costs are paid from a stream of dividends on her non-registered investments. The income I get from freelance writing and marketing is what we’re using for the “nice to haves” like travel or even to up our TFSAs.
Q: How many hours a week do you devote to freelance writing and marketing consulting?
A: It really varies. Actually when I retired, I had no intention of freelancing, but I kept getting offers from people who needed some help and knew what I could do. I’ve done work for people even while I’ve been away traveling in England, Scotland, Wales, Italy and Spain. All it takes these days is a laptop, a phone and Skype.
Q: Can you estimate what percentage of your pension income you are earning from your freelance work? 20%? 40%?
A: Oh, it’s more than either of those numbers. It’s made a tremendous difference. So much so, that after more than three years, we actually have yet to touch a penny in our RRSPs or our TFSAs or our pensions. We are preserving our retirement savings and enjoying a better retirement lifestyle than we really expected.
Q: So, let’s get to your blog. What have some of your most popular blogs been about?
A: Well, my blog “Dave’s Retirement Journey,” really is my personal story. And people are interested in living a good life without going through their money too quickly. In our case, we travel a lot. We were on the road almost 12 of our first 36 months of retirement.
So, one of my most popular blog posts was around spending money slowly while you’re taking a long trip. By the way, we just got back a couple of weeks ago from three months in Europe where we ate like royalty, lived centrally in wonderful cities and we did fun things. Yet we still arrived home with a zero credit card balance.
Q: How important do you think it is to retire without debt?
A: Oh boy, it is absolutely necessary. In my mind, if you are in debt, you are not ready to retire. Obviously, if poor health or a job loss forces you out, you kind of have to muddle through somehow. But otherwise, I believe even thinking about retiring with debt is just crazy.
Q: One of the things that you blogged about is how downsizing in retirement doesn’t always work. Can you tell us a little bit about your home and cottage buying and selling and where you’ve finally landed in terms of your housing choices?
A: Yes, it really was complicated. A couple of years before retirement we sold our big four bedroom house and downsized to a one bedroom city condo, plus a cottage. But we realized the upkeep on the cottage was keeping us from travelling, so we sold it. Then we found that the one bedroom condo on its own was too small and my wife really missed her garden. So we ended up selling the condo as well right about the time we retired. In the end, we bought a new condo in Stratford, Ontario, which is in the MoneySense list of the best places to retire in Canada.
Q: With the benefit of over three years as a retiree, what are several unexpected things you’ve learned?
A: Boy, I love that question. I’d say that the first thing is that if you’re the kind of person who’s disciplined enough to have saved well for retirement, then you’re probably going to find it pretty easy to adjust to the financial discipline of living within your means in retirement.
Another unexpected thing for me has been the power of social media. A couple of years after retiring, I remembered that I had a profile on LinkedIn. I figured I’d better go in and update my profile to show that I was retired. Within a day, someone that I hadn’t worked with in 17 years reached out to me as a result of that LinkedIn update, and asked if I was interested in doing some freelance work for them in the marketing department at Investors Group. Another of my freelance clients actually has paid Google so that if somebody searches for my name, that client’s website comes up.
And I suppose a third unexpected thing I’ve learned along the way is that I actually like doing some freelance work. That’s a big surprise to me, because I really thought that I’d closed the door to work.
Q: So what was the best investment you ever made?
A: This will sound odd, but I believe my best investment was actually to buy a good-quality treadmill about five years ago. It helps keep my wife and I healthy, and to us that’s more valuable than a big tall stack of money.
Q: If you had one piece of advice for Canadians thinking about retirement, what would it be?
A: That’s a tough question. I think Canadians need all kinds of advice when it comes to retirement. But I think for me it all starts with thinking about what kind of retirement you want to have. I like to use a simple analogy.
In your working career, chances are, somebody else wrote your job description. And at the end of your life, somebody else is going to write your epitaph. But it’s that in-between part that you get to write.
So what kind of retirement do you really want to have? Figure that out and of course seek all the help you need to deal with the financial stuff.
Thank you, Dave. I really appreciate talking to you today.
My pleasure, Sheryl.
This is an edited transcript of the podcast you can listen to by clicking on the graphic under the picture above. If you don’t already follow Dave’s retirement journey on Sun Life’s brighterlife.ca, you can find them here. Subscribe to receive blog posts by email as soon as they’re available.
Whether you are saving for retirement or for other long-term goals, the key is that you have to spend less than you earn.
In What is “Saving?” Gail Vaz-Oxlade says it’s also important to distinguish between saving to buy a car or go on a vacation which is planned spending and saving for another chapter in your life like retirement.
Big Cajun Man says in I did my RRSP and TFSA Now What? that opening accounts and depositing money are just the beginning. Unless you develop an investment strategy and make sure you aren’t paying exorbitant fees, your money won’t grow the way it should.
The Toronto Star’s Ellen Roseman recently wrote a great column about How to plan for retirement on a low income. She says people who expect to receive the guaranteed income supplement (GIS) to top up their old age security (OAS) pension after age 65 should save in a TFSA and not an RRSP because TFSA withdrawals will not impact GIS eligibility.
First Foundation is an Alberta and Saskatchewan based financial services company. In their owngrowprotect blog they have started a 52 week money challenge. The author of Go To Disney Land or Pay Bank Fees, Your Choice! calculates that his family can save over $500 per year by shifting to no-fee banking which in ten years will add up to a family visit to Disneyland.
And Mark Seed from My Own Advisor asks the million-dollar question how much money do you need to retire well? He says that the magic number is indeed $1m or more. Even if some costs disappear in retirement like saving for retirement itself and mortgage payments there are costs in your future like property taxes, utilities, gas and food that are going to grow over time.
For those of you who think saving $1m before you retire is an unattainable goal, frugal lawyer Dave explains how he reached $1M net-worth by the age of 34 in this post on the Million Dollar Journey blog. It helped that he rode his bike to work instead of buying an expensive car like many other young lawyers in his firm.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere. Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
When you are planning to fully or partially retire, there are many decisions to make. Most Canadians are aware that they can elect to start receiving their Canada Pension anytime between age 60 and 70.
But many do not know that as of July 2013 if they become eligible for OAS benefits at age 65 they can also choose to defer receiving benefits for up to five years.
Regardless of whether you choose to defer your OAS or not, you must apply for benefits from this program when you wish to begin receiving payments. It may make sense to wait, however, if at age 65 your income is still high enough that your benefits would be fully or partially clawed back. That would occur if you have net income between $71,592 and $115,716 on your tax return, and assuming you expect it to decline in future.
OAS is paid to seniors over 65 who are Canadian citizens or legal residents and have lived in Canada for at least 10 years after turning age 18. People living outside Canada at the time of application must have resided in Canada for at least 20 years after their 18th birthday. Your employment history is not a factor. A full OAS benefit is based on 40 years of Canadian residence.
For the period beginning January 2014, maximum OAS benefits are $551.54 per month or $6,618,48 per year. Benefits are indexed to inflation and adjusted quarterly. If you decide to delay collecting OAS beyond age 65, the benefit will be increased by 0.6 per cent for each month of delay to a maximum of 36%.
Therefore, based on the current annual benefit level (excluding future inflation), the pension you receive beginning at age 70 will be $9001.13.
Marissa Verskin, a senior tax manager at Toronto accounting firm Crowe Soberman, says the decision on whether to delay collecting OAS or claim it right away should depend on your personal situation. This includes your life expectancy, current and projected future income level and your expected rate of return.
Some of the other circumstances that may influence your decision are if you have chosen to work beyond age 65 or if you anticipate receiving a large one-time capital gain or lump sum at retirement (i.e., for accumulated sick leave credits or severance pay).
Doug Runchey of DR Pensions Consulting spent 32 years with Human Resources and Skills Development Canada. He says if you choose to defer receiving OAS beyond age 65 you can’t “double dip.”
That means if you are only eligible for a partial OAS pension because you have less than the 40 years of residence required for a full benefit, you can’t use the deferral period to both increase your OAS pension by counting it as additional years of residence and also receive a 0.6 per cent per month increase for voluntary deferral.
Service Canada is required to count the deferral period either as additional years of residence or a period of voluntary deferral — whichever is of the greatest benefit to the client.
Runchey also says there could be another collateral advantage to voluntary deferral of OAS. “If you delay and increase your OAS by 36 per cent to $9001.13 per year, you also effectively increase the maximum income claw back threshold to $131,599 from $115,716,” he says.
If you have started receiving your OAS benefits within the last six months but think you can benefit from the deferral, you can write to Service Canada and ask them to cancel your benefits for now. Once your request is approved, you will have to pay back the benefits received. Then you can reapply for OAS at a later date.
By 2023, gradual changes in the age of OAS eligibility from age 65 to age 67 will be fully phased in. This change will not affect OAS applicants or recipients born before March 31, 1958. But people born between April 1, 1958 and January 31, 1962 will have a date of eligibility between ages 65 and 67. For example, a person born in June or July 1961 will be not be eligible to collect OAS until age 66 plus eight months.
Today we report on a series of interesting blogs with no particular theme.
If reality shows like Income Property have you thinking about whether or not you should buy and rent out part of your house to help cover the mortgage, you may want to read Sean Cooper’s blog 5 Lessons Learned as a First Time Landlord on Million Dollar Journey.
Every dollar counts when you retire, so you want to make sure you get everything that’s coming to you from the Canada Pension Plan. But on Retire Happy, Jim Yih says that of the CPP audits that he has conducted in the past six months, almost half of the clients were receiving less than they were entitled to because not all earnings were included in the pension calculation. He has suggestions how you can ensure you are being paid the correct amount of CPP.
My Own Advisor gives a Financial Literacy month primer on Old Age Security benefits and offers his controversial wish for OAS: keep it afloat but overhaul this sacred cow so any individual senior making $70,000 or more is ineligible for OAS benefits.
And finally, on Brighter Life, Kevin Press asks, Should we worry about seniors living in poverty? Answering his own question, he says that although one in five Canadians is worried about being able to cover basic living expenses in retirement, we live in a country considered a world leader in the fight against senior citizen poverty.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere. Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.