By Patricia Dubois and Anne Levy-Ward
Did you know? What you hear about retirement savings is sometimes based on preconceptions. Now is an excellent time to educate yourself.
Retirement, what do you know? Indeed you have an idea, based on the experience of your parents or older friends. But remember, what you hear about retirement savings isn’t always right. Now is an excellent time to educate yourself.
True or false: Does the money I withdraw from my RRSP in retirement reduce government benefits?
False. “People often have the impression that if they withdraw RRSPs in retirement, it will reduce their pension. Not at all,” explains Nathalie Jacques, financial security advisor and mutual fund representative at SunLife*.
The Canada Pension Plan (CPP) and the Quebec Pension Plan (QPP) establish your payments according to the duration and the number of your contributions to the plan:
Your payment is fixed.
It does not consider your other sources of retirement income (such as money from your RRSPs).
Here’s what you need to know about other public pension benefits:
The Guaranteed Income Supplement (GIS) is for people with less than $18,984 per year. Most people who have contributed to the CPP or QPP all their life have incomes too high to qualify for the GIS. This is because CPP or QPP pension payments are included in calculating qualifying income. “You have to remember that the GIS is for low-income people. If you want to have more money in retirement, it is better to save more and not depend on the GIS! “says Ms Jacques.
If your taxable income in 2021 exceeds $79,845, your Old Age Security (OAS) benefits may be reduced. Your OAS benefits decrease as your payment approaches $129,581. Above this threshold, you will have to repay all OAS benefits received. This is referred to as a “partial or total recovery” of OAS.
On the other hand, if you’re an average retired Canadian, you don’t have to worry about GIS or the OAS clawback. In effect, your income will be too high for the GIS but not enough for the clawback. According to Statistics Canada, the average total revenue in 2019 of Canadians aged 65 and over was $41,500. This amount is significantly higher than the GIS cap and lower than the OAS clawback threshold.
But if you think you are in a recovery position, know that your advisor is there to help you. Before you retire, talk to your advisor. Together, you can consider a solution to get the most out of your retirement income while avoiding or minimizing this clawback.
What if the taxable income you expect in retirement is more modest? Again, your advisor can help you. With the right withdrawal strategy, you could take advantage of GIS benefits. Whatever your decision, it is always better to consult a professional to develop your collection strategy.
That said, CPP or QPP benefits, like OAS benefits, are taxable. Your RRSP income may push you into a higher tax bracket. In this case, the tax payable on your state benefits will be a little higher. But your pension as such will not be reduced.
When should you start receiving CPP benefits?
True or false: You have to replace 70% of your retirement income?
False. People often say that they need 70% of their gross employment income to live on in retirement. But several surveys (including one carried out by SunLife in 2016) testify to another reality. Most retirees live on an income between 60 and 70%. “It depends,” explains Ms Jacques. This 70% proportion is based on the assumption that advisors calculate retirement income. ยป
The actual percentage could be between 50 and 110%. It all depends on your retirement plans, financial obligations and savings. And your needs will undoubtedly change over time. Suppose that you still have seven years to pay on your mortgage when you retire. Your needs could then amount to 80% of your gross income, the time to finish paying off your mortgage. Afterwards, you can live comfortably with 65%. Or suppose you are interested in travel, as soon as the green light is given. The percentage to meet your globetrotting needs could increase to 100%. But when the urge to go home for good takes you, it will drop to 70%.
How much money will you need in retirement?
True or false: I can’t plan retirement income if I’m not wealthy
False. You do not have
