INDEPTH: RETIREMENT
How much is enough?
by Peter Hadzipetros, CBC News Online | Research: Laura Carlin | Feb. 11, 2005
Ask any financial adviser: how much money do you need to support yourself in retirement in the manner you grew accustomed to during your working years?
They'll probably tell you that you had better have put away enough to cover 70-80 per cent of your pre-retirement income.
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"CPP, OAS and GIS are good deals for Canadians."
Certified General Accountants Canada
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Say you earned a pretty healthy salary of $70,000 a year. Unfortunately, the company you worked for (which may have been your own) had no pension plan. That guy who relentlessly tried to sell you insurance and Registered Retirement Savings Plans kept telling you that you'd need $50,000 a year to get by when the time came to call it a career.
You wake up one day and you're 65.
You qualify for maximum Canada/Quebec Pension Plan benefits of $9,945 a year – and Old Age Security benefits of $5,661 a year. That takes you to $15,606 – not quite a third of the way there.
If you're an average Canadian, you've set aside some money in a Registered Retirement Savings Plan – around $42,000. You stroke your chin and ponder the possibilities: stick that money in some safe investment and you might be able to earn a return of four per cent. There's another $1,600 or so per year.
But other than that, the cupboards are pretty bare: putting the kids through university was a strain, and your spouse – well, the two of you haven't so much as talked since you went your separate ways.
So you've got just over $17,000 a year to live on. Or a little less than 24 per cent of your pre-retirement income.
And it's only a couple of grand more a year than someone who toiled as one of Canada's working poor, earning less than $10,000 a year. A combination of C/QPP, OAS and Guaranteed Income Supplement will replace 147 per cent of their income – perhaps their only raise outside increases in the minimum wage.
If your pre-retirement income was $70,000, most number crunchers recommend you should be able to maintain your lifestyle on about $49,000 per year in retirement income. Government benefits will make up almost a third of that total. The rest – well, it's up to you.
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Relying on government benefits a mistake?
That guy who tried to get you on the investment bandwagon may have told you tales of how there'd be no C/QPP when your turn to collect came up. Turns out he was wrong.
The thing about the Canada and Quebec Pension Plans is – and this is something a lot of people don't realize – they don't cost the governments a penny. The plans are fully financed by contributions from employees and employers.
In 2004, Ottawa asked you to kick in a maximum of $1,831.50. If you worked for yourself, you paid double. At that level, the pension plan administrators say there will be enough to pay pensions to you, your kids and probably their kids as well.
But it wasn't always this way.
Before 1997, CPP was a "pay-as-you-go" plan. You paid relatively little and were promised a higher benefit than your contributions would cover. The theory was future generations of workers would be able to kick in enough to support retirees. But baby boomer demographics wreaked havoc with that model. The boomers weren't having enough kids (future workers).
Actuaries predicted the plan would be out of money within 20 years.
Changes were ordered: contribution rates would be gradually boosted from 3.6 per cent of annual insurable earnings to 9.9 per cent. The health of the plan would be reviewed every three years.
Now the actuaries are smiling. The CPP has a reserve fund of about $75 billion
Judith Maxwell |
Judith Maxwell, president of Canadian Policy Research Networks, says the CPP is in good shape.
"They came up with a plan: raise contributions and diversify investments by not putting all the money into just government bonds," Maxwell told CBC News. "It means the plan is in a much sounder position today than it was seven or eight years ago."
Are OAS/GIS benefits safe?
Probably – but they are government-financed programs and could be altered. But seniors have a loud voice – and it's about to get louder than ever as millions of boomers approach that stage of life.
OAS as we know it, was introduced in 1952. To receive it, you had to be 70 years old and had to have been a Canadian resident for most of your life. The age was eventually lowered to 65.
Both OAS and GIS are funded through general tax revenues and are among the fastest-growing expenses for the government.
There have been attempts to curb those costs. The only one that succeeded was in 1989, when the finance minister of the day – Michael Wilson – introduced the OAS "clawback." People whose net retirement income exceeded $50,000 lost part of their OAS benefits.
Only four per cent of retirees were hit by the tax. But that number grew rapidly because the threshold was only partially indexed to inflation.
In 2000, the clawback threshold was fully indexed to inflation. In 2005, the government starts taxing back your OAS benefits if your net retirement income is a little over $60,000. You will still receive some OAS, until your net income hits around $96,000 a year.
As for the GIS, it's meant to guarantee low-income retirees a pension equivalent to about 30 per cent of the average national wage. You have to be receiving OAS to qualify.
Still not looking very rosy?
So, your $70,000 income is being replaced by a little over $17,000 in retirement benefits from the government. Not quite 25 per cent of your pre-retirement income. Things don't look great, do they?
But they may not be as bad as you think.
Hopefully, you live in a home that's been paid off. You may have blown a lot of money in your day, but – like the vast majority of Canadians 65 and older – you don't owe anybody anything.
Your expenses are pared to the bone: you won't pay much income tax on your $17,000. Your health-care premiums will likely be covered by the government – as will most of the cost of your prescription drugs.
You won't be making mortgage payments. You will be paying property taxes. Or you might sell that house and move into something smaller, using the proceeds of the sale of your home to pay your housing costs (which could be subsidized because you're a lower-income senior).
You won't be paying for the commute to work – or buying all those lunches and coffees.
You may not be in a position to help the kids buy their own homes. But you also won't be that far behind a lot of retired Canadians.
Those financial advisers who recommended you need 70-80 per cent of your pre-retirement income probably didn't tell you that most Canadians retire on far less than that – and manage to get by.
A Statistics Canada study found that people whose pre-retirement income was $70,000 or greater tended to retire on about 45 per cent of that – or around $31,500. Those who earned around the average national wage – between $40,000 and $50,000 – retired on 59 per cent of their pre-retirement income.
Only one in six people with a pre-retirement income of $40,000 or more had a replacement ratio of 75 per cent or more.
If you want to make sure you're in that group, there are several ways.
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| NEWS ARCHIVE: |
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Ontario court upholds CPP benefits for same-sex couples (Nov 26, 2004)
Mandatory retirement ban won't be retroactive: labour minister (CBC Ottawa, Nov.3, 2004)
Martin against mandatory retirement (Dec. 20, 2003)
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