Retirement Programs and Retiring on a Low Income | E006
Full Transcript:
Jason Pereira: Hello, and thank you for joining me for The Wisdom of Wealth, a show where we help educate Canadians about fundamental financial literacy topics to help you make better and more informed decisions, and know when and where to reach out for help. I'm your host, Jason Pereira. Today on The Wisdom of Wealth, we're going to talk about a goal shared by all Canadians: retirement.
Jason Pereira: At some point, we all retire, hopefully by choice, and when we're ready for it. But whether it's at a time when we choose, when we can't work anymore or unfortunate enough to lose our jobs, we all stop working, and we all eventually retire, and whether it's at age 50 or age 75 it can be nerve wracking to think about not having any more employment income coming in while you have all these expenses of life still going out. So, today, we're going to talk about how you're going to pay for it.
Jason Pereira: The World Bank has done studies on how nations around the world help or enable their citizens to retire, and they have identified what they call The Three Pillars of Successful Retirement system. Luckily, as Canadians, we have access to all three. The first pillar is a basic payment system to alleviate poverty amongst the elderly. In Canada, that system is Old Age Security.
Jason Pereira: Old Age Security, or OAS, is a government program that everyone living in Canada qualifies for as long as they've lived here for at least 10 years after the age of 18. In order to qualify for the full amount, someone has to live here for 40 years, between 18 and 65. Everyone who qualifies for OAS can start receiving it as early as age 65. However, if you delay your start date, the amount you're entitled to increases by 0.6% for every month you delay the start, up to 36% at age 70.
Jason Pereira: So, how much are you entitled to? The benefit amount increases with inflation every year, and in 2020, the maximum is $613.53. To figure out how much you qualify for, the math is pretty simple. Divide the number of years you lived in Canada between 18 and 65 by 40, and then multiply it by the benefit. For example, if you lived in Canada 30 years, when you turn 65, that means you'll get about 75% of the benefit, for a total of $461.65. And if you're deferring the start date of the benefit, then you can increase that by 0.6% per month that you defer.
Jason Pereira: Remember how I said this is a program to alleviate seniors' poverty? Well, OAS is intended to do just that. So, if you have too much income in retirement, they actually start to take back. This is something called OAS claw back, and in 2020, if you make more than $79054, CRA will actually start to take back some of your OAS at a rate of 15 cents for every dollar over $79054, until it all disappears if you're making more than $123386.
Jason Pereira: Now, if the opposite is true and you have very low income, you could qualify for one of two additional benefits based on age. If you are low income, under 65, and your spouse is receiving OAS, you could qualify for an allowance benefit. If you are over 65, you could qualify for the guaranteed income supplement. These are additional payments that can be anywhere between $551 and $1388.92 per month depending on age, marital status, and if your spouse is deceased. These benefits are also clawed back if you have other income, but at a much more aggressive rate of $.50 per dollar earned until they completely disappear between $1860 for an individual and $44592 for a couple.
Jason Pereira: Now, on to the second pillar. The world bank defines this as a mandatory pension scheme, and in Canada, we have one of these. It's called Canada Pension Plan. Canada Pension Plan is a program that all working Canadians under 65 are required to contribute to. If you work after 65, you have the option of continuing contributions. Currently, we all contribute 5.25% of income between $3500 and $58700, for a maximum of $2898.
Jason Pereira: At the same time, your employer makes the exact same contribution. Now, if you're self employed, you have to pay both the employer and employee portions for a total of $5796. Your contributions are invested by the CPP Investment Board to help pay for your future retirement, as well as supporting those who are currently receiving these pension benefits.
Jason Pereira: So, what do you get in return? Well, CPP is designed to provide you with up to 1/3 of your pensionable earnings in retirement. Not your total earnings pre-retirement, but a limit that the government sets. The maximum you will qualify for in 2020 is a benefit of $1175.83 cents per month at age 65, and just like with OAS, you can defer a payment.
Jason Pereira: In fact, in this case, it increases the benefit by 0.7% per month, to a maximum of 42% or $1670 per month. But unlike OAS, you also have the option of taking it as early as age 60. If you do that, it will be reduced by 0.6% per month, for a maximum reduction of 36%. So, should you take CPP early, wait to 65 or defer? As always, it depends. There are several factors that could be considered here, including your current age, your life expectancy, your health, your financial needs, other sources of income available to you, and various other things. This is something a qualified financial planner can help you with.
Jason Pereira: In addition, CPP comes with some other additional benefits including survivor benefits for your spouse should you predecease them, orphan benefits for children you leave behind, and a small death benefit of $2500. Now, let's do just a little bit more math.
Jason Pereira: Based on what I just told you, the most a single person can expect to receive at age 65 from both programs is $615.53 per month from OAS, and 1175.83 from CPP, for a total of $1791.36, or basically, $21500 per year. Therefore, the most a couple can expect to receive is just under $43000. That's not exactly enough to have more than a modest lifestyle. In reality, these programs are not there to finance around the world cruises, cottages, or more than just food, shelter and clothing. If you aspire to have more than this in retirement, you have to do one thing: save.
Jason Pereira: And to help you do that, this is where the third pillar comes in: private employer sponsored pension plans and individual retirement plans. In Canada, there are many types of sponsored pension plans, and the individual plans are better known as RSPs and TFSAs.
Jason Pereira: We previously covered pensions on an earlier show, and I plan to devote entire episode to RSPs and TFSAs in the future. But for now, just know that these are special government recognized accounts that come with special benefits to help you save for retirement faster. Now this raises the question, how much do you need to save for retirement?
Jason Pereira: And yet again, the answer, as always, is it depends. There are all sorts of rules of thumb out there telling you to plan on covering 70% of your pretax income while working in retirement. And ones that tell you to save 20 times the amount that we want to have in retirement. I'm here to tell you that all of those shortcuts are nonsense. Everyone is different. We all lead different lives, and no one simple rule can effectively answer the question of how much you need to save.
Jason Pereira: This is where a qualified financial planner can help you by developing a comprehensive financial plan for you, to help you with retirement. A good financial planner will run projections that take into account considerations such as assets, debts, income and expenses, government and employer pension plans, life and retirement goals, risk tolerance, health, life expectancy, and several other factors, to tell you how much you need to save to meet your goals. So, again, I encourage everyone out there to go out and get help from a qualified financial planner carrying the appropriate credentials.
Jason Pereira: Now, I recognize that many Canadians struggle to make ends meet while they are working and in retirement, this can be an even bigger struggle for low income Canadians. So, in order to talk about how to manage in retirement when you don't have a lot of income, I've invited the foremost expert in Canada on the subject of John Stapleton of Open Policy Ontario, to join us in my studio today.
Jason Pereira: Today, on the show, we're lucky enough to have John Stapleton of Open Policy Ontario join us to talk about retiring on a low income. John, thank you for coming in.
John Stapleton: Thank you.
Jason Pereira: So, John, tell us a little bit about yourself and what it is you do.
John Stapleton: Well, I was a benefit designer in the Ontario government working on what we call social assistance or welfare programs. And I left their employ back in 2002, so I've been out for 18 years on my own, and I got very interested as I started coming through my own retirement years, to say what would it be like to retire on a low income, because those were the programs where I was involved in benefit design. So I got into it and the rest is history, as they say.
Jason Pereira: Yeah. And then you've been very influential on many policy changes and even the creation of various types of investment accounts, including the RSP and RDSP, correct?
John Stapleton: Luckily enough, yes. I've been tried to keep in the policy space, and have worked as advisor to governments at all three levels and municipal Ontario, and most lately, with the federal government as they looked at changes to the guaranteed income supplement, a topic we'll be talking about.
Jason Pereira: Sure. And so, just that piece alone, I'll tell you that all Canadians basically owe you a bit of a debt of gratitude for the stuff that you've done. We all benefit from it. So, before we get on, let's talk about, again, we said low income planning. Where people who retire on a low income, it's a very different world than what normal advice would be. So, can you talk about how low income planning differs from, say, the conventional type planning we see?
John Stapleton: Well, the best way to explain it is that people are in a parallel universe, and if they were to actually do the opposite to what mainstream planning advises, they would probably be doing themselves a favor. In other words, 68% of Canadians are in that zone where, yes, they should be buying into RSPs during their working years. Why? Because their income is going to be less in retirement than it was while they were working, and their taxable income, in fact, is going to go down in retirement for obvious reasons.
Jason Pereira: Yeah. So, the old advice is simply, basically contribute when you're at a high income, so therefore you're getting a big tax break, take it out when you're in a lower income, you're at a lower tax rate and you get to save the difference.
John Stapleton: Right.
Jason Pereira: And it grows tax shelter.
John Stapleton: So for people who actually are in the opposite situation, where, in fact, leading up to retirement, they may have forms of income that may not be taxable, they might be getting income, for example, from a social assistance program, for a disability program like ODSP, Ontario Disability Support Plan, or Ontario Works. Or they might have some sort of an award of some sort that's not taxable. And, in fact, for a lot of people, they end up going into retirement where their income goes up instead of down because our retirement system made up of OAS, CPP and Guaranteed Income Supplement, they would actually have higher income in retirement than before age 65, but also they are often trading in forms of income, like Ontario Works, ODSP and other, let's say exempted work, and trading that in for forms of income, like old age security, which is taxable, CPP, which is taxable, pension forms of income that they might get from their pension, which is taxable, and also their RSP, once they start taking money out of that, or from a RIF, after age 71. All of those forms of income are taxable, and they weren't taxed as much before 65, if they were people in a lower income situation.
Jason Pereira: So, it looks logical to a lot of these programs to say, we're going to support you to 65 because hey, at that point, CPP comes in, OAS comes in. You don't need us as much. You're fine. But they're never factoring the tax bill. Right? So, you go from a position where, maybe your income, top line, hasn't changed, but what you're left with after taxation can be radically different.
John Stapleton: Right.
Jason Pereira: Yeah. So, I can see why that would be very unsettling to a lot of people in that situation.
John Stapleton: And also, the main program that people get in retirement who are low income is a program called the guaranteed income supplement, which itself is not taxable, but can pay you up to $916 per month.
Jason Pereira: Yeah. But that's the catch. It's not taxable, but it's subject to a claw back.
John Stapleton: Subject to a claw back.
Jason Pereira: So yes, a rose by any other name. It's a tax that's not a tax. Right?
John Stapleton: Right.
Jason Pereira: Yeah.
John Stapleton: So what happens to people is, if they have taxable forms of income going into retirement, then their guaranteed income supplement is going to go down by at least 50% on the dollar. And there are some zones of income over which it's 75% on the dollar. So, people are advised, going into retirement, to make sure that they have forms of income that are not going to be subject to the GIS claw back. That's where the advice starts to come in as it relates to CPP and the other forms of income.
Jason Pereira: Oftentimes conventional wisdom is to say, "Well, why can't these people pick up a part time job? Even even minimum wage work. But we're looking at tax rates of 70 some odd percent.
John Stapleton: Right.
Jason Pereira: That's a real disincentive, right? I mean, you get to a certain threshold and if you're working for, let's say $15 an hour, pretty close to minimum wage, and you're losing three quarters of that to tax. Who out there wants to work for less than six bucks an hour?
John Stapleton: Yeah. And often we see that going into fast food places, certainly, I go in, I know the person who is my age or a bit older, and yet they're still working in fast food, and I'm thinking, they're not here because they don't need the money. They do need the money, but do they really understand, if they are recipients of these various programs, how much they're really working for? And you often ask them the question, "Are you really getting ahead by working? And their answer is often sort of vague, but, "I don't think I really am. I seem to have the same sort of money that I did before I started working, and I feel that I should have more." But they don't understand the mechanics of it.
Jason Pereira: Exactly. I mean, it's not exactly simple to understand the mechanics are this. I mean tax is difficult. These claw backs make it even worse and it seems really unfair, quite honestly. This is a public policy screw up. I mean, I understand the purpose of wanting to support people at the lowest possible income, but to take it away so aggressively, what is going on in the design of these things that's happened?
John Stapleton: What happened was, back in 2006 in Ontario, and then some other years for other provinces, we abolished mandatory retirement, and therefore people, we had, first of all, policymakers didn't think people would work beyond age 65. Wrong answer. They are working, whether they're juniors, seniors, older seniors, women, men, doesn't make any difference.
Jason Pereira: By choice or by need.
John Stapleton: The trajectory of that is going up and up and up. But our policy, in terms of how we treat earnings in retirement amongst these programs, has lagged behind because the expectation that, age 65, you're not working anymore. And of course going back to the previous millennium, you weren't allowed to work past 65. So, the policy basically did not keep up. The income security policy did not keep up with the employment policy.
Jason Pereira: And just to point out how staggering this is, I mean 75% tax rate is what this really works out to be. We're talking about people earning around $20000-ish. As we said earlier, in a household on a $44000 for a household basis, versus if you look at the top marginal tax rate in Ontario, which starts at $220000, so if you make more than $220000, you pay 53.53. We are literally taxing people at the lowest realm of the spectrum, the lowest end of the spectrum on income, at higher rates than we're taxing the richest. I get that this is a government supplement and a government need for extreme poverty, but something just seems broken in that equation to me.
John Stapleton: Especially when the top CEOs in Canada walking in to get their coffee are paying less in tax than the person behind the counter serving it to them.
Jason Pereira: You often hear these kinds of chimes from the left wing in various countries, in the US and Canada, and I'd say, for the most part, when you're talking about the middle class person, that's not the truth. When you're talking about the lowest level of income, it can be a truth, unfortunately.
John Stapleton: Absolutely.
Jason Pereira: So, that's one key example. The conventional wisdom of, "Hey, I'm going to sock money away my RSP. This is the responsible thing to do. I'm going to take care of retirement, and I'm going to be able to sustain myself later on." And they're doing that when they're on very low income. So, it's a struggle to save all that. And, again, they're actually hurting themselves. Right? I mean, thankfully now we have the TFSA. That's a much better option for those people. We'll talk about it in a future show and again, you should get some credit for the development of that. But that's one piece. What other kind of little unknown tripwires are there, or traps, that these people fall in?
John Stapleton: Well, I think the main ones that they fall into is they usually clog their financial arteries with RSPs before age 65, even though they are going to, I use the term GIS bound. In other words, you look at their pension income, or they may not have a pension, they might not have savings. I have other forms of income, so you know that at age 65 they're more than likely, unless there's lottery winnings or whatever in the offing, that they are going to be receiving the guaranteed income supplement program.
John Stapleton: So, they should not be in our RSPs. Why? Because RSPs, when you take the money out, either in the form of the RSP or past age 71 as a RIF, you are going to be subject, in effect, backend load, you're a 50% reduction rate or a claw back on the RSP. However, if your money was in a TFSA, tax free savings account, then what happens? Nothing. Which is even more important when you get to age 71, where you start to have the mandatory withdrawals, and with the TFSA, once again, what happens at 71? Absolutely nothing. You decide whether to keep the money in or not.
Jason Pereira: And one of the weird, mind-bending things around this problem is that it can potentially be solved, right? If you have a modest RSP, despite the fact clearing it out would mean paying a whack of tax, it can actually be beneficial to you because, if you pay that tax, push it into a TFSA, you could then qualify for GIS going forward. Can you speak a little bit to, basically, that strategy and why that isn't adopted more often?
John Stapleton: Well, I think there's reason it's not adopted more often, is, especially people are always asking me, "Well, can I just convert my RSP to a TFSA?" And I said, "Yes you can, but there's a hitch there. You're going to have to pay tax on it when you take it out."
Jason Pereira: Yeah. It's not conversion. It's a cash out.
John Stapleton: Yeah. So, the first point you talk about, the amount that gets taken off that source is a withholding tax. It's not income tax. If you're low income, you may, in fact, and in most cases, the low income people are going to get that money back at tax refund time. The second thing is, of course, if you're low income in the first place, you might not even be in a zone where you're actually paying taxes, so that the RSP cash out might, in fact, not hurt you at all.
John Stapleton: But the other point is that, if you keep the RSP, once you turn 65, you're going to lose 50 cents on the dollar in your GIS payment. So, when you think that your tax rate, and let's take the example of someone who would in fact have to pay tax, so they get their withholding tax, and then they don't get that much back in their refund. And then they say, "Hey, this is a raw deal."
John Stapleton: And I've had people come to me and say, "Ah, look, I had to pay tax on that just to turn it over into TFSA." And I said, "Well, let's work out your tax rate." And it comes maybe 22% or something like that. What you're avoiding is a 50 cent on the dollar tax once you turn 65. So, you're much better off for having to take the 22% hit, let's say a couple of years before retirement, so that you don't take the larger hit once you turn 65.
Jason Pereira: Yeah. And it's kind of unconventional wisdom to basically say to clear these things out. In fact, the industry pushes back on that because we're all trained to deal with people with lots of assets, right? Not people with few and, it's really a weird kind of dichotomy. Again, kind of the parallel universe we're talking about, where essentially [inaudible 00:22:06] people may say, "Well, come on, we're teaching these people how to maximize a government benefit intended for the poor when they have money."
Jason Pereira: But the reality is that these people are likely going to, if this doesn't happen, run down those retirement savings faster because they need them, because now they're giving up a disproportionate amount of their government benefit, and end up down the road being on GIS anyway. The only difference is we'll have cleaned them out along the way, right? So, it's really kind of ridiculous to think that the system is designed to basically have them eat up every piece of wealth that they have prior to helping them out, versus us saying, "Okay, if we do this, take the hit once shoved this into TFSA, now you have kind of a slush fund for emergency, and this benefit you would have been on anyway is now going to help sustain you."
John Stapleton: Right. And we're really talking about 31% of all seniors. So this is not some small group at all. We're talking almost a third of Canadians are going to be in this. And as people are living longer, of course they start to incur higher and higher health costs that the government does not necessarily pay for in that post retirement period. So you might need that sort of money, and you also, post-71, who is not going to come into some sort of financial challenge, whether it's your refrigerator stops working, you need a new car, and the big one, adult children that need money and need help.
John Stapleton: And then, all of a sudden, when you go to take that money out, the government is going to tax you at the highest that you've ever been taxed in your life because your taxes are going to balloon when you take the money out of your RIF. So you're much better off being in that TFSA. Much better off stabilizing your later post retirement life, and therefore have something. And then, when you get to that point where you might have to go into some sort of long term care arrangement, you get a little bit of money for it. And so the people who are worrying about this being some sort of entitlement that people are maximizing, somehow unfairly on the taxpayer's dime, well you're going to be paying that later anyway [crosstalk 00:00:24:05].
Jason Pereira: Well, so now it's prevention, right? And that's prevention or a pound and pain. Right? So that's what's happening there. So, what are some other tactics people can use to maximize? We had a conversation before this about people not even realizing that they could potentially qualify for GIS. Because I mentioned earlier that you have to live in Canada for 10 years to qualify. But that's generally true. What are the exceptions to that?
John Stapleton: Well, there's 60 countries, now, where Canada has reciprocal social security agreements and the big advantage of those for people who are coming in from those 60 countries, and it's a really idiosyncratic list. You just have to look it up online.
Jason Pereira: It was quite amusing to wonder why some of those are on there.
John Stapleton: There's a reciprocal agreements. For example, there's various countries like United States, Portugal, others, that have reciprocal agreement.
Jason Pereira: Yeah. North American, European countries we're used to seeing on most lists, when we deal with tax. Yeah.
John Stapleton: Yes. And what it means is one year's residency in Canada can give them 1/40 of an OAS pension. You think, "Well, 1/40, that's only six bucks." So, it's not really much per month. But it also qualifies you for the guaranteed income supplement, which is the other big part of that. And although GIS is staggered over those first 10 years, it's certainly more than the $6 that you get from old age security. So, that's an important one.
John Stapleton: Another important one, of course, is to, and here's where the orthodoxy of when you have the parallel universe, is that low income people who know they're GIS-bound, ought to really be thinking about taking their Canada pension plan at age 60. Why? Because if you are getting a lower amount, which means, of course, if you take it at 60 you're going to get less money per month, and for the rest of your life, but your GIS claw back is going to be smaller, and if you're trying to maximize your income, according to the rules. Nobody's cheating here. According to the rules, then you're going to want to take your CPP early, with the caveat that if you're receiving social assistance, don't do that because it'll be minimum wage at 100%.
Jason Pereira: Exactly. We'll come back to that in a second. So, that's an interesting point because more often than not, the conventional wisdom now is pushing people to basically take CPP as late as possible, around age 70, right? And that's because the system got overhauled a couple of years ago. I mean, I still say that it's a much more complex question than people give it credit for. And you just pointed out a perfect example, right?
Jason Pereira: So, whereas the conventional wisdom is we're living longer, therefore get the biggest one possible because you're not going to live until 80. You're going to live until 90, 95. The opposite end of the spectrum, if you do that for these people, they're going to make more CPP but less GIS, and then therefore less overall, and therefore being a harder position.
John Stapleton: Yeah, that break even point is going to be well over age 100, so unless you're really planning to... I always say to people, "How long do you expect to live? How long have your family members lived? Your family history. What's your medical history? Is there anything chasing you?"
John Stapleton: And another important one is what are you going to do with the money that you got from the CPP? If you're going to invest it and invest it wisely, according to some sort of plan that a financial advisor may gave give to you. That's a whole different thing than simply consuming that money.
Jason Pereira: Absolutely. So, you mentioned briefly that certain programs out there, that if you start receiving too much money early, you start losing it on a one for one basis. So 100% marginal tax right there.
John Stapleton: Right.
Jason Pereira: What are some of those programs or some of the things people should look out for?
John Stapleton: Well, in Ontario, for example, almost 7% of people in Ontario receive their incomes below age 65 from two programs. One is the Ontario Disability Support Program and the other one is Ontario Works, better known to most people as welfare programs. And those programs are, in many ways, destitution based program such that if you have any other means then you should be using those means as opposed to social assistance.
Jason Pereira: We are the last payer of this bill.
John Stapleton: We are the last payer of this bill, so that, if you do get CPP, if you do get EI, if you do get workers' compensation or other programs like that, they are going to be deducted 100% from your social assistance.
Jason Pereira: So this is a complex topic, and as I said earlier, we're all trained as financial planners to deal with people with lots of money, not people with low assets and low income. So, oftentimes what we conventionally think is just completely wrong and backwards. So, looking for help in this particular area is actually very difficult. So, unless you have an advisor who's familiar with dealing with people in situations like this and they're saying things that are different than what we're seeing today, you might want to look elsewhere. But you've also provided a number of resources or worked on a number of resources. For instance, you brought this guide with you, that talks about maximizing GIS and how to run all these things. Where can people find this information?
John Stapleton: Well they can find it on my website, which is simply openpolicyontario.com, so it's very easy to remember. And there's a tab called Retirement On A Low Income, and it has all these resources. It has examples, it has the payment amounts vignettes, links to podcasts, all that sort of thing.
Jason Pereira: And this show soon, I guess.
John Stapleton: And the show soon. So, there's all of that. And I also take this on the road to the library systems. Been doing the Toronto Library System since 2013, so this is my eighth year at it in the library system.
Jason Pereira: Been very generous with your time.
John Stapleton: Then moving out to Hamilton this year, doing four of the big libraries there. And we also have an association with the Council of Aging in Ottawa, where I put on low-income retirement planning in both English and French. And we've also got some other language resources, simplified Chinese, Gujarati, and others, for people. It's all on the website and people can avail themselves of that advice there.
Jason Pereira: Excellent. Most recently, we worked on a calculator that helps tell people, if you have this much in RSP, is it worth taking it all out, paying the tax? And if you do, are you going to have an upside down the road? And that's available as a link through your website yet?
John Stapleton: That's also available on the link through the rest. It's just RSPGIS. Just Google that as one name, and you'll get the tool there. That's an important tool.
Jason Pereira: Well, I said before, most Canadians owe you a debt of gratitude and have no idea who you are. It's very true. And I thank you for the work and thank you for the time to come in today, and I thank you for what you're doing.
John Stapleton: Thanks Jason.
Jason Pereira: Pleasure.
Jason Pereira: So, that was today's episode of The Wisdom of Wealth. If you're looking to retire like all of us, I hope the first part of the show was helpful to you, and if you or someone you love is retiring on a low income or retired on a low income, please make sure that they learn about the topics we discussed today, here in the second half with John. It can make a world of difference.
Jason Pereira: As always, I hope we've helped you make better decisions in funding your financial life, and I hope you join us next time for The Wisdom of Wealth. Take care.