How Not To Retire Poor In Canada
THE CANADIAN GOVERNMENT IS PUTTING MORE MONEY IN OUR POCKETS
Moving to Canada from the UK was a HUGE step for me but one of my biggest fears was understanding the government system and increased worry about whether I would retire poor.
That’s when I committed to worrying about my financial future now and not when I retire.
These days I’m happy to report that I feel comfortable with our level of savings power and future retirement although there’s always going to be the, ‘what if’s’ in the back of my mind.
No One Wants To Retire Poor
I’m not alone as many of you out there wonder what life will be like during retirement and whether you’re doing enough today to fund your tomorrow.
- Budgeting
- Earning More
- Spending Less
- Invest your money
What else is there to do?
You need to understand what all of the above means to you when it comes time to retire, that’s what.
If you haven’t yet I encourage you to estimate and plan your retirement budget today so you have an idea what you may be facing in the future.
What does your retirement lifestyle plan look like?
I had a young man email me about his retirement savings and whether he was saving enough money because he was afraid of not having enough money.
This seems to be the trend these days but on the flip side if you want a certain lifestyle you have to save for it.
The best person to talk to is your financial advisor who knows your personal situation.
In the meantime, I’ve done a bit of research myself and wanted to share what I’ve learned about retiring in Canada 2019.
No one wants to retire poor but the reality is that not everyone has the means to save and invest so relying on the Canadian government and assets is all one might have.
We’re fortunate to live in a country that has a government-sponsored programs such as the Canadian Pension Plan (CPP) and Old Age Security (OAS) to aid in retirement for Canadians but for many that might not be enough.
How much do you need to retire in Canada?
It really depends on who you talk to as we’ve been told anywhere from 70% of our income to near 3 million dollars which seems outrageous but not so much depending on the lifestyle you want to live.
Another thing to consider is whether you may be the backbone supporting your adult children financially for whatever reason when you retire.
As older parents, we don’t know what will happen when we retire and our son is in his 20’s.
A friend of ours who’s parents retired are now looking after their son who is unable to care for himself and he is in his early 40’s with a crippling disease.
You just never know.
Related: What should your retirement savings plan look like?
Living a No Frills Lifestyle when you retire because you have little to no savings is possible for a single person or couple but that’s about as basic as it gets.
Related: How much should my retirement food budget be?
This basic lifestyle may mean you have to give up or reduce what you’re used to having such as the house, cable, travel, vehicle etc. It all depends on your money situation and what you and cannot afford.
Related: Why this senior doesn’t care if he is retirement poor
You can receive your full CPP at age 65 in Canada or apply for it early at age 60 but that comes with a permanent reduction or as late as age 70 with a permanent increase.
Note: Amounts are adjusted for inflation each year. – Source: Canada Pension Plan (CPP) Amounts
For a more details you can read the Quarterly Report January to March 2019
| Type of pension
or benefit |
Average amount for new
beneficiaries (October 2018) |
Maximum
payment amount (2019) |
|---|---|---|
| Retirement pension
(at age 65) |
$664.41 | $1,154.58 |
| Post-retirement benefit
(at age 65) |
$10.12 | $28.86 |
| Disability benefit | $955.43 | $1,362.30 |
| Survivor’s pension – younger than 65 | $432.24 | $626.63 |
| Survivor’s pension – 65 and older | $302.01 | $692.75 |
| Children of disabled CPP contributors | $244.64 | $250.27 |
| Children of deceased CPP contributors | $244.64 | $250.27 |
| Death benefit (one-time payment) | $2,298.56 | $2,500.00 |
| Combined benefits | ||
| Combined survivor’s and retirement pension
(at age 65) |
$841.67 | $1,154.58 |
| Combined survivor’s pension and disability benefit | $1,074.91 | $1,362.30 |
Taking CPP early
That only makes sense but if you don’t need to take it early, don’t. My mother-in-law did and it was a huge loss for her and nothing we could do about it even though she has dementia and had no idea what she was doing.
I don’t remember the exact permanent loss she sustained but I do remember opening my mouth wide when I read the letter from the government about it.
Debt repayment is by far one of the top concerns for Canadians but so is saving money for their nest egg which can be overwhelming when life hits you with an obstacle course.
Related: Senior shares retirement savings tips in 3 words
According to a 2017 CIBC poll 25 per cent of Canadians say paying down debt is their top financial priority for 2018 and I suspect this will be no different in 2019. In fact, debt reduction has topped the list of for their annual poll 8 consecutive years in a row.
Although debt has been front and centre for Canadians for many years the message has become loud and clear especially with so many people struggling to pay the bills.
It’s time to buckle down and start looking after yourselves because in the end, you’ll either have no regrets or plenty to look forward to.
While it’s critical to pay down high-interest debt it’s also important to automate savings towards retirement planning.
This is what we do and have done all along but it was never easy especially when Mrs. CBB lost her job in 2009.
We went from maximizing our retirement savings plan with a pension to just my income.
Thankfully we are back on track financially which meant we had to back-pay pay investment savings since we couldn’t maximize them including our Tax-Free Savings Accounts and RRSP.
So back to the question, How much money will I need to retire?
We’ve had conversations with our financial advisor about this topic and he says the rule of thumb is to have 70% of your current income if you want to maintain the same standards of living during retirement.
By this standard that would mean if you earn $100,000 at 70% you would need $70,000 during retirement although you’d have to adjust that figure for inflation.
This is where we plunked ourselves for the time being although things could change especially the more we learn from our in-laws financial situation.
Related: Should you invest in a TFSA, RRSP or Non-Registered Account?
Consider if you earn a middle-class income anywhere from $42,000 to $75,000 combined income you’d need anywhere from $250,000 to 1 million dollars and then some.That’s based on current lifestyle continuance and inflation, but do you really need that much?
More Savings Power
When you consider what you will get from the government upon retiring give or take how long you’ve worked in Canada saving enough money for retirement today for tomorrow seems far-stretched.
The Canadian government has pledged to put more money back into the pockets of Canadians for 2019 through employment insurance (EI) and the Enhanced CPP.
- The strength of the Canadian economy in 2018 contributes to the Employment Insurance (EI) premium rate decrease, with 219,000 more people working and fewer claiming EI benefits.
- The 2019 premium rate of $1.62 per $100 of insurable earnings, down from $1.66 in 2018, represents a reduction of 26 cents from the 2016 rate of $1.88 since the Government announced new enhancements to EI benefits and programs.
- To support Canada’s hard-working entrepreneurs, the Government cut the small business tax rate from 10.5 per cent to 10 percent effective January 1, 2018, with a further reduction to 9 percent coming into effect on January 1, 2019.
- In December 2015, the Government introduced a tax cut for middle-class Canadians. To help pay for the middle-class tax cut, the Government asked the wealthiest Canadians to pay a little bit more. A new income tax rate of 33 percent was introduced for individuals who earn more than $200,000 a year in taxable income.
- Additional changes to the CPP will also provide greater benefits to parents whose income drops after the birth or adoption of their child, to persons with disabilities, to spouses who are widowed at a young age and to the estates of lower-income contributors. These changes are considered the largest reform of the CPP in 50 years.
Even Mrs. CBB and I often question whether we are on track to ensure we will have a comfortable retirement even though we don’t know what the future holds.
- Do we need more money?
- Do we need less money?
- Can we survive on less money?
We’d like to increase our travel but decrease our footprint meaning we’d like to downsize our home so we don’t have as much commitment and few bills to pay.
If you consider the amount of money you spend today while working and what you won’t need when you retire you may not need that whopping 70%.
The key to take from this is understanding what your future retirement goals are and what retiring poor or retiring rich means to you. That’s what we get from it.
Canadian Pension Plan Enhancement
As of 2019 the Canadian Pension Plan Enhancement program will come into effect which means more money for Canadians in exchange for making higher contributions.
Up until 2019 CPP replaced one-quarter of your average work earnings up to a maximum each year.
Employees would pay a max of 4.95% to CPP and employers would contribute a match. This number will increase to 5.1% for 2019.
If you were self employed you’d contribute both portions which was 9.9% also increasing to 10.2% for 2019. CPP Contribution Rates
This was to supplement other retirement vehicles such as OAS, workplace pensions and private savings for your golden years.
| Year | Maximum annual pensionable earnings | Basic exemption amount | Maximum contributory earnings | Employee and employer contribution rate (%) | Maximum annual employee and employer contribution | Maximum annual self-employed contribution |
|---|---|---|---|---|---|---|
| 2019 | $57,400 | $3,500 | $53,900 | 5.10 | $2,748.90 | $5,497.80 |
If you are 18 years of age and work in Canada (Outside Quebec) any earnings over $3500 you contribute to CPP up to a max limit adjusted each year for inflation.
In 2019 this limit is set at $57,400. The purpose of CPP is to partially aid in retirement, disability or in the case of death.
Related: The Quebec Pension Plan
The enhancement increases the CPP retirement pension, post-retirement benefit, disability pension and survivor’s pension you may receive.
The enhancement means that the CPP will begin to grow to replace one third of the average work earnings you receive after 2019. The maximum limit used to determine your average work earnings will also gradually increase by 14% by 2025.
Your pension will increase based on how much and for how long you contribute to the enhanced CPP. The CPP enhancements will increase the maximum CPP retirement pension by up to 50% for those who make enhanced contributions for 40 years.
With the new CPP enhancement program in place for 2019 it will all go down in baby steps or year after year you will see increases. Essentially the more you earn the more you will contribute to your CPP which means more money for retirement.
Step 1: 2019 to 2023
From 2019 to 2023, the contribution rate for employees will gradually increase by one percentage point (from 4.95% to 5.95%) on earnings between $3,500 and the original earnings limit.
Step 2: 2024 to 2025
Starting in 2024, a second, higher limit will be introduced, allowing you to invest an additional portion of your earnings to the CPP.
This new range of earnings covered by the Plan will start at the first earnings ceiling (estimated to be $69,700 in 2025) and go to the second earnings ceiling which will be 14% higher by 2025 (estimated to be $79,400).
Source: Canada Pension Plan Enhancement Program 2019
Can I retire without a pension?
When you retire without a pension it doesn’t necessarily mean you will retire poor it means that you will find other ways to budget the money that you do get to keep your finances on track.
My mother-in-law who hasn’t worked in many years was fortunate to find out that my Father-in-laws’s work pension was far more than they had anticipated. (another blog post on the horizon).
Without that pension, she would solely rely on the CPP that she took early and the death benefit that she is currently getting to the tune of just under $2000 a month.
Thankfully with his pension we were able to pay off the mortgage in full and lower as many of her utility bills as possible to keep her on budget. She doesn’t budget at all but we do the behind the scenes finances for her and give her a $200 weekly allowance or $800 a month spending money on whatever she needs including food.
Even though this allowance is not sustainable it’s far less than what it would cost to put her in a retirement home at the moment.
Outside of this, we have to pay for companion care and travel costs to and from day programs in the community.
Nothing is free in retirement but with a lower income, you can certainly tap into reduced costs by some government-funded agencies such as hydro or program fees.
The sad part is after all those years of working and saving money she doesn’t even get to enjoy it to the maximum as her husband is no longer with her and neither is her mind, and at such a young age.
In reality, we don’t know what the future holds financially or with our health so it’s important to live for today and save for tomorrow.
Retiring With No Savings
Can you retire with no savings?
Had she not had my fathers-in-law work pension she would have needed to sell the house to downsize so she could release some of the equity in her home to live from.
Related: What to expect with little to no retirement savings
They had just over $10,000 in savings which ended up frozen by the bank when he passed away as she was not listed on the bank account.
Her mortgage at the time was around $1300 a month not including any bills and insurance so with only just under $2000 coming in she would have run into financial problems.
I can’t tell you how good it made Mrs. CBB and I feel when we went up to MCAP to bring them that final mortgage cheque for my mother-in-law and father-in-law.
I only wish he was around to witness burning the mortgage something he had no idea would happen before he turned 65.
At the end of the day whether you can survive without a pension depends on your lifestyle and for many, this might mean changes to the way you live and spend your money.
Paying off your mortgage as fast as possible before retirement is so important and as you can see from my mother-in-law’s situation critical.
Retirement Checklist
The CIBC retirement checklist is a great way to target whether you are reaching your savings potential for when the time comes that you are no longer working.
Complete the checklist and then find out your results to see if there are any other opportunities you can take advantage of before you hit your goal retirement age.
| I have a retirement plan that will allow me to meet my goals. | ||
| I review my plan annually. | ||
| I consult with an advisor about my RRSP investments. | ||
| I know how much income I will need for my retirement. | ||
| I know what sources of income I will have in my retirement. |
| Am I investing for maximum potential returns? | Yes | Not Yet |
| My portfolio includes a balanced mix of different investments. | ||
| I have used all of my RRSP contribution room. | ||
| I invest on a monthly basis. | ||
| I have an idea of the approximate rate of return on my total RRSP portfolio. |
Your Rich is Someone Else’s Poor and your Poor is Someone Else’s Rich
Here’s one last thing to consider: Just because you think you will retire poor with 1 million dollars in the bank or investments doesn’t mean the same thing to someone else.
We all have this number in our heads that tells us we will be fine with our finances.
I find the older we get the less we spend because we become more aware of aging and retirement.
This kind of auto-kicks Canadians into the mindset of if I don’t save or cut-back I might be in trouble.
You might find you tend to not care as much about lavish things such as the big home, travelling or having to spend money on clothes or other luxuries like you once used to.
It’s a pity though that many people don’t see this future before it happens so they can save more and worry less, then again not everyone worries as we do.
Retire poor, Retire Rich, retire the way you want to but whatever comes your way be ready to grasp it and enjoy the remainder of your time on this earth.
Discussion:
Do you feel you are doing enough for your retirement or do you fear you will retire poor?
Share your comments below as I’d love to hear your story.
