Life can be a roller coaster ride…
Things can change in an instant
- Stay focussed on your retirement savings plan
- Consider other specific savings goals for events (holiday, wedding, kid’s education, home buying, etc.)
- Always keep an emergency fund to cover any unexpected expenses
- As life events happen reevaluate your retirement plan and financial goals
- Make sure you have a will and beneficiaries set on every account.
Two programs consider being the foundation of retirement planning in Canada. Old Age Security (OAS) and Canada Pension Plan (CPP) are intended to ensure that you receive some income once you retire. These benefits are funded by the Canadian government and it is important to understand the basic details.
Always best to start early…
It is better to start saving for retirement early. Instead of putting it off until tomorrow, when other priorities could get in the way, it is best to start retirement savings early.
Many financial planners have done the math to demonstrate that it is easier to start saving a small amount early and stop, rather than start saving a larger sum later, through the miracle of compound interest and market growth. Their estimate shows that the early bird saver would gain more than the individuals who later started
Old Age Security (OAS) Pension
OAS benefit is a Canadian federal program, funded by tax revenues and it is not based on your personal contribution. The only qualifying criteria for eligibility are age and residency requirements.
To receive the OAS pension, a pensioner must have attained the age of 65. You may defer your OAS pension for up to 60 months or 5 years. If you defer your OAS pension your monthly pension payment would be increased by 0.6 percent for every month that you defer your payment, up to a maximum of 36 percent at age 70.
Residency Requirements for OAS pension
If you have lived in Canada for at least 40 years since turning age 18, you will receive the full OAS pension. You may be eligible to receive a partial pension if you have lived in Canada for less than 40 years but more than 10 years since turning age 18.
Understanding OAS Clawback
The OAS clawback refers to a “means test” that determines whether your OAS pension will be reduced. The OAS benefits are reduced if your net income exceeds a certain amount. E.g. in 2017, the OAS pension was reduced by $0.15 for every dollar of net income above $74 788 that you earned. This may change from year to year so you may want to check the Government of Canada “Old Age Security Payment Amounts” for the latest update.
Guaranteed Income Supplement (GIS)
In general, a single, divorced, or widowed pensioner who is at least 65 years of age and whose sole source of income is the OAS pension will also receive the full GIS benefit. For married couples where both spouses are receiving OAS pensions, each spouse may be eligible for a GIS benefit.
Allowance benefit
The allowance benefit is available to the spouse or common-law partner of a pensioner who is receiving or is eligible to receive the OAS pension and the GIS. To be eligible for the allowance benefit, the spouse or common-law partner must be between the ages of 60 and 64. The allowance benefit was designed to reduce the financial burden that would result from only one low-income pensioner being eligible to receive OAS program benefits.
Allowance for the survivor benefit
The allowance for the survivor benefit is available to the spouse or common-law partner of a deceased pensioner who was receiving the OAS pension. To be eligible for the allowance for the survivor benefit, the surviving spouse or common-law partner must be between the ages of 60 and 64. This benefit was designed to provide benefits to the surviving spouse of a low-income senior. The OAS pension, GIS, and the allowance benefit are adjusted for inflation every January, April, July, and October. The OAS pension is a taxable benefit. The GIS, allowance benefit, and allowance for the survivor benefit are tax-free.
Canada Pension Plan (CPP)
The amount of CPP benefit you are eligible to receive is based on the dollar value of your contributions and the number of years you contribute to the plan. You may apply to receive benefits as early as age 60 and as late as age 70. Please note that your CPP will be reduced by 0.60 percent for each month you take it earlier than age 65. On the other hand, your CPP will be increased by 0.70 percent for each month you take it later than age 65.
- YBE, the year’s basic exemption (YBE). It is the first $3500 of annual income.
- YMPE, the years’ maximum pensionable earnings. It is the upper limit of your earnings that is subject to CPP contribution.
- The CPP contribution rate for employees and employers is 4.95 percent each.
CPP retirement pensions are adjusted for inflation every January. CPP retirement benefits are taxable.
Calculating the dollar value of your contribution is a bit complicated since the dollar value of your contribution can fluctuate during the course of your career. You are allowed to exclude 17 percent of your lowest earnings years from the final calculation. Besides, you are allowed to exclude those years of employment during which you were raising children under the age of seven and any months during which you were collecting a CPP disability pension.
Registered Retirement Savings Plan (RRSP)
The registered retirement savings plan (RRSP) is a type of private savings account that enables you to save for your retirement on a tax-deferred basis. Individuals who contribute to an RRSP receive a tax deduction for their contributions.
The income earned on your investments within the RRSP is not taxed until you withdraw money at retirement. RRSP withdrawals can be made at any time. Withdrawals are considered regular income and are subject to income tax. A withholding tax may apply to assist you with tax payments. There are three different types of RRSP accounts, individual RRSP, a self-directed RRSP, and a group RRSP.
An individual RRSP is sufficient for the needs of investors who are opening their first account or have all of their RRSP assets in the mutual funds of a single company.
A self-directed RRSP allows you to hold a variety of investments within one plan.
A group RRSP represents a series of individual RRSPs that are administered through one employer or association.
Any information, recommendations, or statement of opinion provided here and throughout the site are for general information purpose only. You must consult with a qualified advisor and conduct your own due diligence. Treat all the information received as non-personal general tips for educational purposes, and be sure to consult your own financial planner, accountant, a legal representative who is familiar with your situation.
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