There’s no shortage of misconceptions about money. Well-meaning but mistaken people spread them to family and friends and sometimes even try to convince their financial advisors. In this series of articles about financial myths and realities, we’re sharing some of what our advisors hear on the job, with the goal of separating fact from fiction. Today's topic: retirement.
Myth #1: If I withdraw money from my RRSPs in retirement, the government will cut my pension
“My clients often think that if they take money from their RRSP in retirement, their pension will be reduced. This perception is wrong,” explains mutual fund representative Nathalie Jacques.1
Here's what you need to know about government pension benefits, if you've contributed throughout your working life:
- The Guaranteed Income Supplement (GIS) goes to single pensioners with an income of less than $17,760, and to couples with a combined income of less than $42,576 – thresholds that are regularly reviewed and updated. But most workers who have contributed to the Canada Pension Plan (CPP) or Québec Pension Plan (QPP) throughout their working lives don't qualify for the GIS, because your government pension is included in calculating eligible income, which pushes you over the GIS eligibility threshold. “Keep in mind that the GIS is intended for people with a low income,” says Jacques. “If you really want to have enough money in retirement, you need to optimize your income to have a good quality of life.” In other words, rather than aiming low so you’ll qualify for GIS, aim high so you’ll have enough for a secure retirement.
- The Old Age Security (OAS) pension starts to be reduced on a sliding scale once your taxable income reaches a certain threshold ($74,788 for 2017). Once your income reaches another threshold ($121,314 for 2017), you must repay the total amount of OAS received. These numbers are regularly reviewed and revised. This is referred to as “total or partial recovery” – commonly called a “clawback” – of the OAS.
In reality, given that the average non-farm salary in Canada was $971 a week (or $50,492 a year) at the end of 2016, and the average Canadian retiree reports living on 62% of his or her pre-retirement income, not many will be subject to the OAS clawback (at the high end) or will be entitled to the GIS (at the low end). Keep in mind that your CPP/QPP payment is fixed and is based on past contributions, so it will not be reduced – no matter what your taxable income may be.
If your taxable income in retirement is at the low end of the scale, you can put some drawdown strategies in place so you qualify for benefits like the GIS. Conversely, there are steps you can take to avoid or at least minimize the OAS clawback if your taxable income is at the higher end. It's best to consult a professional to design these types of strategies.
Myth #2: I need to replace 70% of my income in retirement
“Some people think they need to replace 70% of their gross income in retirement [as recommended by sources such as Retraite Québec], but it really depends,” says Jacques. “This is an assumption commonly used by financial planners and advisors to calculate retirement income.”
But depending on your plans for retirement, financial obligations and accumulated assets, the percentage you need may vary from 50% to 110% of your pre-retirement income. It's also not unusual for the percentage to change over the course of your retirement years. You might need to replace 80% of your gross income for 7 years while you finishing paying off your mortgage, for example, but can then get by with just 65%. Or, if you want to take several trips in the first few years after you stop working, you might have to replace 100% of your income then, but could drop down to 70% later. So, it’s a case-by-case basis.
1 Financial Security Advisor, Group Insurance and Group Annuity Plans Advisor and Financial Planner, Solutions financières N. Jacques inc.†, Financial Services Firm, Distributor authorized by Sun Life Assurance Company of Canada and firm partner of Sun Life Financial Distributors (Canada) Inc.† Mutual Fund Representative, Sun Life Financial Investment Services (Canada) Inc.†, Group Savings Plan Brokerage Firm
† Subsidiaries of Sun Life Assurance Company of Canada