For many Canadians, retirement income planning is a bit like completing a jigsaw puzzle: the challenge is to fit all of the pieces together.
But for those approaching retirement with fewer resources, the puzzle can be more difficult to complete. That’s because conventional retirement advice may fail to address the needs and circumstances of those retiring on lower incomes – particularly how income-tested benefits for low-income retirees, principally the Guaranteed Income Supplement (GIS), mesh with other sources of income.
For Toronto-based book author and freelance writer Sarah Hood, who hopes to retire in about 10 years, the need to plan carefully for income in retirement has grown in importance over the past few years.
“When I was a teenager, there was no information about retirement being disseminated in the way it is now,” she says. “I didn’t see bus-shelter ads or TV commercials about the need to save or how different savings plans worked. But in the last 10 or 15 years, I’ve started to really think hard about retirement, and now I think about it quite often.”
Ms. Hood, who says she has always had “modest” earnings, expects her income in retirement to come from multiple sources, including a mix of savings in an RRSP, a small workplace pension, the Canada Pension Plan (CPP), Old Age Security (OAS) and GIS, and “perhaps some inheritance” although she says that other members of her family “need it more than I do.”
Unknowns complicate planning
Like many Canadians approaching retirement, Ms. Hood says she faces a number of unknowns, which make planning more complicated. These range from when she expects to stop working, when she might opt to start her CPP and OAS benefits, and deciding whether she should allocate time over the next few years to work – to build up more savings – or to travel while her health is good.
Then there’s the matter of how long she expects to need retirement funds. “I could live to 100, as my mom is 90 now, or I could die tomorrow. If I plan based on when my dad died (at age 72), my life would look very different than if I knew I’d live as long as my mother or even longer.”
Although she expects to receive some workplace pension income in retirement, Ms. Hood says that the bulk of her family members and freelance colleagues will not have pension income and will need to rely on private savings combined with OAS, GIS and CPP.
How do sources of income fit together?
“It takes time,” she says, to understand how all of these systems fit together. “Many people that I know don’t understand how registered retirement savings plans (RRSPs) work – that what you put in gets taxed coming out. And many people aren’t able to save up to the RRSP limit. In my own case, my RRSP [contribution] room is more than the freelance portion of my entire yearly income. I don’t know anyone who could contribute up to that limit.”
More recently, Ms. Hood says she’s seen public service messaging and financial services advertising urging Canadians to “crunch the numbers” for their retirement income, but she says she’s not sure whether she has enough information to carry out the required calculations, “even if I understood them.” Ultimately, to build financial security in retirement, she says her plan is to continue working as long as she’s able.
The biggest decision Ms. Hood faces is balancing when to turn on her CPP and OAS benefits with her desire and ability to continue to earn taxable employment income. She expects part of her retirement income will come from the GIS, which is paid starting as early as age 65 to retirees receiving OAS and who have taxable income below a set threshold. For 2019, the threshold for a single retiree is $18,240.
When is GIS clawed back?
If Ms. Hood works past age 65, her taxable income over the GIS threshold will be subject to high rates of clawback – as much as 50 or 75 per cent or even higher. (The clawback rate depends on whether the recipient is single or has a spouse or common-law partner.) Although OAS can be deferred to increase the benefit, GIS is paid only with OAS and deferring OAS thus comes at the expense of GIS income.
What this means for future retirees like Ms. Hood is that retirement income planning advice should analyze how choices such as when to take CPP and OAS, when to withdraw from taxable accounts such as RRSPs and registered retirement income funds (RRIFs), and when to withdraw from non-taxable accounts such as tax-free savings accounts (TFSAs) impact the GIS benefit and thus the after-tax income she can spend.
Here, conventional retirement income planning often falls short, as it usually fails to include an analysis of GIS clawbacks. Social policy expert John Stapleton, an innovation fellow at the Metcalf Foundation, a private family foundation in Toronto, says, “people eligible for the GIS need very different financial advice from what is normally heard on the radio, on television, or in magazines and newspapers. Low-income people need savings and retirement strategies that won’t leave them worse off in their senior years.”
The effects of the mismatch between conventional retirement planning messages and the needs of low-income seniors, Mr. Stapleton says, are that “far too many low-income people have failed to get good advice, taking millions of retirement dollars off the table for Canada’s most vulnerable seniors.”
For Mr. Stapleton, one solution would be to add a “disclaimer” for low-income retirees when retirement advice is provided. He envisions that this might look like a food or drug warning: “If you are on GIS or about to receive GIS, the advice in conventional retirement planning advice may not be right for you. Some people who ingest this advice and who receive or who are about to receive GIS may experience considerable adverse effects. Some retirees have experienced episodes of lower income and may not benefit from this advice. This advice may only work best for people with mid- to late-onset high income. Make sure you consult a knowledgeable professional before taking this advice.”