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May 8, 2023
Until fairly recently, CPP replaced a quarter of your average work earnings — but it’s already providing more. We asked experts what to do if CPP and OAS will make up most of your retirement income.
At 57, Betty McCabe, an administrative and accounting assistant in Hamilton, has been thinking a lot about retirement.
But she’s not thinking about how she’ll spend her free time. Instead, she’s figuring out how she can afford to live on just the Canada Pension Plan (CPP) and the Old Age Security pension (OAS).
McCabe (who requested that her name be changed to protect her privacy), earns $52,000 a year and has no debt.
And while she’s been responsible with her money, she has no registered retirement savings plan (RRSP) and no tax-free savings account (TFSA). The issue, she says, is that every time she gets ahead, a crisis hits and her savings vanish.
“I’ve been working since I was 16,” she says, explaining that her family didn’t have a lot of money, so she paid for everything from clothes and toiletries to her post-secondary education.
It’s unlikely most Canadians will be able to pay for their retirement on just CPP and OAS alone, say advisers and financial planners Cindy Marques and Elke Rubach. But the two programs are more generous than most people think, and CPP is about to become even more generous, providing as much as a full third of your pre-retirement income when you hit 65.
Understanding how CPP and OAS work is key to retirement planning and knowing how much you may get. The CPP — a mandatory pension plan financed by contributions from employees, employers and self-employed individuals — was always meant to provide some but not all retirement income to Canadians when it launched in 1965. Until fairly recently, CPP replaced a quarter of your average work earnings — that’s if you contributed the maximum throughout the lifetime of your working years.
But in 2019, the CPP enhancement was introduced, which means that in exchange for making higher CPP contributions, you could get up to 33 per cent of your pre-retirement income when you hit 65. The changes are being phased in slowly: the payouts are already increasing, but no one will receive the full increase until 2065.
Starting in 2024, there is a second phase of the enhancement with the introduction of a higher limit that allows you to invest an additional portion of your earnings into CPP. It’s called the year’s additional maximum pensionable earnings.
So if you earn more than the first earning ceiling, estimated to be $69,700 in 2025, you’ll automatically contribute more to CPP and so will your employer. Your employer will continue to deduct your contributions from your paycheques and if you’re self-employed you continue to make your CPP contributions when you file your taxes.
But not a lot of people know exactly how CPP works and how much they will get, says Marques, a certified financial planner and director at Open Access Ltd. in Toronto.
“Federal pensions are great as a supplemental layer, but a retirement it does not make,” she says. “I think people just hear about a pension plan and think, ‘I’m taken care of, all these deductions are coming off, I don’t need to worry.’ ” It’s that thinking, she adds, that’s preventing people from doing their due diligence and research.
If you’re like McCabe and staring down a short tunnel to retirement with only CPP and OAS, what are your options?
Maximize your benefits
If you can, work beyond 65. Marques says that if you can work until 70 years, you can get the maximum CPP and OAS. “Both will be augmented, which is quite helpful because the CPP will be augmented by 42 per cent by age 70, and OAS will be augmented by 36 per cent.”
That could add several thousands of dollars to your annual income, depending on your contributions. The maximum CPP payout in 2023 for those who are 65 is $1,306.57 per month and OAS is $691, for $23,970.84 a year.
Getting the maximum CPP amount depends on how much and for how long you contributed and when you decide to apply for it. Maximum OAS is decided by how long you lived in Canada after age 18.
It all depends on how much you make and how many years you contributed. If you’re curious about how much you’ll get, you can check your My Service Canada Account.
Look into the Guaranteed Income Supplement
If you’re single, divorced or widowed and your retirement income in 2023 is less than $20,952 a year, you could get a maximum of $1,032.10 a month or $12,385.20 yearly with the GIS.
Using your home for a reverse mortgage
Marques says to look at assets like a paid-off home. That can be used for a reverse mortgage where you could get up to 55 per cent of the value of the home, which is repaid when the home is sold.
“For individuals who are not as concerned about keeping that property in the family after they pass, then that’s a means of accessing equity,” she says. “It’s an option if you’re comfortable with doing a reverse mortgage and you don’t have to worry about interest while you’re taking the money.”
Another option, if you have a home, is to get creative, says Rubach, an adviser and president of Rubach Wealth in Toronto.
“If you own a house, get creative and rent a room, rent the garage, rent something,” she says. “It’s getting creative and proactive before catastrophe hits.”
If you don’t have a house, both Marques and Rubach say it can be harder to live off of CPP and OAS, especially in places with very high rent. An option is to move somewhere cheaper.
Leveraging a whole life insurance policy
Marques says a whole life insurance policy could provide additional retirement income. Permanent life insurance policies, which provide a death benefit to beneficiaries, can also build up cash values within them that you can borrow. That means you’ll have money during your lifetime that will be repaid when the policy is paid out on your death.
Moving back in with the kids
Marques has been seeing elderly parents moving in with their kids upon retirement, pitching in with the rent or other living expenses. All of this depends on whether everyone gets along.
When asked about public long-term care homes where the fees are lower than for-profit homes, both experts say it’s an option, though Rubach says government cuts could affect the services offered.
McCabe has run her numbers and feels confident she can live off CPP and OAS, having seen her parents do it. Her apartment is rent-controlled and she’s hoping to save up enough to put a down payment on a condo for $250,000 in the next year or two. She expects to pay it off before she retires at age 70.
“I’m hearing impaired, and hearing aids are expensive,” says McCabe. They cost anywhere from $1,000 to $4,000 per device, according to House of Hearing and AudioSense Canada. The majority of that cost is out-of-pocket.
“So you’re always behind an eight ball financially speaking, because there’s a lot of output for whatever disposable income you may have and were saving. So since I was 16, all I’ve been doing is essentially saving until the next crisis occurs.
“I am lucky to live in a city though,” she adds. “This is one of the reasons I don’t want to move if I don’t have to, because there are a lot of social services and community services for low-income people, including low-income seniors.”