When planning retirement income, it’s important to understand the government benefits you might be eligible to receive. These benefits are generally Canada Pension Plan, Old Age Security, and Guaranteed Income Supplement.
Canada Pension Plan is a contributory plan that provides guaranteed indexed income in retirement. It can be started as early as age 60 and deferred until age 70. Currently, the maximum monthly CPP at age 65 is $1,175.83 and the average amount is $672.87. If clients don’t know how much they’ll be receiving, I usually ask how long they will have been contributing to CPP when they reach age 65.
If the answer is 20 years, a good rule of thumb is to divide the 20 years by the maximum required contribution period of 40 years. In this example, it’s 20/40 so the client could expect 50% of the benefit at age 65. This assumes they’ve been making the maximum CPP contribution each year. Remember, this is just an estimate and, if possible, the client can go to Services Canada and get the exact amounts for you.
Old Age Supplement (OAS)
If you’ve been living in Canada for 40 years or more after your 18th birthday, you will qualify for the full OAS. If not, you can use the same logic as we used above to determine your partial payment. For example, if by age 65, you will have lived in Canada for 30 years, you can expect 30/40ths or 75% of the benefit. Right now, the maximum OAS is $613.53, so you could expect approximately $460.
OAS has another feature which results in a reduction in payments when a person’s net income is above $79,054 (for 2020). For every dollar above this amount, 15% of OAS is clawed back. In the extreme case, if some reported net income of $128,136, all of their OAS would be clawed back ($613.53 x 12/15% = $49,082 + $79,054 = $128,136).
Here’s a good table with the OAS and GIS details.
One last number for you, $58,700, this is the 2020 YMPE, or Yearly Maximum Pensionable Earnings. This number is the amount after which, no more CPP premiums are collected.
Business Owner Tip:
Business owners should consider T4 themselves this amount each year to maximize their CPP contributions. If they are only taking dividends, they will not be making CPP contributions. Only paying dividends will disqualify the business owner from using an Individual Pension Plan (IPP) as a retirement vehicle. Your accountants can help you decide which is better.
Let me know your thoughts below.
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