Flowing Old Age Security & Canada Pension Plan into Your Retirement Pool.

Generally, managing your retirement resources sustainably is a wise practice to participate in. Think of it as a reservoir: there are many tributaries flowing into the reservoir, that’s the various income sources; and there’s a certain amount of water that must flow through the dam to move the turbines to create the electricity, that’s your lifestyle. If you run the water through the dam too quickly, then one day there won’t be enough electricity to keep the lights on.

If you want to stop working one day, then the main tributary, your income from work, will dry up. It’s unlikely that we can replace that flow entirely with a new one: income from your personal retirement savings. However, there will still be smaller tributaries running, mainly the Old Age Security (OAS) and Canada Pension Plan (CPP), and the flow at which those are contributing to the reservoir will impact how much flow can safely leave the reservoir to turn the turbines, to fund your lifestyle. We can’t forecast much in the world of personal finance, but fortunately CPP and OAS are outliers in this regard.

The income streams from both pensions are factored differently, but both are quite predictable. How much will you receive from the OAS is determined by how long you’ve lived in Canada. To get the full amount, $589.59/m at age 65, Canada must be your home for at least 40 years after you turn 18. For every year less than 40 that you lived here, your income would be reduced by 1%. For example, if you lived in Canada for 30 years after the age of 18, then you’d be entitled to ¾’s or 75% of the pension. You must have lived in Canada for at least 10 years to get anything at all; in which case you’d receive ¼ or 25% of the full amount.

There is a claw back feature of the OAS; if your net income is higher than $75,910/yr, your OAS will be reduced by 15 cents for every dollar that you are over. Once you hit $122,843 of net income, you receive no OAS; that tributary will be dry. It’s an annual calculation, so the water could start flowing again in the future.

The CPP is determined by your level of annual income and for how many years you earned it. To get the maximum amount, $1,134.17/month at age 65, you need to have earned up to the years maximum pensionable earnings (YMPE), which is $55,900/yr for 2018, for roughly 83% of the years between 18-65. To give you an idea of how inflation impacts the YMPE, when I started in the business in 2003, the YMPE was $39,900.

There are provisions available to take away low or no income earning years so that you aren’t penalized for those years that you were at home with young children. You are incentivized to delay taking the pension beyond age 65 and the CPP penalizes you if you take it prior to age 65. The OAS can’t be taken earlier than age 65.

There are a few variables that affect the flow from both Government pensions and having all the figures required to calculate your own estimates is a challenge. The good news is that a customized CPP estimate is available online if you are registered with My Services. It tells you how much you’d receive if you continued to work until 65 and then start receiving benefits; as well as, if you decided to take it as early as age 60 or as late as age 70. Forecasting your OAS monthly payment is relatively straight forward and determining if you are at risk of being clawed back can be done with the right planning software. This gives us all the information we need to accurately predict the flow of funds that you’ll receive from those tributaries.

To sign up for online access to My Services, visit: My Services Canada Account (MSCA), click Register and follow the prompts. To get full access to the information, you need to apply for a security key that will be mailed to you, much like the CRA My Account login procedure.

The amount of water flowing into the reservoir from these two tributaries may not be the only ongoing sources of income to fund your retirement lifestyle. Other sources include:

• Defined Benefit Pension income
• Rental income
• Dividends from private corporations

If you want to know what kind of lifestyle you can afford in retirement, or how much water can be sustainably released from the dam, then a detailed analysis is required. 

Depending on your age, there is a percentage that can be sustainably withdrawn from your portfolio, the older the retiree, the higher the percentage. We can then add the sustainable withdrawal rate (SWR) and the ongoing retirement income together to determine a sustainable retirement lifestyle. Ideally, your sustainable lifestyle in retirement won’t be meaningfully lower than the lifestyle enjoyed while working. The time to take a good look at this analysis is well before retirement, 15 years is adequate, but the earlier the better. Time will provide the buffer required to make any necessary adjustments for a smooth financial ride through one of the biggest life transitions we’ll ever face. If the water is flowing too freely out of the dam for too long, then it’s near impossible to slow the pace back to a sustainable level. As Warren Buffet once said:

“Chains of habit are too light to be felt until they are too heavy to be broken”

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About Us

Mike Preto and Jason Del Vicario are Investment Advisors at HollisWealth, a division of Industrial Alliance Securities Inc. Based in Vancouver, BC, Canada, they work together in bringing a unique approach to managing money to ensure their clients are financially prepared for their retirement. They can be reached at 604-895-3349.

This information has been prepared by Mike Preto & Jason Del Vicario who are Investment Advisors for HollisWealth®. The opinions expressed in this article are those of Mike & Jason only and do not necessarily reflect those of HollisWealth. HollisWealth® is a division of Industrial Alliance Securities Inc., a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. Hillside Wealth Management is a personal trade name of Mike & Jason.