Canada has a strong retirement income system. Alain Néemeh, Canadian Life and Health Insurance Association (CLHIA) chairperson, stated in a recent speech that Canada's retirement savings system has helped reduce poverty rates among Canadian seniors from 35 per cent in 1980 to just 5 per cent today.
However, despite the country's strong safety net, a January 2011 CIBC poll found that many Canadians are still worried about their ability to financially navigate retirement.
To soothe some of these fears, CreditCards.ca crunched the numbers and calculated a senior couple's bare-bones survival retirement in Toronto, Ont., Canada's largest -- and most expensive -- city. Surprisingly, we found that even poverty-level retirees can thrive.
Budgeting for the basics
Financial planning experts estimate that a retired Canadian couple requires a combined gross annual income of at least $30,000 (or $2,500 monthly) just to stay solvent.
The highest monthly expense for retirees in good health is typically the cost of housing. Affectionately nicknamed Hogtown, Toronto's average monthly rent is $1,124 -- an amount 30 per cent more than the $864 average for all Canadians cities, according to Canada Mortgage and Housing Corporation's spring 2011 survey. Even with paid-off mortgages, homeowners also pay housing expenses at least comparable to rent for property taxes, electricity, heating, water, insurance, maintenance and other expenses.
After covering their monthly housing bills, Hogtown retirees on a monthly survival budget of $2,500 have an average $1,376 left to pay other expenses.
To test how a relatively poor retired couple could afford $2,500 in monthly charges, CreditCards.ca ran several scenarios through the Canadian government's official retirement income calculator. Both spouses were assumed to be age 65, while each made just $15,000 annually before retiring.
Government-source retirement income
Here's how Canada's retirement income system works: Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) provide a basic level of retirement income to Canadians. Both OAS and the GIS are inflation-indexed and are funded by general tax revenues.
In addition, Canadians from age 60 to 70 can start to collect under the Canada Pension Plan (CPP). The monthly CPP amount depends on pre-retirement earnings and attained age when payments begin.
At age 65, our Hogtown couple qualifies for $1,726 in monthly government retirement income as follows:
- $1,048 from OAS.
- $54 from GIS.
- $624 from CPP.
All told, government-provided retirement benefits generate 69 per cent of the seniors' monthly $2,500 survival budget. But they're still $774 short.
Private pension and retirement savings income
Canadians lucky enough to be covered by an employer pension plan can easily fund the remaining deficit. According to the Canadian Life and Health Insurance Association (CLHIA), about 52 per cent of Canucks are covered either under an employer pension plan or group Registered Retirement Savings Plan (RRSP).
Unfortunately, few Canadians earning $15,000 per year qualify for employer-sponsored retirement benefits.
The best option for our Hogtown pair is contributing to tax-efficient individual RRSPs. Based on Statistics Canada's 2009 report, the median annual RRSP contribution was $2,680. If each spouse deposits that yearly amount into their respective RRSPs starting at age 55, and assuming a modest 7 per cent investment return, the retired couple receives $407 in monthly RRSP income at age 65.
That reduces the monthly shortfall to $367.
Retirement income from savings and other sources
Perhaps the best way for our Hogtown retirees to generate the remaining $367 is to have also set up Tax-Free Savings Accounts (TFSAs) at age 55. By contributing $2,000 from yearly tax refunds and investing in blue-chip TFSA holdings, the couple will have at least $36,000 in savings at age 65. That sum can yield $367 in monthly income.
Retired homeowners can cover their monthly deficit by taking in tenants. Frugal couples may also save an extra $100 weekly by using discount coupons, buying in bulk when basics go on special and switching to low-interest credit cards.
One or both spouses may also want to work past age 65. Even a part-time weekend job at a minimum wage job can deliver an extra $400 monthly. Human Resources and Skills Development Canada published a 2007 review revealing that only 19 per cent of seniors earned employment income. Yet there are a surprising number of sustainable jobs, including working as security concierges in residential and commercial buildings, which could bring in over $30,000 in annual wages if both retired spouses worked full-time.
By pooling their resources and carefully budgeting, our senior couple will be able to afford more vacations and enjoy a much more comfortable existence in their golden years.
Best of all, they won't have to move from Hogtown to a city with lower average housing costs.