Planning for retirement with little or no savings to draw on

Despite their best intentions, some Canadians, facing a variety of financial challenges throughout their working lives, aren’t able to save much towards retirement. It can be difficult to know how to manage in those circumstances, especially when so much of the financial planning advice that gets shared widely caters to wealthier people. 

Retiring with little to no savings can be challenging, but it is not impossible.

Canada Pension Plan (CPP)

For a retiree who has worked most of their life, the Canada Pension Plan (CPP) will replace a modest portion of their historical earnings. The CPP retirement pension is meant to replace 25% of what you earned, on average, over your career, up to a certain limit. A CPP enhancement, started in 2019, will gradually increase that replacement rate to 33% over time.

In 2022, the maximum CPP retirement pension payment at age 65 is $1,254 per month—that is up to $15,043 per year. However, not all retirees have made enough CPP contributions during their careers to receive the maximum. In fact, the average CPP pensioner is receiving only $728 per month—about 58% of the maximum. A CPP Statement of Contributions can be obtained from Service Canada to help estimate a future CPP pension.

CPP payments can start as early as age 60 or as late as age 70, and the later you start your pension, the higher the benefit you will receive. There can be a lot of factors to consider related to timing your CPP pension, and payments are adjusted annually to account for increases in inflation and the cost of living.  

Old Age Security (OAS) and the Guaranteed Income Supplement (GIS)

Beyond CPP, retirees can also expect to receive an Old Age Security (OAS) pension. OAS is not based on work or contribution history, as it is a non-contributory pension. It is based on residency. A lifetime or long-time Canadian resident may receive up to $667 per month at age 65 as of the third quarter of 2022, which is $8,002 annualized. A 2022 change to OAS now means that pensioners aged 75 and over receive a 10% increase in their OAS pension. The maximum for a 75-year-old in the third quarter of 2022 is $734 per month, or up to $8,802 per year. OAS is adjusted quarterly based on inflation.

OAS can begin as early as age 65 or as late as age 70. Delaying OAS can boost payments by 0.6% per month or 7.2% per year, so that you get more monthly, but for fewer years. 

A low-income retiree with little to no retirement savings may be well advised to start OAS at 65, however, especially if they are no longer working. The ideal timing of a CPP retirement pension is a little more variable, but the main reason to consider applying for OAS at 65 is a related benefit called the Guaranteed Income Supplement (GIS). 

GIS is a tax-free monthly benefit payable to OAS pensioners with low incomes. Single retirees whose incomes are below $20,208 excluding OAS may receive up to $996 per month, or $11,952 per year, as of the third quarter of 2022. The maximum income and benefit for couples varies depending on whether both are receiving OAS. If both spouses are receiving the full OAS pension, their maximum combined income to qualify for GIS is $26,688 excluding OAS, and the maximum monthly benefit is $600 each ($7,194 annually). If your spouse is not receiving an OAS pension, the income limit rises to $48,432 excluding OAS, and a $996 monthly ($11,952 annual) maximum benefit applies.

It should be noted if a GIS recipient receives any taxable income other than OAS, they will receive less than the GIS maximums above. 

If we combine these three pensions, a single retiree at age 65 who is entitled to the maximum CPP and is no longer working may receive $15,043 per year at age 65. They may also receive $8,002 per year of OAS, assuming they have been long-time or lifelong Canadian residents. They would not get the maximum GIS but would still get $2,589 per year.

That’s $25,634 per year in total between CPP, OAS and GIS, or about $2,136 per month, with little to no tax payable depending on the retiree’s province or territory of residence and eligible tax credits or deductions.

Other forms of retirement income

There are a bunch of other factors involved with all three pensions, but the point is they can provide a solid foundation for a senior’s retirement income and should be evaluated individually by potential recipients. 

Other federal and provincial benefits, often tax-free, may also be payable to retirees. The Government of Canada has a Child and Family Benefits Calculator to try to estimate them. The eligibility for these benefits is generally determined by simply filing a tax return. 

What could retirement look like with $10,000, $50,000 or $100,000 in savings?

What if you have saved $10,000, $50,000, or $100,000 towards retirement to supplement your government pensions? 

At age 65, a sustainable initial annual withdrawal from your investments might range from 3% to 4% or more, depending on your investment risk tolerance, investment fees, and life expectancy. That means a saver with $10,000 could withdraw between $25 and $33 from their savings per month, or $300 to $400 per year, and increase those withdrawals by inflation each year. 

With $50,000 in savings, those withdrawals could be $125 to $167 per month, or $1,500 to $2,000 per year. 

And at $100,000, withdrawals could be $250 to $333 per month, or $3,000 to $4,000 per year. 

Consider these calculations as very rough guidelines with plenty of other factors to take into account. The tax implications would depend on the type of account you have saved in, but even fully taxable registered retirement savings plan (RRSP) withdrawals may be subject to little or no tax for a low-income retiree. Tax-free savings accounts (TFSAs) may be preferable saving options for savers with low taxable incomes close to retirement, as RRSP deductions are less beneficial in such cases, and withdrawals may reduce access to future government benefits. 

Home equity may also be available to supplement retirement spending. Some combination of downsizing, selling and renting, borrowing using a secured line of credit, or applying for a reverse mortgage, could top up investments or turn real estate value into cash for retirement spending. Conventional retirement planning often ignores home equity and, in a perfect world, it would not be necessary to use equity to fund retirement. But in a perfect world, many Canadians would retire at 55, spend winters down south and help their children buy homes of their own. We do not live in a perfect world, and home equity may be a part of some retirees’ retirement plans. 

Anyone approaching retirement should engage in planning on their own or with a professional to identify their retirement income sources relative to their spending. Those with little to no savings may have less access to third-party advice, but this makes it even more important to learn about government pensions and benefits, and consider sources beyond savings, including home equity. 

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

More on retirement:

• Earning, saving and spending money in Canada: A guide for new immigrants
• How might inflation impact your retirement plans?
• Financial planning in your 70s
• Where do we pay income tax if we retire abroad?