Subscribers to our site will know we’ve covered a few retirement income case studies on our site (we’ll link to those a bit). This one, however, might be the most important one: Retirement on a Lower Income using Guaranteed Income Supplement (GIS). Why?
Well, retirement income planning may be easier when you have lots of money saved and many accounts to drawdown. Retirement income planning can be more complex and far riskier when you’re trying to retire on a lower income. You have fewer resources available to you and those financial savings could disappear much faster…
In today’s important case study, we’ll look at one of our clients who sought out our services out to answer some important retirement questions at a lower income level: What can I spend in retirement?Will my money last?
I am 42 years old and will need about $2,500 a month. I would like to see how long I can survive on my money in the worst-case scenario. Worst case scenario means: I stop working (soon) due to my disability and I have no other income.
Read on to learn how this client can retire on a lower income, using the Guaranteed Income Supplement (GIS) and other income planning strategies.
As a backgrounder, you can check out some of our pillar posts on government retirement benefits:
Retirement on a Lower Income using Guaranteed Income Supplement (GIS) – can it work?
In our eyes, absolutely.
At Cashflows & Portfolios, we are only happy to work with clients at any age, at any income level, with any desire to retire early, at a traditional age, or later. The choice is theirs!
We know retirement income planning for folks on a lower income is not as easy as it might be for wealthier folks. That’s because conventional retirement income planning fails to address the needs of lower-income Canadians – these individuals don’t have the financial means to get access to fee-only planners or support. Our site hopes to change that.
Retirement on a Lower Income – Sources
It goes without saying but we’ll say it anyhow, folks with modest earnings or funds don’t have an abundance of income sources to rely on.
There is no large six-figure RRSP or a major workplace pension to lean on. Instead, retirement income planning on a lower income usually comes in the form of a modest/smaller mix of RRSP investments, maybe some TFSA assets, some cash savings or a small emergency fund in a taxable account. The combination of these modest savings will most likely mean any successful retirement will rely heavily on the Canada Pension Plan (CPP), Old Age Security (OAS) and possibly GIS to get by.
Timing also complicates retirement income planning for lower-income Canadians. There could be a wide range of expectations that other Canadians flush with cash simply don’t need to worry about:
Should I take CPP or OAS as soon as possible – because I need the money?
Should I draw down personal assets sooner to transfer longevity risk to CPP and OAS?
Should I keep working as long as possible – to avoid running out of money?
How should I maximize my small savings while optimizing government benefits?
And much more….
For today’s post, let’s look at our client’s profile and see when she might be able to retire.
Tina is 42 years young and wishes to retire soon or as soon as possible. She has a disability and has a modest Retirement Disability Savings Plan (RDSP) in place. More on that value and other account values in a bit.
You might already know that a Registered Disability Savings Plan (RDSP) is a savings plan that is intended to help parents (and others) save for the long-term financial security of a person who is eligible for the disability tax credit (DTC).
Contributions to an RDSP are not tax-deductible,
Contributions can be made until the end of the year in which the beneficiary turns 59.
Contributions that are withdrawn are not included as income to the beneficiary when they are paid out of an RDSP. However, the Canada disability savings grant (grant), the Canada disability savings bond (bond), investment income earned in the plan, and the proceeds from rollovers are included in the beneficiary’s income for tax purposes when they are paid out of the RDSP.
Asset profile (values are approximate for post content):
RDSP = $97,500
Cash savings/taxable = $148,000
Other taxable/non-registered stock account = $47,000
Personal RRSP = $50,000
TFSA = $142,000
Debt = $0.
In fact, when we look at it, Tina has done VERY well for her early-40s self including a healthy TFSA balance that most Canadians would be jealous of!
We used various assumptions in working with Tina based on her inputs to see if she could survive some worst-case scenarios. Here are the assumptions and results!
Retirement on a Lower Income using Guaranteed Income Supplement (GIS) assumptions
6.5% for a 100% stock portfolio (a mix of Canadian, U.S., and other equities).
4.90% for a 60%/40% stock and bond balanced portfolio.
1.5% for cash savings (which may or may not keep up with inflation).
Second, as we mentioned in the introduction, Tina has no company pension plan nor fat RRSP portfolio. So, she’ll need to rely on her personal assets to the extent possible and government benefits to fund her retirement. This introduces some risk given she only has part of Canada’s Retirement Income System to rely on – these are the Three Pillars of Canada’s Retirement Income System.Third, for now, we’ll calculate inflation at 2%. Sure, it could be higher over time but for simplicity, that’s where it is. That 2% figure will also apply to her government benefits – such as CPP, OAS and GIS. You might recall the Guaranteed Income Supplement (GIS) benefit is reviewed in January, April, July and October to reflect increases in the cost of living as measured by the Consumer Price Index. The beneficiaries’ monthly payment amount will not decrease if the cost of living goes down.Fourth, we ran a number of optimizations to figure out the earliest date Tina could possibly retire AND cover her desired $30,000 in annual expenses, increasing by 2% inflation over time. Spending $30,000 per year is Tina’s current after-tax spend, although she could spend less if needed. She is consistent on that. Fifth and finally, we want to stress-test Tina’s plan a bit, to see: how long she could survive on her money in the worst-case scenario, leaving the workforce within the year.
Retirement on a Lower Income using Guaranteed Income Supplement (GIS) results
We provided Tina with two (2) final reports.
In Scenario 1, it was an average of $30,000 per year spend (increasing with inflation), take CPP at age 70, OAS at age 65, and retire at age 43 in the coming months.
In Scenario 2, it was also a $30,000 per year spend (increasing with inflation), take CPP at age 70, OAS at age 65, but retire age at 45 (which is more likely and targeted).
Here are the projections… For Scenario 1: We noticed for retirement at age 43; stopping RDSP contributions, taking CPP at 70, and OAS at 65, and obtaining GIS from ages 65-70 (due to no other retirement income besides TFSA), Tina may run into a deficit by the end of the year she turns age 73. Now, this is not to say Tina will run of money for sure at that age – but she’ll only have CPP and OAS for income at that point going forward. It’s a big risk. We stress-tested her scenario by using the worst historical 20-year returns. In Scenario 2: We noticed that if we pushed her retirement ahead a couple of years to age 45 – the news is much better for Tina but not without some remaining risk.
Given Tina has a maxed-out TFSA, we have her withdrawal strategy as Savings > Non-Registered stocks > RRSP > RDSP and then finally withdrawing from her TFSA. Keeping her TFSA “until the end” has some major benefits. When Tina reaches age 65, most personal accounts will be drained except for her TFSA. Recall TFSA withdrawals are tax-free – check out Everything You Need to Know about the TFSA here! Given all other personal accounts are effectively exhausted by age 65, from ages 65-69, since Tina has no other income besides OAS (started at age 65), then she’ll be eligible for maximum GIS. For the sake of this exercise, we estimated that income stream to be around $14,000 per year when she reaches age 65. This is not a trivial amount of income. (Today, the maximum GIS payment is just over $900 per month.) Of note….you might be wondering – should Tina delay OAS? Our answer is “no”.
While you can receive your first OAS payment the month after you turn age 65, and you can receive a higher amount for each month you decide to delay your first OAS payment, recall to be eligible for the GIS, you must first meet the eligibility requirements for the OAS pension. Also, to receive GIS, the combined income of you and your spouse or common-law partner, cannot exceed a specific amount determined by the federal government.
So, essentially, for anyone to be eligible for any GIS benefit their income is arguably very low and those individuals likely need every bit of that income for retirement income security. That’s why in most cases, at Cashflows & Portfolios, we believe it makes sense to take OAS at age 65 including any GIS benefit, and defer CPP where possible to age 70 if you have that CPP benefits available to you.
When Tina reaches age 70, her retirement will again consist of CPP, plus OAS, and her remaining TFSA. To support Tina’s goals of retirement in a few years vs age 43, we also stress-tested this scenario with the worst 20-year period of returns (and repeating), and the maximum spending dropped to $26,000 per year but we never noticed a deficit at age 73. In fact, using the worst historical 20-year returns we concluded as long as Tina’s expenses can be flexible between $26,000 to $30,000 per year (on average, increasing with inflation) then the longer her portfolio should last – until age 99. Yes – no after-tax spending shortfall!
Retirement on a Lower Income using Guaranteed Income Supplement (GIS) summary
Of course, nobody knows exactly what the financial future holds. We can, however, make some assumptions about what might occur, how things could play out and test ourselves (and our portfolios) against those scenarios to answer many valuable retirement income planning questions like:
What can I spend in retirement?
How long will my money last?
Should I take (or defer) CPP or OAS – will that change my outcome?
Asking these valuable questions will apply to any higher income earner, modest earner, or anyone that may need to consider retirement income planning on a lower income.
We want to thank Tina for being a client and we look forward to helping her out again in the future.
Need any support with your retirement income projections?
Knowing how to demystify the retirement income puzzle is not trivial work but it’s absolutely something we can help with. If you need some help solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), or figuring out if you have enough saved to spend for your retirement income plans, we’re here to help answer those questions and more!