Retirement Questions...

[eblend]

Hi Guys,

My parents are about 7 years away from retirement and they started asking me some questions based on some conversations they had with other people, and I wanted to see if anyone has any experience with this. They said they should probably talk to a financial planner about some of these things, but ideally we can avoid that and figure this out ourselves.

So, first thing first. My parents told me that if you have RRSPs saved up when you retire, you will not get the full government pension? They said that the government pays something like $1200 per month for pension, but if you have RRSP they only top up to $1200 or something like that. Anyone have any clue about this?

The whole idea came from my parents current debt on their Heloc. Recently they sold their townhouse with all it's problems and non-stop special assessments and bought a small detached house in silverado. My parents don't have much money being that they came to this country as immigrants and worked their way to their lifestyle right now. We came her about 19 years ago. They have about 60k to pay off on their heloc for this house switch. They do not have any savings at all and were just starting to save up when they got fed up with special assessments and bought a new house, prior to the house purchase, they had paid off their mortgage on the old town house. My mom has about 70k in RRSPs from her matching contributions from work retirement savings. With what they appear to have learned, they are questioning if they should keep saving that 70k RRSP into their retirement, or if they should take it out and pay off their HELOC.

If the whole "If you have RRSP you don't get full pention" thing is true, it seems like taking the money to pay off the heloc makes sense, as they want to get the max benefit from the government pension when the time comes. They are aware that if they take out the money, they will be taxed marginally on it at 32%. They can pull the money out over 2 tax years at that 32%, thus the 70k they pull out would only really be 48K after taxes, not enough to cover all of their HELOC, but much closer.

So the question becomes, should they pull the money out, pay the taxes on it, and put it towards a HELOC, or pay off the heloc as is over the next 3-4 years and keep the RRSP for when they retire. They really don't like the idea of having to use own RRSP money if having it means they won't get maximum benefit from their government pension.

Any suggestions are welcome, and recommendations too for a personal advisor should they need to see one.

Thanks guys.

[vengie]

Keep the RRSP, pay off the HELOC over the next few years.

[Tik-Tok]

Originally posted by eblend


So, first thing first. My parents told me that if you have RRSPs saved up when you retire, you will not get the full government pension? They said that the government pays something like $1200 per month for pension, but if you have RRSP they only top up to $1200 or something like that. Anyone have any clue about this?


Are you talking about CPP, or something else? CPP pays out regardless of your other retirement income sources.

[ExtraSlow]

I think OAS clawback is what he's referring to.

[macman64]

They probably mean OAS/GIS. http://www.servicecanada.gc.ca/eng/services/pensions/oas/gis/index.shtml


Here is the caps for income to receive the GIS http://www.servicecanada.gc.ca/eng/services/pensions/oas/payments/index.shtml


The GIS portion is essentially for those in poverty.

For the OAS portion you will need to look at how long they have been in Canada : http://www.servicecanada.gc.ca/eng/services/pensions/oas/pension/calculate.shtml

[eblend]

Thanks for all the info guys,

So if I understand correctly, you get your standard pension (CPP) at 65 (or as early as 60 at a reduced rate), then on top of that you get your OAS right, and if that still doesn't make it up to a set value, a GIS on top of that?

I assume my parents CPP contribution can be calculated from their notice of assessment?

So hypothetically speaking, looking at the numbers on service canada site, the average amount for retirement pension is $607.33 per month, so we will use this figure, on top of that, assuming my parents both get full OAS, they will get $506.86 each (as per http://www.servicecanada.gc.ca/eng/services/pensions/oas/payments/index.shtml)

For a total of $1114.19 per person right?

Now, I am confused about the Maximum annual income portion on here http://www.servicecanada.gc.ca/eng/services/pensions/oas/payments/index.shtml

What does that mean exactly? It says that Maximum Annual income to receive the OAS pension is $22,500 (If your spouse/common-law partner receives the full OAS pension). If my parents are retired, they wouldn't have any other income..just pension, or I guess RRSP if they pull from that if they have something in there...does pension income count as income in this purposes?

Sorry for so many questions, never needed to know any of this before.

[eblend]

Further on to the RRSP question and the Maximum Annual income mentioned above, how does RRSP withdrawal play into this?

If I understand correctly, if they hold on to the RRSP until retirement, they can pull up to a total of $43953 (http://www.cra-arc.gc.ca/tx/ndvdls/fq/txrts-eng.html) and be in the lowest tax bracket (15% federal and 10% alberta)....so does it mean that if they make for example $20,000 in pension, they can take out $23953 as RRSP and still be in this bracket? Is pension taxable?

Man this is so complicated haha

[G]

It actually pays to be legally "divorced"?


If you are a single, widowed or divorced pensioner
$764.40 $17,088 (individual income)

If your spouse/common-law partner receives the full OAS pension
$506.86 $22,560 (combined income)

If your spouse/common-law partner does not receive an OAS pension
$764.40 $40,944 (combined income)

If your spouse/common-law partner receives the Allowance
$506.86 $31,584 (combined income)

[macman64]

Just as a note they won't receive the full OAS as from what you have said they haven't been in Canada long enough:

http://www.servicecanada.gc.ca/eng/services/pensions/oas/pension/calculate.shtml They will get partial OAS.

When you mentioned income, yes RRSP withdrawal counts as income.

[eblend]

Originally posted by macman64
Just as a note they won't receive the full OAS as from what you have said they haven't been in Canada long enough:

http://www.servicecanada.gc.ca/eng/services/pensions/oas/pension/calculate.shtml They will get partial OAS.

When you mentioned income, yes RRSP withdrawal counts as income.

Yah, just noticed that while watching some videos online on youtube about the matter.

So based on the reading I did over the last couple of hours, this is what I kind of came up with I think.

1. If they take all their RRSP and pull it out at their marginal rate of 32% (over two tax years), they will end up with 48k (with 27.6K going to taxes) which they can use to pay off the HELOC, however, once they retire, assuming they are not able to save any more money, they will be considered low income pensioners and would get their CPP, OAS, and most likely GIS.

2. If they keep paying the HELOC and pay it off before retirement, they will end up with 70k (plus whatever else they get in there until their retirement) to be used in their retirement and can take out as income, but if they do take RRSP out, they will still get their CPP and OAS, but most likely NOT GIS, as they would have to draw on their own RRSP funds.

So the question becomes...how are these things different if they have normal savings in a savings account vs RRSP?

If they pulled all the money now to pay the heloc and just saved money in a savings account, would they still be able to qualify as low income pensioners and get cpp, oas, and gis, despite having some money in the bank? It isn't income, it's just existing savings.

Same question but with RRSP. Obviously if you pull RRSP you are taxed at 25% at a minimum and IT IS concidered income, so you pay, but if you withdraw each year at the minumum to still qualify for GIS, do you qualify...or not since you actually have much larger RRSP backing and the government can see that and simply make you pull out more yourself, thus not having to pay for your GIS.

[eblend]

I know I am talking to myself here, but I found a very good document that talks about low income earners and how this whole things plays together, it can be found here

http://openpolicyontario.com/wordpress/wp-content/uploads/2012/09/maximizing-Paper-V6.pdf

In short: If you are low income earner, you should offload your RRSP, because using your RRSPs during retirement reduces your GIS payments. Dump money into TFSA, any savings that you use during retirement don't count as income and thus you could have lots of money in savings and live comfortably, while getting CPP, OAS and GIS, without increasing your income.

Thanks for everyone's input and for pointing me into the right direction.

[leftwing]

Originally posted by eblend
Hi Guys,
They said they should probably talk to a financial planner about some of these things, but ideally we can avoid that and figure this out ourselves.

Beyond < Industry Professional who works on this exact scenario daily...

[ExtraSlow]

beyond >> ALL

[eblend]

Originally posted by ExtraSlow
beyond &gt;&gt; ALL

Agree. In that document I attached is the exact reason why I don't really trust planners of any kind, they are out to make money for themselves first and foremost. It's mentioned in there that the standard line is RRSP all the time, buy more RRSP, when in reality, for low income people like my folks, it isn't beneficial at all.

[Xtrema]

Here's how it goes (2014 numbers), there are 3 benefits when you are 65 (or 67 @ 2023).

1) CPP, if you paid into CPP, you are eligible to collect CPP. How much is depends on a schedule based on how much you have paid into it. Maximum: $1038/month

2) OAS, you get this as well as long as you have been in Canada for more than 10 years and your yearly income is < $114K. Partial if you don't meet the criteria. Maximum: $546/month

3) GIS, you only get this if your yearly income is < $17K for single, < $40K for couple. Maximum: $764/month.


So if you are withdrawing from RRSP, it counts as income. So most likely you will blow your cap needed to collect GIS.

I don't know your parent's age to plan this accordingly because age and current income will affect how to get rid of the RRSP. But as a sample, I would draw RRSP out before they hit 65 and pay off whatever you can while they are still in a favorable tax bracket. If you withdraw RRSP while you are collecting CPP+OAS, you will lose GIS and on top get taxed in higher brackets.

Since they only have $70K and has debt, I doubt they need to worry about RRIF when they hit 71.

End of the day, the whole RRSP scheme is designed that you either be filthy rich and don't need government's help or be dirt poor to lives off the government. Being stuck in the middle is the worst case scenario since you get neither.

[kaput]

.

[max_boost]

Originally posted by Xtrema
Here's how it goes (2014 numbers), there are 3 benefits when you are 65 (or 67 @ 2023).

1) CPP, if you paid into CPP, you are eligible to collect CPP. How much is depends on a schedule based on how much you have paid into it. Maximum: $1038/month

2) OAS, you get this as well as long as you have been in Canada for more than 10 years and your yearly income is &lt; $114K. Partial if you don't meet the criteria. Maximum: $546/month

3) GIS, you only get this if your yearly income is &lt; $17K for single, &lt; $40K for couple. Maximum: $764/month.


So if you are withdrawing from RRSP, it counts as income. So most likely you will blow your cap needed to collect GIS.

I don't know your parent's age to plan this accordingly because age and current income will affect how to get rid of the RRSP. But as a sample, I would draw RRSP out before they hit 65 and pay off whatever you can while they are still in a favorable tax bracket. If you withdraw RRSP while you are collecting CPP+OAS, you will lose GIS and on top get taxed in higher brackets.

Since they only have $70K and has debt, I doubt they need to worry about RRIF when they hit 71.

End of the day, the whole RRSP scheme is designed that you either be filthy rich and don't need government's help or be dirt poor to lives off the government. Being stuck in the middle is the worst case scenario since you get neither.

Is there gonna be anything left when we retire in 30 years Stanley lol this sounds like a ponzi scheme where we need more immigrants to come in and keep funding it haha

[atgilchrist]

Go talk to a planner. Believe it or not, not all are crooks, and this is what they do day in and out.

[Xtrema]

Originally posted by max_boost


Is there gonna be anything left when we retire in 30 years Stanley lol this sounds like a ponzi scheme where we need more immigrants to come in and keep funding it haha

The roll back of social programs will continue. My friend's kid can't get a student loan because of his RESP portfolio. RRSP basically remove the fed's responsibility on GIS in long run.. OAS will continue to increase in admittance age, probably to 70yr old by the time we need it. And CPP won't be funded for long as more and more people are turning from employees to self employed contractors.

Even if I'm entitled to CPP and OAS, I only planning for them to be supplemental income.

[eblend]

Originally posted by kaput
1. Figure out how much they will pay in taxes for withdrawing the RRSP (seems like you've already done this, assuming their combined income is under $55k/yr)
2. Figure out how much interest they will pay over however many years it will take to pay off the loan without using the RRSP.
3. Factor the difference into all the CPP OAS stuff already being discussed.

Hi kaput,

Just curious about your point 1...what does 55k/y have to do with this?

The RRSP is all under my mom, she makes 42k per year, so I believe she would be taxed 32% from about 44k to 88k, so she would widthdraw over two tax years, 44k the first year, 26k the second, end result is 32% tax rate. Does it matter what my dad makes in this case? Together they are over 100k. If my numbers are correct, taking out 70k at 32% will result at a tax of $22,400, leaving them with $47,600 after tax. If I am not mistaken, they would pay a minumum of 25% tax post retirement if they don't go over that 44k first braket, so the net result off pulling now at 32% vs later at 25% is about $4900. Ofcourse all of this changes greatly if they have to pull money out on their combined income...thus a 36% tax rate......or 39% depending on how much they pull..I hope this isn't so.

2. I calculated the interest they would pay using an online calculator, comes out to about $3700 ish over 3 years if they paid a certain amount every single month

3. This is hard to calculate at the moment, have to get more numbers form their CPP contributions, working on getting this info.

[eblend]

So it looks like Sunlife doesn't allow the withdrawal of the RRSP.....??? Anyone ever heard of this?

My mom called them this morning and they told her that she is sitting at $74k, but can only take out 36k, which is her portion of the contribution, and if she does take even 36k out..she will not receive additional RRSP matching for a full year from her company...?

[ExtraSlow]

Pretty normal for there to be rules preventing withdrawal of the company paid portion of the RRSP if it's been set up through work.

[eblend]

Originally posted by ExtraSlow
Pretty normal for there to be rules preventing withdrawal of the company paid portion of the RRSP if it's been set up through work.

Bummer. Well all those plans are off the table now :D

Does quitting your job release all those funds? Just curious.

One thing I learned from this....is well, don't trust anything. I don't do RRSPs myself as I find they are useless, but never looked into what my parents were doing, now I know, will help me in life....but not so much them.

[Tik-Tok]

Originally posted by eblend

I don't do RRSPs myself as I find they are useless

If your company matches (like it appears your moms does), it's 100% return... not that useless.

[Xtrema]

Originally posted by eblend
One thing I learned from this....is well, don't trust anything. I don't do RRSPs myself as I find they are useless, but never looked into what my parents were doing, now I know, will help me in life....but not so much them.

And don't underestimate compound interest/gain in an tax sheltered portfolio.

Yes, there is such a thing as too much RRSP when it's time to convert to RRIF but I think most people probably don't have to worry about that.

[dezmarez]

And income splitting with a spouse, which is a huge benefit.

[suntan]

Originally posted by Xtrema

The roll back of social programs will continue. My friend's kid can't get a student loan because of his RESP portfolio. RRSP basically remove the fed's responsibility on GIS in long run.. OAS will continue to increase in admittance age, probably to 70yr old by the time we need it. And CPP won't be funded for long as more and more people are turning from employees to self employed contractors.It's not hard to give yourself enough to cover CPP on employment income. And feds raised rates on non-preferred dividend income, so less benefit taking it out that way.

[eblend]

Originally posted by Tik-Tok


If your company matches (like it appears your moms does), it's 100% return... not that useless.

Sorry, should have clarified, in a non-matching situation it seems useless. I for sure would do the matching myself if i was in the situation as well, free money.

[Tik-Tok]

Originally posted by Xtrema

And CPP won't be funded for long as more and more people are turning from employees to self employed contractors.

Self employed contractors still need to pay CPP do they not?

[eblend]

Originally posted by Tik-Tok


Self employed contractors still need to pay CPP do they not?

"And how’s this for a double whammy: Under the CPP/QPP, self-employed workers pay both the employer and employee contributions themselves. So while employees will pay only $2,118.60 in CPP contributions in 2009, self-employed workers will have to pay twice as much, or $4,237.20!
"

Something I found online while researching this topic, don't know if that applies to everyone or whatever.

[dezmarez]

Originally posted by max_boost


Is there gonna be anything left when we retire in 30 years Stanley lol this sounds like a ponzi scheme where we need more immigrants to come in and keep funding it haha

Some information that speaks to this argument..

http://www.cppib.com/en/our-performance/cpp-sustainability.html

http://retirehappy.ca/will-canada-pension-plan-cpp-be-there/

[triplep]

Originally posted by eblend


&quot;And how’s this for a double whammy: Under the CPP/QPP, self-employed workers pay both the employer and employee contributions themselves. So while employees will pay only $2,118.60 in CPP contributions in 2009, self-employed workers will have to pay twice as much, or $4,237.20!
&quot;

Something I found online while researching this topic, don't know if that applies to everyone or whatever.



You do realize that the other 2,118.60 is paid by the employer if you are an employee right....

[suntan]

Originally posted by eblend


&quot;And how’s this for a double whammy: Under the CPP/QPP, self-employed workers pay both the employer and employee contributions themselves. So while employees will pay only $2,118.60 in CPP contributions in 2009, self-employed workers will have to pay twice as much, or $4,237.20!
&quot;

Something I found online while researching this topic, don't know if that applies to everyone or whatever. Yes if you are self employed that is how it works.

Don't feel too bad we don't have to pay EI.

[JRSC00LUDE]

eblend, you should not be doing this yourself.

.02

[eblend]

Originally posted by triplep




You do realize that the other 2,118.60 is paid by the employer if you are an employee right....

I do....but that was not the question, the question was about self employed, where you are the employee and the employer

[eblend]

Originally posted by JRSC00LUDE
eblend, you should not be doing this yourself.

.02

Yah, once we found out that our plan to pull things out won't fully work, we decided to scrap that idea and just pay off the heloc over the next few years, so nothing is happening for a while regarding any of this, when the time comes might look more into it again.

[Xtrema]

Originally posted by eblend


Yah, once we found out that our plan to pull things out won't fully work, we decided to scrap that idea and just pay off the heloc over the next few years, so nothing is happening for a while regarding any of this, when the time comes might look more into it again.

You should start to have a strategy if your folks is getting close to 60 or about to stop working (voluntary or involuntary). Talk to a planner because you probably won't want to spill the beans on Beyond and the planner need a full complete picture before he/she can advise on the best way forward.

Everyone is different.

[leftwing]

Originally posted by eblend


Yah, once we found out that our plan to pull things out won't fully work, we decided to scrap that idea and just pay off the heloc over the next few years, so nothing is happening for a while regarding any of this, when the time comes might look more into it again.

Why don't you go a retirement planner right away, so they can develop a plan and get the wheels rolling in terms of preparing your parents for retirement. Believe it or not, a financial planner will be able to give you a better idea of what you need to do, and what your options moving forward are with regard to your parents financial situation. Relying on beyond to answer your questions with such vague data and such a complex situation is pretty irresponsible.

[ragu]

Originally posted by Xtrema
Here's how it goes (2014 numbers), there are 3 benefits when you are 65 (or 67 @ 2023).

1) CPP, if you paid into CPP, you are eligible to collect CPP. How much is depends on a schedule based on how much you have paid into it. Maximum: $1038/month

2) OAS, you get this as well as long as you have been in Canada for more than 10 years and your yearly income is &lt; $114K. Partial if you don't meet the criteria. Maximum: $546/month

3) GIS, you only get this if your yearly income is &lt; $17K for single, &lt; $40K for couple. Maximum: $764/month.



Assuming that one has lived in Canada for well over 10 years and made appropriate contributions to CPP, the max you receive is ~$1,500. This is regardless of balance in your RRSP, TFSA, savings?


Originally posted by Xtrema


The roll back of social programs will continue. My friend's kid can't get a student loan because of his RESP portfolio. RRSP basically remove the fed's responsibility on GIS in long run.. OAS will continue to increase in admittance age, probably to 70yr old by the time we need it. And CPP won't be funded for long as more and more people are turning from employees to self employed contractors.

Even if I'm entitled to CPP and OAS, I only planning for them to be supplemental income.

So contributing to RRSP is a double edge sword i.e. you get tax benefit but your kids can't get student loans and you lose out on GIS?

[suntan]

RESP, not RRSP.

[blownz]

Since it looks like CPP and OAS will be your parents main source of income in retirement, I would spend some time determining if they will actually have enough income to keep their house in retirement. Sounds like they will be at near poverty levels and property tax, utilities, repairs and maintenance might leave them broke and ending up living with you.

I think this will be a problem for lots of people with parents nearing retirement.

My wife and I have 3 sets of parents (divorce on one side) that will all be retiring in the next 2-5 years and we have had some blunt and ugly conversations with them as I am trying to identify my financial risk with each of them. Funny thing is the set I have the most to worry about is currently in the biggest house, drive the newest and most expensive vehicles, make the most money, but have the most debt and least savings and highest expected standard of living. It will be a rude awakening for them (and I am guessing countless others out there) and I am afraid it will end with them living in my basement one day. :thumbsdow