The point: Retirement planning using general assumptions about your future income is just retirement guessing. And – surprise – it’s useless.
Seriously? Three posts into a retirement series and we haven’t even answered the question “how much do I need to retire?”
To reiterate (again): we’re approaching retirement planning without assumptions, and trying to avoid useless numbers in favour of real ones. Heck, we’re even questioning what we mean when we say “retirement”. (For another good assumption-busting post, take a look at Jon Chevreau’s take on findependence vs. retirement.)
Because you’ve already done the work in part two to analyze your current spending and project those expenses into the future, you know how much income you’ll need. Now we’re looking at where it’s going to come from.
To that end, here’s a retirement calculator, already helpfully filled in with all the information you need to know about your Canada Pension Plan and Old Age Security entitlements:
That guy looks pretty relaxed, right? I mean, for a guy with no savings and no company pension, he just opened up his laptop and found out he’ll get $18,702.84 a year from the government when he retires. Sweet!
Put that guy in a suit with a name-tag, replace his slightly confused expression with a confident smile, stick him behind a desk, and he’s now qualified to offer retirement planning, thanks to the magic of computers! Hooray!
The Bad News
It’s pretty unlikely that you’re going to qualify for the maximum amount of CPP. The average benefit paid to retirees at 65 (for now) is $6,415.80 per year, substantially less than the calculator’s default of $12,150.
Any “advisor” who gets to this part of a retirement plan and forecasts your government benefits using the default maximum values, or by allowing you to guess at your pension eligibility, isn’t worth talking to. In short: he doesn’t know what he’s talking about.
He was given a three hour course on how to use a retirement calculator and set loose on an unsuspecting population to clutter up their filing cabinets with “planning” garbage. Oh, yeah, and to convince you to contribute more to your RRSP.
Are you shocked? Skeptical of my abilities to peer into your private meeting? Let’s take a (very)short quiz to see if he knew what he was talking about:
- Did he ask you for your record of CPP contributions?
- Did he ask you for a copy of your most recent pension statement?
If the answer to either of these questions is “No”, then I’m right, he’s wrong, and you’ve got a useless retirement plan.
And now for the good news
You already have access to precise information about your public and private pension income forecasts based on your past contributions and years of service.
Canada Pension Plan
You can find your Statement of CPP contributions online in your My Service Canada Account. (If you don’t already have an account, get one. There’s no good reason to not have immediate access to your own information online.)
Here’s an example of the amazing things you can learn: based on the actual amount of money you’ve contributed, and your actual eligible earnings since you turned 18, you can even get an estimate of what your pension would be if you were 65 (or 60, or 70) today.
Old Age Security
OAS is easier and more difficult at the same time. It’s easy if you were born earlier than 1958 or later than 1962 and have or will have lived in Canada for 40 years after you turned 18. Both groups of people will receive the maximum amount, which right now is $6552.84. Those born earlier than 1958 will get it when they’re 65, and those born later than 1962 will get it when they’re 67.
Anyone born in 1957 through to the end of 1962, but live in Canada for 40 years after age 18 will still get the maximum amount, but will have to wait a little later to get it. You can find your exact eligibility date here.
**I’m going to do you a favour: If you fall into either of the three OAS situations described above, skip this next section, because It Is Boring. Trust me, I wrote it. Flowcharts are fun, but not that fun.**
Click to enlarge, but only if you want your eyeballs to bleed.
**All right, you can start reading again.**
More good news: if you have a defined benefit or contribution plan through your employer, you get a statement every year. That statement tells you exactly when you’re eligible to retire and with how much. (What it doesn’t tell you, unfortunately, is how underfunded your pension plan might be. That’s a post for another day.)
Real numbers are so much fun, aren’t they?
Now you’re armed with some information specific to you: what you want your retirement to look like, how much annual income you think you’ll need to cover your expenses, how much CPP and OAS you’ll get depending on when you choose to take them, and how much income you should get from your private pension if you have one.
Which means it’s almost time for fun with retirement calculators!
This is part four of a six part series on realistic retirement planning. If you’re just starting with me, you can read the rest of the series here:
RRSPs: Hunting Season (what banks and brokers are really offering at RRSP season)
Avoiding the Useless Retirement Plan, Step One (figuring out what you mean by “retirement”)
Numbers, Numbers, Numbers (how to calculate exactly what you’ll spend in retirement by figuring it out today)
Fun With Retirement Calculators (how to get the best use out of a faulty tool)
Effective Retirement Planning is About Spending, Not Saving (And Sit Up Straight) (what to do if you can’t save enough)