Most Canadians are leaving money on the table when it comes to maximizing their government benefits. In the video above, we review a strategy that individuals and financial advisors often miss.
Meet Mike
Mike is 65 years old, and his goal in retirement was to be able to spend $50,000 per year, increasing with inflation at 3.5% per year until age 90.
He had never formally put together a retirement plan, but he planned to start his CPP & OAS as soon as he turned 65.
His CPP would pay him $12,000 annually.
His OAS would pay him slightly more than $8,200 per year.
After he sold his home, he had $300,000 in a non-registered account.
He also had $100,000 in his Tax-Free Savings Account and $600,000 in an RRSP.
Mike was comfortable with a moderate amount of risk in his investment portfolio and projected a return of 5% moving forward.
He was now living at his cottage, valued at $300,000.
He had no debt, and based on the value of his assets, Mike had a net worth of $1.3 million.
To spend $50,000 per year, Mike would rely on his government pensions and make up the difference from his non-registered account. He would leave his RRSP as is until he was forced to convert to a RRIF at age 71. He would then start making the mandated withdrawals.
Source: Marc Sabourin – Navi Plan – 2023
Mike’s Current Plan
Based on Mike’s assumptions, he was very much on track to achieve his spending goal.
Today, Mike’s Net Worth is $1.3 Million. It increases over the first few years of his retirement as his assets a growing at a higher rate than the withdrawals from his portfolio.
Eventually, his net worth starts falling as he’s mandated to make larger withdrawals from his RRIF.
When Mike is 90, we see a sudden drop off due to some taxes being paid on his death, but his estate that he would like to leave to his kids is still valued at $1,077,000.
Let me be clear, there is nothing wrong with this plan as it achieves all of Mike’s goals, but there are ways to improve it.
Maximizing government benefits
Based on Mike’s current position, he can take advantage of the Guaranteed Income Supplement, also referred to as GIS.
The GIS is a tax-free benefit for low-income senior citizens receiving the Old Age Security (OAS) pension.
So how much can Mike receive?
The benefit is based on your yearly income, excluding the OAS pension.
Hypothetically, if Mike’s income outside his OAS were $0, he would receive a GIS benefit of $1,032.10 per month in addition to his OAS pension. The GIS is more than the CPP he was due to receive.
Source:https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments/tab1-1.html
As your income increases, the benefit is reduced until it’s eliminated once your income is above $20,952. If you are married, the rules and thresholds are different, but we’ll include a link in the description below so you can look up how much you can potentially receive.
Old Age Security payment amounts – Canada.ca
To take full advantage of this strategy, Mike should keep his income as low as possible. That would entail deferring his CPP to age 70.
An additional benefit of deferring Mike’s CPP to 70 is that it would increase by 42% due to the deferral bonus.
In reality, Mike’s non-registered account would generate taxable income to the tune of about $5,000 per year. Because of this income, Mike wouldn’t be eligible for the max GIS payout but would still receive $762 per month.
Source: https://www.canada.ca/en/services/benefits/publicpensions/cpp/old-age-security/payments/tab1-1.html
Like Mike’s plan, the idea would be to rely on his OAS & GIS and make up the shortfall from his non-registered account. By implementing the GIS strategy, Mike’s estate at age 90 is valued at $1,273,000.
Source: Marc Sabourin – Navi Plan – 2023
Summary
With one simple strategy, Mike can leave his kids an extra $197,000.
As mentioned, many Canadians are leaving money on the table. Maximizing your government benefits can have a significant impact. Be make sure to review all of your options before finalizing your CPP and OAS.
If you liked this article be sure to check out: What Happens To Your CPP When You Pass Away
