Maximizing Government Benefits for Low-Income Solo Retirees in Canada
Maximizing government benefits for low-income solo retirees in Canada.
Despite their best intentions, some Canadians, facing a variety of financial challenges throughout their working lives, aren’t able to save much towards retirement if anything at all. 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.
Government benefits for seniors in Canada
In Canada, there are three sources of retirement income, which are often known as the three pillars.
The FIRST TWO PILLARS are government-sponsored programs. PILLAR ONE is made up of Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), available to people of retirement age, while the second is the Canada Pension Plan (CPP), available to those who worked and contributed to the pension plan.
The THIRD PILLAR is made up of any workplace pension plan or personal savings and investments you may have.
How much you’ll get from the first two, along with your plans for retirement, will determine how much you should set aside under that third pillar.
Maximize your government benefits. Timing plays a big role when it comes to getting the most out of your government benefits in retirement.
Maximizing CPP
The amount of CPP benefit is based on how much you contributed during your working years.
To maximize the CPP amount,
- make contributions for a minimum of 39 years between 18 and 65
- also contribute the maximum allowable amount for 39 years.
To qualify for CPP, you’ll simply have to have made at least one valid contribution to the plan either through work you did in the country or having received credits from a former spouse or common-law partner at the end of your relationship.
However, unless you maxed out the time and dollar figure, you will not receive the same amount as someone that has done so.
First Way to Maximize CPP
The CPP enhancement is a new component of the CPP that increases the amount of the CPP retirement pension, disability pension, survivor’s pension, and post-retirement benefit for people who have worked and contributed to the CPP in 2019 or after.
It is not a separate benefit, but rather a top-up to the original CPP. Since June 7, 2022, eligible Canadians began receiving the enhanced component of their CPP benefits. Eligible recipients can expect to receive their first enhanced payment, including any retroactive amounts owing, over the course of the next few months. – [source]
The second way to maximize CPP
You can claim CPP as early as 60 years old, or as late as 70.
But the sooner you start taking your payments, the less you’ll receive every month. If you start taking your payments before 65, you’ll lose out on 0.6% each month, or 7.2% a year — up to a maximum reduction of 36% for those who start at 60.
And if you wait past 65, your payments will increase by 0.7% each month you hold off on drawing your pension, or 8.4% per year. By 70, you’ll hit the maximum increase of 42%.
Most advisors would suggest you delay drawing CPP as long as possible to maximize your benefits.
FOR low-income seniors in Canada?
You will get less money (0.6% less per month) than if you apply at 65. But if you will have little or no income other than an OAS pension after age 65, it is better to take CPP early unless you receive social assistance.
CASE STUDY #1:
Lisa is 59 and on her own. She would like to take CPP early retirement
at age 60. But Lisa also wants to keep working past age 60 – maybe
even past 65.
-> Lisa’s future benefits will increase because she will make the choice to continue paying.
-> On the other hand, by taking early CPP, Lisa makes her CPP payments lower over her lifetime. When she turns 65, she could get more GIS each month.
CASE STUDY #2:
Here’s an example of twins Beth and Janet
Janet and Beth are twins. Let’s assume they both qualify for the same CPP of $1000 per month at age 65. Let’s further assume, Beth decides to take CPP now at age 60 at a reduced amount while Janet decides she wants to wait till 65 because she will get more income by deferring the income for 5 years.
Under Canada Pension Plan benefits, Beth can take income at age 60 based on a reduction factor of 0.6% for each month prior to her 65th birthday. Thus Beth’s benefit will be reduced by 36% (0.6% x 60 months) for a monthly income of $640 starting on her 60th birthday.
Let’s fast forward 5 years. Now, Beth and Janet are both 65. Over the last 5 years, Beth has collected $640 per month totaling $38,400. In other words, Beth made $38,400 before Janet collected a single CPP cheque. That being said, Janet is now going to get $1000 per month for CPP or $360 per month more than Beth’s $640.
The question is how many months does Janet need to collect more pension than Beth to make up the $38,400 Beth is ahead? It will take Janet 106 months to make up the $38,400 at $360 per month. In other words, before age 74, Beth is ahead of Janet and after age 74, Janet is ahead of Beth.
If Beth or Janet can provide their date of death, making the right decision would be easy. Another way to phrase this question is, “How long do you expect to live?”
How much are OAS and GIS for a single person?
For seniors living on reduced incomes, the government provides additional support through the Guaranteed Income Supplement (GIS) program. To qualify for GIS, single seniors must earn less than $19,464 a year.
Your GIS amount will depend upon your marital status and your previous year’s income (or combined annual income in the case of couples). The maximum monthly GIS amount for single/divorced/widowed receiving the maximum OAS is $ 1026.96 (2023 amounts).
Guaranteed Income Supplement (GIS) Guide
Here are a few of the Ontario benefits that low-income seniors may apply for if they qualify.
Understanding how government benefits work can help you optimize how much you receive in retirement. Approximately 1/3rd of seniors receive GIS benefits in Canada.
HOW TO Maximize GIS for low-income seniors
You can maximize your GIS or qualify for GIS by lowering your income through a Registered
Retirement Savings Plan (RRSP) contribution.
If you are in the GIS ‘zone’, making an RRSP contribution can get your income under the limit so that you qualify for GIS or increase its amount.
A person who has contribution ‘room’ can keep putting money into an RRSP until age 71. If you have to pay taxes, your RRSP contribution will help you pay less.
Ontario Benefits For Low-Income Seniors
From eligibility requirements and payment amounts to what to expect when applying, this guide shares everything you need to know.
TIP 1: You must apply for OAS, GIS, the Allowance, CPP, and other federal programs. You will not receive them automatically.
TIP 2: Because many programs use your income tax return to decide if you are eligible, you should file a tax return by April 30 each year even if you have no income to report. This will also allow you to claim a GST rebate and other refundable tax credits.
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