Low Income Retirement Planning
Low-income retirement planning requires a very different set of tools than your average retirement plan and this can sometimes lead to trouble when a soon-to-be low-income retiree gets advice that has been tailored for someone with a much higher income.
What we need to consider for a low-income retiree is very different than for your average retiree and the recommendations in a low-income retirement plan can sometimes be the opposite of a regular retirement plan.
The drawdown of investment assets, the timing of CPP and the timing of OAS are among many factors that differ in a low-income retirement plan.
When it comes to low-income retirement planning we’re primarily concerned with one thing, government benefits. We want to ensure that the way we save pre-retirement and the way we create income after retirement does not impact the amount of government benefits received.
This can be very tricky and can often lead to some less than obvious recommendations.
Before we get into some ideas to consider around low-income retirement planning lets look at why government benefits are the main consideration.
Guaranteed Income Supplement
Guaranteed income supplement (GIS) is the main retirement benefit for low-income seniors. Although there is a perception that only a small group of seniors receive GIS the reality is that nearly one third of seniors who receive OAS also receive GIS in Canada. That’s almost 1 in 3 seniors who receive GIS benefits.
GIS provides a basic level of income for seniors in retirement. It helps protect seniors against extreme poverty. It’s a fantastic form of social assistance that helps some of the most vulnerable people in our country. But it comes with clawback rates of between 50% and 75%.
The clawback rate on GIS means that for every $100 earned in taxable income, between $50 and $75 of GIS benefits will be lost. There is still a net positive for the retiree, but on a $100 RRSP withdrawal, they may only receive a small amount after GIS clawbacks are taken into account.
Its these GIS clawbacks that we want to be very cognizant of when it comes to low-income retirement planning. We DO NOT want to trigger GIS clawbacks if we don’t have to.
GIS is important but there are other government benefits that we want to be cognizant of too.
Other Seniors Benefits
There are a number of other government benefits that are also available to low-income seniors. Many of these benefits are based on taxable income, like GIS. Benefits like the federal GST/HST credit or provincial benefits like the Trillium benefit or the GAINS benefit in Ontario.
These government benefits all have a clawback rate based on taxable income. The clawback rate might vary from between 2% and 5% for each benefit, but when added together they can have a significant impact on disposable income.
It’s the combination of various seniors benefits, GIS benefits, and basic income tax credits that we need to be very careful of when doing low-income retirement plans.
What Counts As Taxable Income?
Because many government benefits are based on taxable income, it becomes very important to understand what counts as taxable income.
Here are the types of income that would count as taxable:
- RRSP withdrawals
- RRIF withdrawals
- LIF withdrawals
- Pension payments
- Canada Pension Plan (CPP) payments
- Old Age Security (OAS) payments (ignored for GIS calculations)
- Non-registered income like interest and dividends
- Taxable portion of capital gains (50% inclusion rate)
- Rental income
Here are the types of income that would NOT count as taxable:
- TFSA withdrawals
- Return of capital from investments
- Principal repayment on GICs, bonds, loans
- Non-taxable portion of capital gains (50% inclusion rate)
- Capital gains on a primary residence
Low-Income Retirement Planning Strategies
Based on these facts we can come up with some simple low-income retirement planning strategies that could help a low-income retiree increase their disposable income in retirement.
Warning:There are many nuances when it comes to low-income retirement planning. This post is for educational purposes only. The strategies below are generic and may not apply to your situation. Although it may seem like a large expense, we recommend seeing an advice-only financial planner to help build a custom retirement plan. A custom retirement plan can help you avoid triggering unnecessary clawbacks on government benefits in retirement.
Start CPP As Soon As Possible (Even While Still Working)
Because monthly CPP payments trigger clawbacks on government benefits like GIS we want to minimize these payments during retirement. This means that taking CPP as soon as possible, even while still working, can be a smart decision for a low-income retiree.
Delaying CPP can make sense for high-income retirees, but for those faced with GIS clawbacks in retirement a higher CPP payment will only get clawed back by 50% to 75%+ in retirement, so there isn’t any sense in delaying CPP.
When starting CPP early, while still working, any income from CPP should be placed in a TFSA and invested for retirement. This may incur additional income tax when combined with employment income prior to retirement, but for a low-income senior this is preferable to the 50% to 75%+ clawbacks on government benefits.
Use A TFSA To Save For Retirement
Although the TFSA is still rather new, it’s the clear winner when it comes to saving for retirement on a low-income. The main benefit of the TFSA is that withdrawals are not considered taxable income and therefor do not impact government benefits in retirement.
Draw Down RRSP Assets Faster and Trigger Capital Gains Before Age 64
Because RRSP withdrawals are considered taxable income, and affect government benefits, it can make sense to draw down RRSP assets faster and possibly before retirement.
GIS benefits, which start at age 65, are based on taxable income from the year prior, when aged 64. For this reason, we may want to trigger taxable income from RRSPs and/or capital gains before the age of 64 to avoid GIS clawbacks.
Depending on the size of RRSP investments and/or capital gains, this strategy may need to be altered to avoid extremely high income tax rates. Its ideally something that is implemented in the in the 5-10 years leading up to retirement at age 65.
Avoid Small LIF/Annuity/Pension Payments
Small payments from LIFs, annuities and/or defined benefit pensions can lead to high clawbacks on government benefits in retirement. For this reason, it can sometimes make sense to avoid these types of payments.
For LIFs there are options to unlock some or all of the LIF. There are also opportunities the draw down LIF assets faster. This can increase flexibility and allow for assets to be moved into accounts that aren’t impacts by government clawbacks (like the TFSA). This strategy has negatives, like increased income taxes. So be wary of how this is implemented.
Purchasing an annuity with registered assets can provide a lifelong stream of income for retirees however for low-income retirees the lack of flexibility, and the high clawbacks on this income means that purchasing an annuity with registered assets is not likely the optimal choice.
Small defined benefit pension payments will trigger government benefit clawbacks in retirement. Sometimes it can make sense to take the commuted value of a defined benefit pension. This increases investment risk, but allows for more flexibility to avoid GIS clawbacks.
Avoid Part-Time Work
Taking on part-time work is sometimes a strategy for seniors to both increase income and provide social benefits. This strategy however can incur large clawbacks on government benefits for low-income retirees if income is above a certain level. A low-income retiree can earn up to $5,000 before triggering GIS clawbacks starting in 2019 and there is a 50% exemption on the next $10,000 earned. This is a big change from the previous $3,500 limit.
Although the net impact is still positive, the $/hr net income after taking into account government clawbacks is often very low for a low-income retiree. This makes part-time work much less attractive.
Options like volunteering can provide the same social benefits, with more flexibility, and be tied closer to personal values, and it helps avoid claw-backs on government benefits.
Retiring on a low-income can be stressful. There are other resources that you should investigate if you’re going to be retiring on a low income.
This guide from Open Policy Ontario provides some useful insights into low-income retirement planning. It’s a great resource for low-income retirees. John Stapleton also does talks on a regular basis and this can be a great opportunity to learn more about low-income retirement planning.