Author Topic: Canadians - are you counting CPP/OAS or not?  (Read 6309 times)

Heather

  • 5 O'Clock Shadow
  • *
  • Posts: 79
Canadians - are you counting CPP/OAS or not?
« on: September 25, 2013, 11:14:21 AM »
I've created a nice tidy spreadsheet to trade off cost of a house renovation or move, vs retirement ages for my husband and myself.
The only problem is that I'm just using the 4% SWR in a very raw form, as the "size of nest egg required".
It does not include (yet)
- Tax on the RRSP portion of the savings as it is withdrawn.
- OAS/CPP benefits

Both of these are not precisely knowable, since we are not yet 50.  Tax rates and CPP rules will probably change before then. It's seems wise to assume tax rates will be higher.
CPP and tax on RRSP withdrawals are each relatively large amounts.  Especially CPP - even if we only were to get half of the 1000/mo maximum, it would be the equivalent of having 150,000 savings generating 4% SWR. 
There isn't even an easy way to find out what we'd get if we were 65 today - the formula doesn't seem to be published.

If you're Canadian, what do you do?  Do you count CPP/OAS as a given, or not?

A second question, are you counting RRSP savings as before or after tax dollars? It seems that the possible amount of tax can vary a huge amount, because of the 10k basic personal tax exemption amount.   For instance if half of our savings were in RRSP, half unsheltered, and we lived on 40K/year after retirement, we could get the half (20K/year) from the RRSP tax free (10k each).  If we each got 6000/year CPP,  (counts as earned income), the total tax rate would still be less than 10%.

What do you do about this in your calculations? 
-Count OAS/CPP or not?
-Count tax on RRSP or not ?







Posthumane

  • Bristles
  • ***
  • Posts: 310
  • Location: Alberta
    • Getting Around Canada
Re: Canadians - are you counting CPP/OAS or not?
« Reply #1 on: September 25, 2013, 11:26:43 AM »
I wouldn't count OAS or CPP when calculating how big of a stash you need. Instead, I would consider these as a bit of a safety net, an additional amount which may help offset any unexpected expenses. As far as RRSP taxes go, if you have fairly low expenditures (like MMM's $24k range) then the taxes paid on withdrawals would be pretty small, but since you are talking about $40k then it would probably be prudent to include them, since they would amount to over $6k a year unless you have some other deductions you can apply. In order to get 40k/year net you would have to withdraw around $49k/year in Alberta, $48k in Ontario, etc.

Mega

  • Stubble
  • **
  • Posts: 176
  • Location: Burlington, Ontario
Re: Canadians - are you counting CPP/OAS or not?
« Reply #2 on: September 25, 2013, 12:53:31 PM »
I plan on retiring years before I can collect CPP / OAS, so I don't even think about it.

In regards to taxes, I don't really worry about it either. I focus on hitting my number. After I hit the number, then I will decide what to do with my new found freedom. Expenses can go WAY down once you aren't locked into going to the office for 50+ hours a week, including commute.

Spudd

  • Stubble
  • **
  • Posts: 217
Re: Canadians - are you counting CPP/OAS or not?
« Reply #3 on: September 25, 2013, 01:39:21 PM »
CPP is pretty much a sure thing, as far as I understand it. It's been actuarially looked at and deemed that it's in no danger. OAS is more of a gamble.

If you sign up for a Service Canada account online you can see your CPP contributions and then you can plug those into a CPP calculator to get an estimate of how much you'll get from CPP post-retirement.

Even if part of your savings are non-registered, you'll still need to pay tax on the capital gains/dividends. The TFSA is the only truly tax-free place to save, but it's so small. So in summary, I do think you need to take tax into account. It's hard to do, because it's so variable depending on the type and amount of income. Personally I am hoping to live on a low enough income (30k household, so 15k each) that taxes should be minimal.

totoro

  • Handlebar Stache
  • *****
  • Posts: 2143
Re: Canadians - are you counting CPP/OAS or not?
« Reply #4 on: September 25, 2013, 01:54:53 PM »
I don't count them for the same reason Mega doesn't - I plan to retire early and won't have access to these funds for 15-20 years. 

We're banking on a 4% safe rate of withdrawal plus rental income formula.  Once we qualify for OAS/CPP we will put extra funds towards helping family members in the most tax advantaged way possible. 

I'm afraid I'm haven't done a work-up of how using RRSPs vs. TFSA at retirement will affect CPP/OAS.  Nor have I done advanced calculations on using the Smith Manoeuvre with rental property to ensure that rental income has an interest deduction and at what point this makes sense.  On the to do list, maybe :)

pachnik

  • Handlebar Stache
  • *****
  • Posts: 1850
  • Age: 56
  • Location: Vancouver, BC
Re: Canadians - are you counting CPP/OAS or not?
« Reply #5 on: September 25, 2013, 02:42:29 PM »
I count on CPP and OAS but I am not an early retirement person.  I will retire around 60 or so.  But I do plan on working part-time until 65 to not have to draw early on my CPP, if my health permits of course. 

Gerard

  • Handlebar Stache
  • *****
  • Posts: 1445
  • Location: eastern canada
Re: Canadians - are you counting CPP/OAS or not?
« Reply #6 on: September 25, 2013, 06:40:54 PM »
CPP is pretty much a sure thing, as far as I understand it. It's been actuarially looked at and deemed that it's in no danger. OAS is more of a gamble.

If you sign up for a Service Canada account online you can see your CPP contributions and then you can plug those into a CPP calculator to get an estimate of how much you'll get from CPP post-retirement.

Yes to both these things.

Also, remember that you'll probably get an age-based bump in your basic deduction (the "age amount"), so you won't be paying any taxes on anything under about $14K (in today's dollars). And, thanks to the favourable tax treatment of both capital gains and (especially) Canadian dividends, you could easily find yourself well into the 30Ks before you're paying much tax at all.

KMMK

  • Handlebar Stache
  • *****
  • Posts: 1465
  • Age: 43
  • Location: Edmonton, AB, Canada
    • Meena Kestirke Insurance
Re: Canadians - are you counting CPP/OAS or not?
« Reply #7 on: September 25, 2013, 08:19:13 PM »
No, I don't count on any CPP. I suspect I'll probably get some, but it will be bonus money. My understanding is that because I probably won't work that many years total, my CPP wouldn't be that high either, though I haven't researched this at all.

For taxes, I have a rough idea as I want to keep my expenses not much higher than the personal amount. But I'm too far away to worry about exact numbers. As I get closer to retirement I'll have a better idea of my actual expenses and tax rates. Then, I'll worry about that calculation.

Heather

  • 5 O'Clock Shadow
  • *
  • Posts: 79
Re: Canadians - are you counting CPP/OAS or not?
« Reply #8 on: September 26, 2013, 12:52:27 PM »
..you can plug those into a CPP calculator to get an estimate of how much you'll get from CPP post-retirement.


Does anyone have a link to a CPP calculator?  One that handles retiring many years before starting to draw CPP?

Spudd

  • Stubble
  • **
  • Posts: 217

GuitarStv

  • Senior Mustachian
  • ********
  • Posts: 15847
  • Age: 39
  • Location: Toronto, Ontario, Canada
Re: Canadians - are you counting CPP/OAS or not?
« Reply #10 on: September 26, 2013, 01:07:54 PM »
Nope, not counting it.  Hoping I'll get a little extra money though . . .

Heather

  • 5 O'Clock Shadow
  • *
  • Posts: 79
Re: Canadians - are you counting CPP/OAS or not?
« Reply #11 on: September 26, 2013, 01:13:26 PM »
http://www.servicecanada.gc.ca/eng/services/pensions/cric.shtml

Alas, that calculator doesn't take into account early retirement.
"We also assume that your future average earnings to the age of 65 will be the same as the amount you entered above."

daverobev

  • Magnum Stache
  • ******
  • Posts: 3438
  • Location: France
Re: Canadians - are you counting CPP/OAS or not?
« Reply #12 on: September 26, 2013, 01:30:29 PM »
CPP *yes* because it's an independent, funded program. I don't *like* it but I'm fairly sure it'll be there to pay me out when I get old. Un/fortunately I'll only have worked a few years in Canada so my CPP payout will be tiny.

OAS... who knows. It is subject to the whim of government, but there is likely to be such an outcry if it gets cut too much at any one time.. whether it's affordable or not. So it could die over 25 years by not being raised with inflation.

I should get something from the UK government as well, but again - who knows.

Spudd

  • Stubble
  • **
  • Posts: 217
Re: Canadians - are you counting CPP/OAS or not?
« Reply #13 on: September 26, 2013, 04:06:08 PM »
http://www.servicecanada.gc.ca/eng/services/pensions/cric.shtml

Alas, that calculator doesn't take into account early retirement.
"We also assume that your future average earnings to the age of 65 will be the same as the amount you entered above."

Yes, it does - in the CPP section, there's a page called "Changing your Future Earnings" that lets you say you'll earn nothing (or whatever you want to input) between ages X and Y.

arrow1963

  • 5 O'Clock Shadow
  • *
  • Posts: 10
Re: Canadians - are you counting CPP/OAS or not?
« Reply #14 on: September 26, 2013, 04:21:13 PM »
My parents are in their early 50's, and we definitely include CPP, OAS and RRSP withdrawal taxes in their financial plan.

I don't understand why people are so apocalyptic when it comes to future government events.  There's obviously a non-zero probability that CPP or OAS will undergo some time of means testing, or have some alteration made to the inflation adjustment, but I think it's unlikely that it will be done in such a way that it will meaningfully impact retirees at mustachian levels of spending.

Likewise, where exactly are taxes going to go?  If someone is expecting to be in a 29% bracket (for example), where is that going to move to?  33%  59%    Leaving aside the fact that raising taxes appears to be the 'other third rail' of Canadian politics (apart from two tier healthcare), it only takes small changes in marginal tax rates to meaningfully impact government revenue balances.  Since mustachians can't be expected to be taxed at the highest marginal rates in retirement, I think any tax changes should be of minimal impact.

Want to be conservative?  Model OAS at $4K a year instead of $6K, or whatever you think is most appropriate.  Treating these income sources as $0 is arbitrary, and in my mind, not justified.  Model your average tax rate as 30% instead of the 26% it might be now.  Make your informed guess, perform sensitivity analyses, and see what comes out.

daverobev

  • Magnum Stache
  • ******
  • Posts: 3438
  • Location: France
Re: Canadians - are you counting CPP/OAS or not?
« Reply #15 on: September 26, 2013, 06:43:08 PM »
One of the things that does make me slightly nuts is that... percentages should be able to remain roughly static.

Like - raising the EI *percentage* - yes, EI should fund itself (whether it should exist or not, or be optional, is a really hard question - I understand why it's there - but the fact I am forced to pay it when it is completely useless to me makes me furious - I won't work enough hours to ever be able to claim it!) - but percentage is just that. If people's wages go up, then their EI contributions will go up automagically! Ditto CPP. Ditto income tax, HST, etc - you shouldn't NEED to monkey with the percentages, because they should take care of themselves!

Cecil

  • Bristles
  • ***
  • Posts: 301
  • Age: 35
  • Location: Vancouver, Canada
Re: Canadians - are you counting CPP/OAS or not?
« Reply #16 on: September 26, 2013, 09:03:30 PM »
Yes, I count them. I don't have a crystal ball, so my best guess is that they'll stay about where they are. They might get bigger, they might get smaller.

Either way, I'm going to have to live off my 'stache for 25 years or so before they even come into play, so it doesn't really affect my FI date much either way.

Heather

  • 5 O'Clock Shadow
  • *
  • Posts: 79
Re: Canadians - are you counting CPP/OAS or not?
« Reply #17 on: September 27, 2013, 08:43:18 AM »
Thanks Arrow1963. 
A practical answer, and well explained.
 

Heather

  • 5 O'Clock Shadow
  • *
  • Posts: 79
Re: Canadians - are you counting CPP/OAS or not?
« Reply #18 on: September 27, 2013, 09:05:25 AM »
Yes, it does - in the CPP section, there's a page called "Changing your Future Earnings" that lets you say you'll earn nothing (or whatever you want to input) between ages X and Y.

Thanks.

It does... or at least it tries to.
Alas, is broken though.  If I enter any zeros for income, or change the stop working date to something other than 65, it doesn't work. It just gives me full value as if I kept working.   I'll tell CRA.   
I hope it hasn't misled too many people.
H.

Ishmael

  • Stubble
  • **
  • Posts: 119
Re: Canadians - are you counting CPP/OAS or not?
« Reply #19 on: September 27, 2013, 09:57:24 AM »
I would definitely count CPP - as mentioned, it has been examined quite a few times and has always been found to be on a very solid footing (including by Kevin Page), is well managed and is a separate fund independent from the rest of gov't.

OAS is paid out of general revenues, and not directly contributed to by citizens; so politically it is a lot higher risk. It could be eliminated or changed based on the whims of any party in power.

Personally, I say yes to CPP and no to OAS. CPP is as close to guaranteed as anything can get. I would factor OAS in for luxuries that I could do without.