Millennials have heard it all before. Save as much as you can because your government pension won't provide you with enough money to enjoy the lifestyle that you want in retirement. This might be the case, but it's fairly safe to assume that younger Canadians can anticipate some form of fixed income to complement their retirement savings.
Planning for these benefits, however, can be challenging due to the evolving nature of government policy.
The new Canada Pension Plan (CPP) rules concerning contributions and benefits will come into effect over the next several years, and they are mostly good news for millennials.
The expanded CPP was created to address a shortfall in retirement savings. There are a few noteworthy changes to the current system. Increased pension contributions means your take-home income will take a hit during your working years, but it also means an increase to your monthly benefits on retirement.
| Current CPP | Expanded CPP | ||
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| Employer-matched contribution | 4.9% | 5.9% | |
| Percentage of income paid out in retirement | 25% | 33% | |
| Maximum earnings limit | $55,900 | $82,700 | |
| Maximum annual benefit in retirement | $13,610 | $19,900 | |
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| Source: Department of Finance | |||
(Editor's note: Quebec residents pay into a separate pension regime, which introduced its own changes in November 2017 that run along similar lines as the federal plan.)
How much can I expect to receive from government pension benefits?
Your CPP benefits in retirement will depend on your pre-retirement income and the number of years you've paid into CPP. Young people -- specifically those who start working by 2025 when the new CPP is fully phased in -- can expect a higher payout than those who are well into their working years. The current maximum payout per year is $13,610. Under the enhanced CPP, the maximum retirement benefit per year will increase to nearly $20,000 by 2025, or approximately $1,670 per month.
In addition to the CPP, retirees with annual income up to a specified income threshold can expect to receive Old Age Security (OAS) payments. Depending on your annual income at retirement, you may be forced to pay back some or all of your OAS. (Currently, the maximum OAS payment is $586.66 per month. It starts to be partly clawed back once annual income exceeds $75,910, and is completely eliminated once annual income reaches $122,843.)
A related government benefit is the Guaranteed Income Supplement (GIS), but this is available only to low-income seniors. GIS amounts vary according to income and marital status.
Will these benefits still be there when I retire in 20-30 years?
There are no absolute guarantees that government benefits will be payable decades from now. But according to Craig Hughes, manager, tax and estate planning at Investors Group in Winnipeg, the recent expansion of the CPP is indicative of a reasonable level of commitment by the federal government. On the other hand, Hughes believes that as a taxpayer-funded program -- unlike the CPP, which is employer and employee-funded -- OAS is more likely to be reviewed and adjusted.
How much should I save?
Your retirement savings rate all comes down to the type of lifestyle you want in retirement. A frequently used rule of thumb is 70% of pre-retirement income. A more accurate estimate would require you to look at how much you plan to spend and your sources of income.
"Look at government benefits, work pension plan, and any other income streams from your employer," says Hughes. "Then plan for how much extra you must save."
For most retirees, there are generally three major sources of retirement income: CPP, OAS, and private savings and investments. Your working life will determine the amount you receive in CPP, while your OAS payments will depend on government policies such as age eligibility and income-testing. The amount coming from the third major income source, private savings and investments, will be up to you.
The amount that you will accumulate in your savings will depend on your contributions and your investment returns. For instance, assume you would like to have a retirement income of $48,000 a year in today's dollars, as measured by purchasing power.
Assuming also that that only half of that income will come from CPP and OAS, your retirement savings would need to generate $24,000 through income and/or withdrawals.
Continuing with this example, if your savings and investments were returning 5% a year, you'd need to have a nest-egg of at $480,000 or more to generate $24,000, again as measured in current purchasing power. For young adults, savings amounts of this magnitude might seem like an intimidating proposition.
It should come as no surprise, then, that financial-planning experts recommend starting early to save for retirement. With several decades of paid work ahead of them, millennials do have the advantage of a long time horizon and a greater ability to ride out market volatility.
Key takeaways for millennials? First, be aware that government-sponsored pensions and benefits will help achieve your retirement-income goals. Second, don't rely on these sources exclusively. Third, be diligent about saving and investing for retirement, and do so early and often.
