The financial future for millennials is vastly different from that of previous generations,” said Martin Joyce, partner and national leader of human and social services at KPMG, in a press release. “They face unique challenges when it comes to building wealth despite having more education and income, primarily because of housing unaffordability.”

Relying on government programs to fund your retirement is risky. Given your many professional and personal demands, you may wonder how you’ll ever be able to save for a new home, new baby, pay down your student loan debt and mortgage, and put enough money aside for retirement.

A survey by Blackrock Canada reveals that 62% of non-retired respondents are generally confident that they have planned well for retirement. But only 59% of these people actually have a plan. And fewer than half of Canadians who have saved less than $100,000 for retirement have a plan—even though they are, arguably, the group that needs it most. As self- employed professionals, you must consider where the income will come from when you are no longer working.

All or part of your retirement funding may come from government sources; Canada Pension Plan (CPP), Old Age Security (OAS), guaranteed Income Supplement (GIS )and the Registered Disability Savings Plan (RDSP).

CPP was designed in 1965 to help Canadians save more for retirement and prevent seniors from poverty. At the time of introduction, life expectancy for females was 73 and males 66.  Life expectancy today is 84 for women and 80 for men. It will cost a lot more to fund a retirement. When all things considered; a decade of a low interest rates, market volatility, inflation and the future economic impact from Covid, the ability to stretch your dollar even more becomes challenging.  While some may still dream of an early retirement, the world where freedom 55 seemed like a genuine possibility is no longer the world we live in today.

To receive the maximum CPP payment, you would have to contribute the max CPP contribution each year for many years. As of 2020, the maximum benefit amount is $1175.83 /month, however, the average CPP for 2019 was a much lower $679.16 per month. This is because not all individuals have contributed enough to receive the full CPP payment. The CPP was intended to supplement a person’s retirement plan, not to be the only plan. Unlike today, in 1965 the majority of working people had work pensions.

As times have changed, is the government doing more to help with retirement? There are several initiatives the government is taking to improve retirement security for Canadians. The Government has implemented in a number of key reforms, such as indexing for cost of living, increasing the disability pension and offering their pension management infrastructure to assist public and private sector employers with a multi-employer retirement savings program.  However, this still leaves a large gap in resources when it comes to serving the small business owner and self-employed individual to save for retirement.

OAS was also designed to supplement retirement income when you turn 65. In 2020 the full monthly benefit is $613.53.  You are eligible to receive a benefit if you are a Canadian citizen or legal resident, have lived in Canada after the age of 18 for 10 years or more (different criteria for Canadians or legal residents not living in Canada).  If your net world income exceeds the threshold amount $79,054 for 2020,  you have to repay part or your entire OAS pension.  If you earn $128,137, you will be required to pay back the entire OAS benefit.

It is important to note that neither of these benefits is paid out automatically; you must apply for each one in order to begin receiving benefits.

Guaranteed Income Supplement (GIS) is for low income seniors. It is available for individuals earning less than $18,600 annually. Planning and implementing an effective retirement strategy early on, during your working years, can prevent you from depending on GIS to live.

Have you heard of the Registered Disability Savings plan (RDSP)? If you or a loved one has a disability, Canada’s RDSP can be a great way to secure a solid future. The plan became available in 2008.  This very lucrative federal program can go a long way to ensure someone with a disability can be cared for financially and thrive. An RDSP functions similarly to an RRSP but receives government funding in addition to personal contributions. It’s unfortunate, despite this tool’s ability to improve the lives of people with disabilities, just over 10% of the 500,000+ eligible Canadians have opened an RDSP since the program’s inception.

To be eligible, you must qualify for the Disability Tax Credit, be under the age of 60, and be a Canadian resident with a SIN. The plan offers a matching grant  up to 300%, depending on the beneficiary’s family income and contribution. Not all investment companies or financial institutions offer the RDSP, mostly because of its administrative cost and cumbersome paperwork.

On the first $500 you contribute, the Government will deposit $3 for every $1 you put into the plan, that’s 300% = $1,500 a year.  The next $1,000 you contribute each year, the Government will deposit $2 for every $1 you put into the plan, up to an additional $2,000 a year. That’s $3,500 per year of grant money, with a limit of $70,000 grant money. Grants can only be received up to the age of 49. Total lifetime contribution is $200,000.

Contributions and grants are tax sheltered and can grow tax free while invested.

Because the RDSP was designed to encourage long term savings and to protect those who may be at risk, complicated rules and stringent guidelines, prevented many from opening a RDSP.  For example, if a person was no longer eligible for the disability tax credit, the plan had to be closed.  Another barrier was accessing funds from the plan. The ten-year rule meant if a grant was received, no portion of the funds could be withdrawn until 10 years after the last grant was paid. This made it unreasonable for some to open a plan because of the nature of their disability, 10 years may be too long as life expectancy was uncertain. As of March 2019, under proposed changes for 2021, the existing time limitation on the period that an RDSP may remain open after a beneficiary becomes ineligible for the disability tax credit (DTC) will be removed.  The rules and guidelines have changed since the inception of the RDSP. If you are eligible or have a loved one who may be eligible, we recommend you consider the RDSP and speak with a qualified advisor.

Regardless of how you plan your retirement, it is important you do just that – plan. The sooner you start saving, the easier it will be to comfortably retire. The government benefits are a nice supplement to your income but as a self-employed professional you’ll need to make sure you’re setting aside money to pay yourself in retirement. As a starting point, the BCNA offers a group retirement savings plan to help you reach your goals.

Published in the BCNA Bulletin, Fall 2020 

This article has been provided by Sindy Billan, SB Wealth Solutions* and Saskia Vermeulen, Southlands Financial and is for informational purposes only.

It is not intended to provide legal, accounting, tax, investment, financial or other advice and such information should not be relied upon for providing such advice. Information obtained from third parties is believed to be reliable, but no representation or warranty, express or implied, is made by Sindy Billan or Saskia Vermeulen as to its accuracy, completeness or correctness.

*SBILLAN Wealth Solutions Inc. doing business as SB Wealth Solutions E&O/E 2020

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