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Retirement Planning: Testing the Canadian Government Retirement Savings Calculator

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Like me, some of the writers of financial sites I visit are more than half-way through their careers. They’ve been trying to estimate how to drawdown their savings in retirement and to decide when they will have enough saved to start retirement. Their posts made me curious about how we’re doing. Have we saved enough for retirement? Could we manage if we were forced into early retirement? I decided to start experimenting with some of the online calculators to find out. Here’s a review of my attempt to use the federal government’s retirement savings calculator hosted by Service Canada.

Will the Government Know What I Entered Into the Canadian Retirement Income Calculator?

Sort of. The program does not ask you for your name, address, SIN or any other identifying information. But anytime you use the internet you leave a trail. Technically, the government could probably trace back to which computer was used to enter the data. But if you are that concerned about your privacy you have bigger issues than figuring out your retirement income.

What You’ll Need to Know Before Using the Service Canada Retirement Income Calculator

  • What, if any, defined benefit pension payments you will receive
    • whether those payments are realistic (e..g. are they based on the belief that you will keep working for this employer till you retire and how likely is that?)
    • whether they are indexed (increased) to keep up with inflation
    • whether they decrease at a certain age, such as when you turn 65 and may start receiving CPP
  • Your Defined Contribution pension savings, if any
    • how much is in your DC plan
    • how much you and your employer contribute to your DC plan each year
    • what average annual rate of return you expect to get for your plan each year (the program will suggest 3%)
  • Your Deferred Profit-Sharing Plan savings, if any
    • how much is in your DPSP plan
    • how much your company contributes to your DPSP plan per year
    • what average annual rate of return you expect to get for your plan each year (the program will suggest 3%)
  • Your Group RRSP savings, if any
    • how much is in your Group RRSP
    • how much you and your employer contribute to your DC plan each year
    • what average annual rate of return you expect to get for your plan each year (the program will suggest 3%)
  • Your total RRSP savings, if any
    • how much is in your RRSP/s
    • how much you contribute to your RRSP each year
    • what average annual rate of return you expect to get for your plan each year (the program will suggest 3%)
  • Information about any other pensions, income from annuities, survivor benefits etc that will give you income in retirement.
    • You will need to know the amount you expect to receive each month, in today’s dollars.
    • This is where you would include income from your TFSA and/or regular non-registered savings if you have any for retirement.
  • Your estimated CPP monthly payment from a recent CPP Statement of Contributions
  • Your current gross annual income. (This is used to compare with how much income you will have in retirement.)

Some people estimate their retirement income without including any CPP or OAS. That’s great. Personally, I will be dead of starvation if I don’t receive any CPP or OAS, so I’m including it. We don’t have a Defined Benefit pension so it will be our only steady, reliable, partially indexed retirement income.

How to Estimate Your Canada Pension Plan Payments

It’s difficult to get a good estimate of your Canada Pension Plan monthly payment if it’s years before you will retire. Their estimating programs tend to assume you will continue to make the same salary. But if you are forced into early retirement at, say, 55, you will not be contributing at all between then and 65. Or if you are downsized into a lower paying job the same problem results. And of course if you want to retire early and not start taking any CPP till 65 you have a bunch of zero income years which will reduce your CPP.

An article on the RetireHappy site suggests you can roughly estimate what percentage of the maximum CPP you will get based on how many years you contributed the maximum allowable. If you have a recent CPP Statement of Contributions you can quickly count up the Ms. That’s what I did for our test. If we continue to earn well and contribute more, our CPP will be higher. But at least it gives me a number to start with.

(number of Ms from CPP statement on contributions)/40 X (maximum annual CPP today) = possible CPP in today’s dollars

On this basis, I assumed that together my husband and I would get $11 829 / year from CPP if we didn’t contribute anything further.

When planning for retirement, remember that if you are married or living in a legal common-law partnership, if your spouse dies you will NOT automatically get their CPP! The most CPP any one person can receive is the maximum CPP payment per person. So you might get a fraction of your spouse’s CPP payments but you also might get nothing at all. That can be a big financial shock.

How to Estimate Your OAS Payments

This one is easy if you’ve been a Canadian living in Canada every day since you turned 18. It will be much more complex if you immigrated to Canada as an adult or if you lived elsewhere for a number of years.

For those of us who are Canadian and who lived in Canada for 40 years after turning 18, our OAS payments (before any tax claw backs) are the maximum OAS possible.

So starting at 67, my husband and I could be receiving $13 248 per year.

This particular retirement calculator will try to estimate your OAS for you, so I didn’t really need to know this number.

But What If CPP is Cut and OAS Is Gone When I Retire?

Yeah well what if there’s another World War or the USA decides to invade so that it can legally own our fresh water and petroleum resources? There are a lot of “ifs” in the future.
The obvious answer is that the more concerned you are that you won’t get OAS or CPP the more you should save for retirement. It’s not like there’s anything else you can do. Oh, and maybe vote for whichever government you think might keep CPP and OAS to your benefit.

What Assumptions Does the Service Canada Retirement Income Calculator Use?

The program assumes

  • inflation is 2% per year
  • the rate of return on your investments will decrease by 1% per year when you start receiving your pension
  • contributions are made only at the end of each year
  • all savings are used up by the age at which you have a 50% chance of being dead OR the age you type in

It’s not clear whether it expects Other Income sources to increase to keep up with the rate of inflation. I suspect it does.

It doesn’t say whether you should enter the expected rate of return after fees/MERs and other costs. But of course you should.

How to Use the Service Canada Retirement Income Calculator

Introduction

  1. Go to http://www.servicecanada.gc.ca/eng/services/pensions/cric.shtml
    Read through the information provided then click Continue.
  2. Read through the next set of information provided then click Continue.
  3. Enter your date of birth and gender. This is used to estimate OAS, to estimate how long you will live (!) and to estimate how many years you have before retirement for your investments (e.g. RRSPs etc.) to grow. Click Next.

OAS

  1. Read through the information about how OAS is calculated, then click Next.
  2. Confirm whether you will have lived 40 years in Canada after turning 18 by selecting Yes or No. I selected Yes. (If you select No it will give you a few screens to enter the information about how many years you will have qualified for OAS.) Click Next.
  3. If desired, you can experiment with delaying starting your OAS payments to increase their amount. I did not choose to do that. Click Next.

CPP

  1. Read the information about CPP then click Next.
  2. Confirm that you can estimate your CPP by selecting Yes then click Next.
  3. Type in the amount you expect to receive each month from CPP. You can experiment delaying starting your CPP payments to increase their amount. I did not choose to do that. Click Next.
  4. If you want to experiment with how your future earnings will impact your CPP, you can choose Yes. I chose No and clicked Next.

Employer Pensions

  1. If you will receive a pension, including a Defined Contribution or Group RRSP pension, from a Canadian employer, click Yes or No. I clicked Yes. Then click Next.
  2. The program lists 4 types of possible employer pensions:
    • Defined Benefit Plan
    • Defined Contribution Plan
    • Deferred Profit-Sharing Plan
    • Group RRSPs
  3. Click to select the first pension type you will receive, then click Next.

If you select Defined Benefit Pension Plan

  1. Read the provided information.
  2. Type in your best estimate of your annual income from your defined benefit pension.
  3. From the drop-down list, select at what age that pension will begin.
  4. Select Yes or No for whether you have another employer pension plan.
  5. Click Next.

If you select Defined Contribution Plan

  1. From the drop-down list, select the age at which you expect to start receiving this pension.
  2. The program will assume you die at a certain specified age. You can change that age, however.
    I’d suggest you change the age to at least 100 by typing it in the Different Age field.
  3. Type in how much is in your DC plan.
  4. Type in how much your company contributes to your DC plan per year.
  5. Type in how much you contribute to your DC plan per year.
  6. Estimate the plan’s average annual rate of return.
    Read the note explaining that the program will decrease this rate of return at retirement by 1%.
  7. Click Next.
  8. Read the Employer Pension Results.
  9. Select Yes or No for whether you have another employer pension plan.
  10. Click Next.

If you select Deferred Profit-Sharing Plan

  1. From the drop-down list, select the age at which you expect to start receiving this pension.
  2. The program will assume you die at a certain specified age. You can change that age, however.
    I’d suggest you change the age to at least 100 by typing it in the Different Age field.
  3. Type in how much is in your DPSP plan.
  4. Type in how much your company contributes to your DPSP plan per year.
  5. Estimate the plan’s average annual rate of return.
    Read the note explaining that the program will decrease this rate of return at retirement by 1%.
  6. Click Next.
  7. Read the Employer Pension Results.
  8. Select Yes or No for whether you have another employer pension plan.
  9. Click Next.

If you select Group RRSPs

  1. From the drop-down list, select the age at which you expect to start receiving this pension.
  2. The program will assume you die at a certain specified age. You can change that age, however.
    I’d suggest you change the age to at least 100 by typing it in the Different Age field.
  3. Type in how much is in your plan.
  4. Type in how much your company contributes to your plan per year.
  5. Type in how much you contribute to your plan per year.
  6. Estimate the plan’s average annual rate of return.
    Read the note explaining that the program will decrease this rate of return at retirement by 1%.
  7. Click Next.
  8. Read the Employer Pension Results.
  9. Select Yes or No for whether you have another employer pension plan.
  10. Click Next.

Read the information about RRSPs.
Select Yes or No for whether you have any RRSPs and click Next.

For Your RRSP

  1. From the drop-down list, select the age at which you expect to start receiving this pension.
  2. The program will assume you die at a certain specified age. You can change that age, however.
    I’d suggest you change the age to at least 100 by typing it in the Different Age field.
  3. Type in how much is in your RRSP/s.
  4. Type in how much you contribute to your RRSP per year.
  5. Estimate the RRSP’s average annual rate of return.
    Read the note explaining that the program will decrease this rate of return at retirement by 1%.
  6. Click Next.
  7. Read the RRSP Results and click Next.

Other Income

  1. This is where you can type in income you expect to receive each month from any other sources during retirement.
    You can enter different values for three age brackets:

    • While you are under 60
    • While you are 60-64 and
    • While you are 65 and over
  2. After you have typed in the values, click Next.
  3. The next screen will report the totals of your other income. Click Next.

Summary
This screen will summarize all of your expected income from

  • OAS
  • CPP
  • Employer Pensions
  • Defined Benefit
  • Defined Contribution
  • Deferred Profit Sharing
  • Group RRSPs
  • RRSPs that you have already saved
  • RRSPs that you expect to save between now and retirement
  • Other Income

Click Next.

Gross Annual Income
Type in your current gross annual income. It does not appear that this value is used to calculate your CPP payment or tax rate.
Click Next.

Summary
The program will compare your retirement income with your current income.
The program asks if you would like to change your RRSP contribution numbers. Select Yes or No.
Click Next.

If you select Yes, you go back to the screen where you can enter your RRSP contributions. Then you click Next a few times to get back to the final comparison of your retirement income with your current income.

If you select No, you reach the screen telling you that you have completed the Canadian Retirement Income Calculator. Click on the link to open and print a Summary of your work.

If desired click on the Feedback Form link to provide information to Service Canada.

If desired, click on the Post Retirement Benefit Calculator link to experiment further.

When you are finished and close the browser session you will lose all of the date you entered. It is not stored on or offline.

My Review of the Service Canada Retirement Income Calculator

I was left a bit uncertain by this calculator.

It doesn’t clearly state many of its assumptions. For example, I don’t know if it assumes that any “Other Income” I receive is indexed for inflation.

I would have preferred to enter some even lower rates of return but that was not allowed. The lowest I can enter is 3% (with 2% inflation) until retirement for any Defined Contribution, DPSP or Group RRSP amounts. For RRSPs, however, I can put in 2% return (with 2% inflation.)

I like that I can enter the age to which I want to receive a pension. While some of our relatives have died unpleasantly young, others have managed to outlive annuities that lasted till they were 95. (Not a great situation but fortunately they have loving family who could support them.)

It was interesting but I will be trying other calculators to compare.

What Did Service Canada Say About Our Joint Retirement Income?

Yay! It says we’ll live!

Basically what was nice to read is that we would have enough income at 67 to match our current spending (with everything back in today’s dollars) even if we don’t save any more for retirement.

That means if we can keep working and not incur any debt we are already somewhat ready for retirement.

BUT

  • remember what I said about cuts to OAS and CPP?
  • and what about runaway inflation or market collapses? (OK we have very little in the market so that last one doesn’t affect us as much as some others but still.)
  • what about renovating our home some more;
  • taking some nice vacations; or
  • helping our children over some of the hurdles of higher education, boomeranging, buying first homes etc etc.

We’ll keep saving. But it’s wonderful to know that we are getting darn close!

Or are we? Now it’s time to test the same numbers with some other calculators. After all the government one comes with a big disclaimer that says “The calculator’s results are rough estimates for information purposes only – not financial planning.”

Related Reading

Retirement Planning

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Have you puttered around with retirement calculators? Did they scare you into dropping the mouse and shrieking as if you’d just tried unexpectedly to scroll down with a real Deer Mouse? Or did the results bring a momentary smile and sigh of relief? Please share your insights with a comment.

Pension Planning: What Happens If My Partner or Spouse Dies Young?

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Almost all pension planning articles seem based on the assumption that both partners in a relationship, married or common law, will live to an incredibly old age, happily or not. That’s not reality, however. In fact, according to 52 Ways to Wreck Your Retirement: …And How to Rescue It “the average age for widowhood in Canada is 56.”

56.

I never would have guessed that number and I doubt many others would have either.

For those who lose their partner before 65 this could make a huge difference to their financial future. Instead of two people living together pooling their pensions and resources for many years there will be only one. And perhaps more distressingly, if the person dies young, there may be a number of years lost when it was expected they would boost their RRSP savings and pension earnings. Many people don’t really save significant amounts until they are in their fifties. Most Defined Benefit pensions are calculated based on the number of years of service and the highest earning years: both of which will probably be reduced if a person dies young.

Others may lose their partner almost immediately after retirement. One of our closest relatives was diagnosed with a fatal illness at 64 and was gone by 67. Her husband lived another 11 years without her. While the death of a partner just after retirement may not reduce planned savings or pension entitlements, it can still have a severe impact on the surviving partner’s income.

CPP Is Not Directly Payable to a Surviving Spouse

Many people haven’t given much thought to how CPP works. When they estimate their retirement income, they simply add the expected CPP payment for both spouses. But when one spouse dies, the other is only entitled to CPP Survivor Benefits, not the deceased person’s full CPP payment.

The combined CPP payment to any person is limited to the maximum CPP monthly payment based on the maximum that second person was entitled to when they retired. (The monthly maximum is adjusted frequently but only applies to people who are just beginning to get CPP. For someone already receiving CPP their monthly maximum was set the day they started receiving CPP and is only increased by an inflation adjustment. So the maximum is based on the maximum at the time the second person in the couple retired.)

Imagine a man retires and begins receiving the maximum personal CPP monthly payment. Unfortunately, soon after his wife, who began receiving CPP before him, dies. The husband will not get ANY additional CPP! There is a death benefit of up to $2500 to help defray some of the costs of the funeral but that is all. And that benefit is fully taxable as income to the recipient or to the estate, so in reality it may be worth $2000 or less after tax.

In another case, imagine a woman retires and begins receiving one third of the maximum CPP monthly payment. Her husband retires after her and receives the maximum CPP monthly payment. If he dies, she will begin to receive at MOST the maximum CPP monthly payment only. She will not receive his maximum plus her one third. She will receive 60% of his payment plus her payment, up to a maximum of his maximum CPP monthly payment. Her CPP income will likely only be about 75% or less of what their joint CPP income used to be.

The Toronto Star recently reported on this issue. In their article they interviewed a man who was surprised to discover that when his wife died, his own CPP payment only increased by $22.75, even though his wife’s CPP monthly payment had been $1053.

For CPP planning, it’s probably best to estimate your survivor benefits as conservatively as possible. In general, you should assume you would only receive 60% of what your partner was receiving, added to your own CPP payment, but capped at a maximum value of 100% of what your maximum monthly CPP payment is or will be. If that’s too complicated, assume you will get nothing from CPP if your spouse dies. It’s better to plan on receiving too little money than too much.

Defined Benefit Pension Plan Benefits May Also Be Lost

Most defined benefit pension plans also limit the amount paid to a surviving spouse or partner. A common amount is 60% of the original payment. However the actual amount can range from 0 to 100%.

The only way to know what you might receive from your partner’s DB pension is to look it up. In fact, you may even have to check it annually as the terms of the plan may change from year to year.

I know when a friend took early retirement, not really be choice, the friend was asked to choose what percentage of their pension would go to their spouse if they died. If they chose 60%, the monthly amount they would receive before death would be significantly lower than if they chose 0%. This friend was then left trying to decide who was more likely to die first! That’s a terrible decision to have to make and a dangerous one as many of us don’t have any way of knowing what the future holds.

Defined Contribution Pension Plan Benefits Vary for Survivors

Defined contribution pension plans have varying rules if a person dies before retirement. Some simply turn over the entire account to the surviving spouse as a locked-in RRSP-type of investment. Others give the survivor 60% of the value of the plan. There is no “one” answer. Again, you would have to check the rules for the specific plan your partner or spouse is enrolled in.

DC pensions also have different rules for what happens if a person dies after they retire. You will have to check these rules with whomever administers the plan. Some DC pensions, for instance, are used to buy an annuity type of product when the person retires. The terms of the annuity may include a guaranteed minimum number of payments with the beneficiary getting any payments the pensioner does not receive; other annuities give a percentage of the monthly payment to a survivor; others give nothing after the pensioner dies.

The Rules for Survivors of Group RRSP Pension Earners Also Vary

As with DC pensions, group RRSP pensions have different rules depending on the company setting up and administering the plan. You have to check the terms of your pension or your spouse’s pension with the administrators. Don’t assume you will automatically inherit the same pension funds or pension payments as the pensioner received!

Checking Survivor Pension Entitlements is a Key Step in Pension Planning

The frequent use of the words “may, possible, probably, often” and so on in this article should point out clearly that there is no standard answer for what pension you will receive if your spouse or partner dies. It’s critical for proper pension planning to check the details of the specific pension plans your partner participates in.

You can review the CPP rules at Survivor Benefits, and Canada Pension Plan Survivor Benefits.

The conclusion of your review may very well be that you should not rely on receiving much or anything from your partner’s pensions if he or she dies first. If you don’t think you can survive on only your own pensions and savings, it may be time to try to improve the value of those.

Related Reading

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Do you find it shocking that if your spouse dies you could receive none of their CPP monthly payment? Do you know if you would get anything from your spouse’s work pension/s if he or she died? Please share your experiences with a comment.