A Canadian based study was conducted by three University of Waterloo researchers, entitled “Basic Living Expenses for the Canadian Elderly”, to determine the basic living expenses required by Canadian seniors living in different circumstances in terms of age, gender, city of residence, household size, home ownership / renter, means of transportation, and health status.  It assesses the minimum level of income required in retirement and the adequacy of savings and income security programs.  Using Halifax, Montreal, Toronto, Calgary and Vancouver as base urban centres, the study looks at identifying what the elderly income threshold is for these urban areas for an single elderly individual and an elderly couple for 2001.

The paper’s conclusions suggest that individual circumstances, rather than age, are the primary drivers in determining the cost of basic expenses.  The thresholds resulting from the study provide a general impression of the necessary after tax income needed to cover basic needs.

A no frills retirement – couple rents rather than owns, owns no vehicles but uses public transit, low clothing expenditures, and has very little or no extra cash for minor indulgences (like cable, alcohol and entertainment) – would have an annual cost of between $20,200 to $27,400.  Some comfort is out there for those concerned about those annual cost numbers because the Old Age Security (OAS) and Guaranteed Income Supplement (GIS) programs for low income seniors gets close to covering these basic needs – just barely or very close depending on the city you live in.  If you add the Canada Pension Plan (CPP) payouts, if you worked most of your life, you will get more – a bit less than $30,000.

I’m sure most would look at a no frills lifestyle and cringe but there will be income.  Most Canadians want better than the no frills version and expect the same or similar levels of comfort they enjoyed while working.

Another article that discusses the noted study presents some info regarding how much income to you need.  It assumes you receive about $30,000 from CPP and OAS as a base.  For a more active lifestyle than the no frills lifestyle described above, an extra $10,000 to $30,000 a year would be needed.  Some financial planning research suggests you need retirement savings of 25 times your annual retirement spend (excluding CPP and OAS) if you want to keep spending that much for the rest of your life.  Statistics Canada indicates that median spending by a couple over 65 is about $40,000 a year and average spending is about $51,000 per year.  At the $10,000 value that would mean a nest egg of $250,000.  A higher end lifestyle, at the $30,000 value, would mean a nest egg of $750,000.  If you want to be a big spender with an extra $100,000 a year of disposable income, your nest egg would have to be $2.5 million.

This all goes to show that you need to match wants to means – find a retirement lifestyle that fits your budget.  A more lavish lifestyle will be supported by an appropriately sized nest egg.  For many, going back to work part time can provide additional cash for extra lifestyle improvements.  Ideally finding part time work doing something you enjoy so you would love the work as well the extra money.

Refer to http://ideas.repec.org/p/mcm/sedapp/240.html to download a copy of the study.  Information from one of the authors can be found at http://www.naylornetwork.com/cia-nwl/articles/?aid=31031&projid=2080.

Refer to http://ca.finance.yahoo.com/retirement/article/moneysense/42/retirement-three-magic-numbers for an article about the study plus additional related data.

Last week the Finance Department announced changes to the Canada Pension Plan that will be phased in from 2011 to 2016. They will affect people who start receiving payments early, or who delay getting them until after they are 65.

Under the proposed changes, if you retire before 65, your pension will be cut by 7.2 per cent for each early year, instead of 6 per cent under the old rules. That means if you start collecting CPP at age 60 (the earliest you can), your monthly benefit will be cut by 36 per cent instead of 30 per cent.

If you keep working past age 65 and delay collecting CPP, however, you will get more than before. For each year you wait, you’ll get an extra 8.4 per cent (instead of 6 per cent under the old rules). That means someone who waits until age 70 will get a 42 per cent higher payment than they would have at age 65, compared with 30 per cent higher under the old rules.

Another change will allow you to collect CPP before age 65, even if you are still working. Previously, you had to quit work and stay off the job for at least two months to qualify for payments.

Ottawa says the idea is to let people use CPP income to supplement earnings or to phase into retirement. Another adjustment will allow people over 65 who are collecting CPP, but still working, to make further contributions if they want, so their benefits will increase.

And finally, workers will be able to remove eight low-earning years from those that are used to calculate average pay for CPP purposes. That’s up from seven years. That change will help individuals whose careers have been interrupted.

This article originally published in the Globe and Mail June 2, 2009 (Richard Blackwell)

Personal impact comment – My own situation may not be unique in deciding to take early CPP benefits.  Most of our income now comes out of my RRSP.  At age 63 I’m not yet able to split  pension income with my wife – that comes at 65.  Hence, the more personal income I have (made up of withdrawls from the RRSP and CPP), the more income taxes I pay.  Yes, I can withdraw less from the RRSP that together with early CPP makes income taxes payable the same.   I’m reluctant to do so for two reasons.  First, I’d like to get as many $ out of my RRSP as I can to allow  more investment (such as a TFSA) and spending outside the RRSP.  And outliving my RRSP is not something I want to do.   And second, my family history has me living longer than the average Canadian.  Hence, I’d be risking early but lower monthly CPP benefits against higher CPP payments in the future should I live longer than the average.  Oh man!  I’ve probably jinxed myself – If you hear of me getting hit my lightning you’ll know why it happened to me.

Tony Almonte