Dominic Perri got into retirement investing late in life, but he's trying to make up for it now.
The Toronto-based stonemason had relied on his employer's pension plan, but when the company went under, it didn't leave him with much. So he looked into what he'd get from the government after he retired, and was immediately inspired to start an RRSP.
If you're depending on the government safety net for your retirement, you may want to prepare for a hard landing. Although Canada's government-administered retirement benefits are relatively generous, when viewed on a world-wide standard, many Canadians may be surprised at how little they are entitled to after they retire.
Post-retirement payments from the federal government comes in two forms – Old Age Security (OAS) and the Canada Pension Plan (CPP).
OAS is a payment made directly from the government coffers to any Canadian over the age of 65 who meets residency requirements. In and of itself, though, it doesn't offer all that much security.
In 2008, the standard payment is $502.31 a month in taxable income. If you make more than $64,718 annually after retirement, the government will claw back a portion of OAS payments at tax time. And if you make $104,902, you'll have to pay it all back.
If a retiree has little or no other source of income, though, the federal government can supplement OAS with another fund called a Guaranteed Income Supplement (GIS). Calculated by income, age and martial status, the GIS maxes out at $597.53 a month, plus $392.01 a month for an eligible spouse.
CPP works differently. It is a fund that Canadians contribute through their taxes, which is paid back after retirement – very much like the federal government opening a savings account for you that you can't access until you retire.
Since 2003, the contribution rate is 4.95 per cent of a salaried worker's gross employment income between $3,500 and $43,700, up to a maximum annual contribution of $1,989.90. Employers are required to match that contribution. Self-employed Canadians must pay both as employer and employee, essentially contributing at a 9.9 per cent rate, up to a maximum of $3,979.80.
Now self-employed, Perri pays the $3,979.80 every year, but wonders if it's a good deal.
"I know I could get a better return on an RRSP," he said. "But at least I know I'm getting something back."
How much you get from CPP depends on how much you put in. The official maximum is $884.58 per month, but according to published sources, the average payment in 2007 was just $481.46 a month.
While the primary reason people don't receive the maximum payment is because their working income didn't reach CPP's maximum, payments can also be affected by time away from the workplace or retiring early – CPP payments can start as early as age 60, but there's a considerable deduction for early retirement.
So while a government-administered retirement income of over $24,000 a year is technically possible; it's only available to a few, and most Canadians should expect significantly less.
There are concerns that the recent economic crisis has affected the CPP fund – although the federal government says it hasn't – and a potential strain on the fund as increasing numbers of Canadians reach retirement age.
