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How low income earners can still ensure they have enough money for retirement

(Photo: Thinkstock)
(Photo: Thinkstock)

Retirement advice ads are everywhere. You can’t get through half a “Friends” rerun without a 30 second spot with a washed-up actor pumping the financial planning genius of Blank & Blank. But these ads aren’t speaking to everyone. They’re meant for people with average or higher incomes, with big enough portfolios to generate the fees that keep the investment industry roaring.

Few people are lining up to spread the retirement gospel to people at the low end of the income spectrum. If your earnings are less than around $35,000 a year, it’s a challenge to find much literature on the subject. And maybe we can cut the financial experts some slack here; it’s tough to come up with savings advice for people who don’t feel they have anything extra at the end of the month to set aside.

But retirement is an eventuality, and people earning at low-income levels need a game plan in order to hit old age in the best financial situation.

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“They live in a parallel universe,” says social policy consultant John Stapleton, of low-income earners needing financial advice. In the parallel universe, the rules are different, meaning the white-haired guy on TV pushing RRSPs and mutual funds really isn’t doing you any favours.

The good news for Canadians is that there are government entitlements in place to help seniors with little or no pension or retirement income. The bad news is the traditional RRSP-savings game plan – which allows investors to deduct contributions from taxable income and pay income tax when the funds are later withdrawn – can trip up your attempts to receive them.

“Our whole retirement system is based on the idea that you are going to do less well in retirement from an income point of view than you do during your working years,” says Stapleton.

“For low income people the opposite is often true, and especially for very low income people.”

This logical flip-around is due to two benefits that Canadians not yet close to retirement probably rarely think about or may not even know about: Old-Age Security (OAS) and the Guaranteed Income Supplement (GIS).

Anyone paying close attention to the federal election race may have heard passing mention of the GIS, as both the Liberals and NDP say they would add to it if elected (though of course the parties have paid far more attention to the middle class ‘hard-working families’ cohort that are believed to drive the bus on election night).

According to Stapleton, a single senior with no other income would receive about $18,000 a year from the GIS and OAS combined, while a couple would get around $32,000. It’s a decent starting point, but larding it up with additional RRSP withdrawals will force it to be clawed back. It’s also taxable, so taking out RRSP savings on top of it could push you into a tax bracket near or above your pre-retirement levels, which would reduce the benefit of the RRSP’s tax-deferred status.

So does that mean there’s no point in saving at low-income levels? Far from it, but avoid the RRSP in favour of the Tax Free Savings Account, which shelters your investment growth, but isn’t tax-deferred, so not taxable when you make the withdrawals. Stapleton terms the TFSA “agnostic” to the old age system.

“For the normal well-to-do person, you’d always maximize your RRSP first. Then you’d possibly top it up with a TFSA,” he says.

“If you’re low income, you’re in an alternative universe where you would always buy a TFSA first.”

Perversely, the time to think about moving back into RRSPs would be after retirement, Stapleton says, when minimizing income would keep the GIS and OAS taps flowing. Under the current rules, you can keep investing in RRSPs until age 71, giving you a six-year window to save while keeping your income low.

Of course, going the traditional route can still make sense if you get an early start and can save enough to make the old-age benefits less necessary. It may seem daunting to carve savings out of a meager paycheck, but getting into the habit early can help, says Caroline Nalbantoglu, president of CNal Financial Planning in Montreal.

“Start with what you can afford, because when you tell people you’ve got to save $5000 a year in order to have a decent retirement, that’s going to turn them off completely,” she says.

Instead, start small with maybe $50 a month set aside. Once you get used to the money coming off every month, you can slowly add to it over time.

“You get used to it, and it’s not a matter of setting up a budget, because oftentimes people don’t do that,” she says.

“But the old adage of paying yourself first, I’m a firm believer in that. Just take the money, put it away, and the rest is yours to spend.”