David Christianson, BA, CFP, R.F.P., TEP, CIM
“Dollars and Sense”
Let’s talk today about the decision of when to take your Canada Pension Plan (CPP) benefit, and the easier decision, when to take Old Age Security (OAS).
This decision shouldn’t have anything to do with COVID-19. Unless:
- the pandemic has radically affected your job and its future;
- you are now reconsidering your retirement age and plan;
- you have changed your mind about what’s really important to you;
- you really believe that pandemics will shorten your life expectancy.
The debate about when to take CPP and OAS is one that is revisited frequently online and in financial publications. We will see if we can summarize the arguments pro and con, with credit to the financial writers and pundits who have also weighed in.
To bring you up-to-date, radical changes were made to CPP in 2012, and revised a few times since then. You can start reduced CPP as early as your 60th birthday, even if you continue to work for pay.
If you are employed or self-employed, however, contributions continue to be required up to 65, even if you are also collecting. You can also continue to contribute voluntarily from 65 to 70 if you have employment or self-employment income.
These later contributions go into a Post-Retirement Benefit, which increases your ultimate pension.
Age 65 is “normal” start age for CPP and OAS. Current CPP maximum for a 65-year-old is $1,175 per month, though the current average benefit is just $735, according to CRA. In order to qualify for the maximum benefit, a person must have contributed the maximum CPP premium in 83% of the years between age 18 and 65. Up to eight low contribution years are dropped out of the calculation.
If you start before 65, CPP is decreased by 0.6% per month or 7.2% per year. Hence, starting at age 60 reduces your benefit by 36%, all other things being equal.
Both CPP and OAS benefits increase if you delay past age 65 by 0.5% per month or 6% per year for OAS, and by 0.7% per month or 8.4% per year for CPP. So, a delay to your 70th birthday results in a 30% increase in benefits for the rest of your life when receiving OAS and a 42% increase when receiving CPP.
At 65, life expectancy in Manitoba for a man is 18.5 years (age 83.5), and for a woman 21.4 years, or age 86.4, according to Stats Canada.
The bottom line? If you live to the normal life expectancy of a 65-year-old at the time you make your decision, you are better off by delaying to age 70. Similarly, waiting to 65 instead of starting CPP at 60 pays off in the long run.
This assumes the amount you would have received sooner (the bird in the hand) is spent along the way, and simply calculates the total benefit received over your lifetime.
Making the decision to delay involves several considerations. Getting more in the long run is great, but what if you need the income now?
What if you prefer the sure thing, to the mathematical calculation being better off in the long run?
On the other hand, do you intend to live much longer than average and thereby soak the government for as much as possible?
OAS has special considerations. Everyone who has lived in Canada for 40 years after age 18 qualifies for the maximum.
But if you start OAS at 65, will some or all of it be clawed back? If your net income is over $79,000, OAS is recovered by the government at a rate of 15 cents for every dollar of additional net income. If your income is high from 65 to 68, for example, and will then fall, it might make complete sense to defer.
On the other hand, the forced conversion of your RRSP into RRIF by the end of the year in which you turn 71 might push your income higher, into the OAS clawback zone. If your situation allowed full OAS from age 65 to 72, then you would be wise to take it right at your 65th birthday.
Clearly, there’s a lot to think about and we have not covered it all. Some careful thinking and good advice might be recommended. We hope the above has helped somewhat.
Happy deliberations!
Dollars and Sense is meant as an introduction to this topic and should not in any way be construed as a replacement for personalized professional advice.
Please consult legal, tax, insurance and investment experts for advice on your unique situation.
David Christianson, BA, CFP, R.F.P., TEP, CIM is recipient of the FP Canada™ Fellow (FCFP) Distinction, and repeatedly named a Top 50 Financial Advisor in Canada. He is a Portfolio Manager and Senior Vice President with Christianson Wealth Advisors at National Bank Financial Wealth Management, and author of the book Managing the Bull, A No-Nonsense Guide to Personal Finance.
