Why I’m taking OAS right at 65

Benefits are majorly clawed back if your income exceeds a certain threshold

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During the “Victory Lap” stage of life between full-time employment and traditional “no-nothing” retirement, a key strategy is deciding when to commence receipt of various streams of income.

This commonly occurs in one’s 60s. As you move from a salaried single stream of income to the “multiple streams” of income inherent in post-corporate portfolio careers, certain considerations may cause you to commence receipt of certain streams while postponing others.

Non-registered investment income is one income stream you can scarcely avoid receiving, whether fully employed or semi-retired. Part-time work is a likely source of income in this stage: the previous column in this series examined its positive impact on your nest egg. Even if you decide you don’t want to work part-time after age 70 or 71, you can slowly replace that income with no-longer-deferred government or corporate pensions and of course the mandatory forced annual taxable RRIF withdrawals once you turn 71.

But in the pre-RRIF years of your 60s, if you can live on some of the above income streams, it may be advantageous to delay employer pensions and government retirement income sources like the Canada Pension Plan and Old Age Security.

The decision when to draw on an income stream will often be based on tax considerations and the desire to maximize benefits. It’s well known that the longer you defer receipt of CPP, the better: we’ll look at this in greater depth next time but if you can get by without the income, you should strive NOT to take CPP at its earliest possibility at age 60. Instead, try to wait until 65 or even 70, by drawing on all those other income sources first.

Your situation may differ but my own financial planner believes I should defer CPP but take OAS as soon as it’s on offer at age 65: two years from now.

Why take OAS at 65? Recall that as of the 2012 budget, Ottawa rejigged the rules to tempt people to defer taking OAS until as late as age 70. With this “voluntary deferral,” for every extra month you wait after 65, you gain 0.6% a month, so if you wait until the bitter end at age 70 the result would be monthly OAS benefits 36% higher than if you had taken them at your earliest convenience. Note that this reward for deferring OAS is slightly less generous than CPP, where there’s a 42% bump for deferring CPP from 65 to 70.

Of course, the Conservatives planned to make younger people wait until age 67 before they could even start collecting OAS but the new Liberal government nixed this after the 2015 election, so as of now we can all collect OAS at 65 if we are so inclined and put in the requisite number of years of residency in Canada.

Why defer CPP but take OAS as soon as you can? For me, the big difference is OAS clawbacks. CPP and OAS both generate taxable income but only OAS benefits are clawed back if your income exceeds a certain threshold: in 2016 the clawback starts to kick in at $72,809 and is fully clawed back at $118,055, according to Morneau Sheppel.

In my case, it seems likely that some or all of my OAS benefits will be clawed back once my RRSP becomes a RRIF at the end of my 70th year. In the meantime, I see a six-year window for taking OAS in my 60s with minimal chance of clawback so in the spirit of never saying no to free government money I intend to exercise that option.

My advisor also sees early OAS as a hedge on CPP deferral, just in case you pass away earlier than anticipated. CPP works off a bigger dollar base, so there are more dollars to be gained by deferring CPP than OAS, which at best pays out $570.52 a month in 2016. Adrian Mastracci, president of Vancouver-based KCM Wealth, calculates someone eligible for maximum CPP can boost benefits from $1,092 at age 65 to $1,540 at 70. The comparable OAS figures are $570 and $775, so the “extra” gained by deferral is $448 for CPP: twice as much as the extra $205 gained by deferring OAS.

In practice, while it’s common to defer CPP or consider doing so, Matt Ardrey, a wealth advisor with TriDelta Financial, says “I have yet to have a client who is thinking about deferring” OAS.

All this depends on your wealth, of course. Retired actuary Malcolm Hamilton notes OAS is a moot point for those earning more than $120,000 (whether employment or retirement income). Then there is the group who know they’re in relatively poor health: they may as well take OAS (and CPP) as soon as they can.

Between these extremes, the decision is fairly simple. As Hamilton puts it, “For most people, if you need the money you should take it. If you don’t need it, then you should probably defer it. It’s not a decision to lose sleep over: many will simply defer because they don’t want to complete the forms” Ottawa makes available at age 65.

Jonathan Chevreau is MoneySense’s Retired Money columnist and founder of the Financial Independence Hub. He can be reached at jonathan@findependencehub.comHe and Michael Drak have just published the book Victory Lap Retirement

14 comments on “Why I’m taking OAS right at 65

  1. Seems like such small amounts in the big scheme of things that it isn’t worth agonizing over. Unless you are very low income and every dollar counts. Or am I missing something?

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  2. Quick correction… In your article, you say: “it seems likely that some or all of my OAS benefits will be clawed back once my RRSP becomes a RRIF at the end of my 70th year.” Actually, you have an additional year before converting your RRSPs to RRIFs, which must be done before Dec. 31st of the year you turn 71 (not 70), with RRIF income starting as late as your 72nd year. Also, you can reduce the minimum amounts required to be paid out of your RRIF each year, if you base those minimum payments on a spouse’s younger age (assuming you are lucky enough to have a younger spouse!)
    Doreen (Dee) J. Gregson, CLU, CH.F.C., CFP®
    Chartered Financial Planner | Retirement & Estate Planning Consultant
    P.O. Box 37 | Lions Bay, BC | Canada | V0N 2E0 | Mobile: 604.765.4910
    https://ca.linkedin.com/in/DoreenGregson Email: doreengregson@hotmail.com

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  3. “…many will simply differ because they don’t want to complete the forms”. But the Federal Government automatically enroles you in OAS at 65 unless you contact them to delay.

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  4. I may be in a different situation than the author. I have converted my rrsp’s to rrifs and trying to withdrawl extra to move these to tsfa. That way i have a higher investment withdrawl the next 6-7 years, and once i turn 70 start collecting oas and cpp, at the same time reducing my rrif withdrawls to the mininum , ending under the oas cutoff. Any extra monay can come from tsfas which are non taxable, and i would have maximized the tsfa contributions.
    Of course that only works if one hasn’t maxed out tsfa’s.

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    • And by tSFa you meant tFSa …..

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  5. I have a a quick question. What if you have variable dividend income and no other source of income. How would that work for Old Age Securrity benefits. If I am in the higher tax bracket. Thank you for your any advice you can offer me.

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  6. I read the obits each day and realize many, many individuals do not reach 65 or 70. I think the biggest wild card in retirement is your health. Consider that first. I know I can make better returns with CPP money myself so decided to take it at 60 and am glad that I did.

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  7. Mmmm, interesting point of looking at the question. Why then it is often said, and indeed strongly advised at least by OSSTF-led workshops, to start taking at the earliest possible CPP even when in receipt of another pension, in my case that of a retired teacher?

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    • Because like me I am bridged till 65 which means my fed pension will not be reduced till I hit 65 so I will collect the CPP and the bridge amount till 65 so for me it’s like free money

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    • I would like to know if the calculations for the increased CPP when deferred include the years from sixty to seventy as non working years. Non working years reduce the CPP and few people actually get the maximum.

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      • I was wondering that too, Darby. I’m looking at taking early retirement at 56 and given that I may not have any more working years in my future, I’ve heard that my best bet is to begin drawing it right away. Any thoughts?

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  8. You don’t have to fill out any forms if you want OAS to start at 65. That is the default nowadays as per the information you supply on your tax return. If you want to delay OAS, you have to inform them.

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  9. I started taking both CPP and OAS as soon as I could. I calculated how much I would receive, starting at various ages, and found that it would be about 13 or more years, before making more by waiting. And that didn’t take into account investing the money in the meantime. .6% is 1/166th of the monthly amount. Therefore you will need 166 of the incremental benefit to make up for the delayed benefit. Granted, the extra benefit increases monthly, so eventually it will overtake the amount that would have been collected by starting earlier. Three summary points are:
    1. A common belief is that we won’t need as much income in later years of life
    2. How long we’ll live is unknown, but all benefits will stop then
    3. Have you ever known the government to do something which benefits the taxpayer more than it benefits the government?

    Reply

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