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 firstname.lastname@example.org. He and Michael Drak have just published the book Victory Lap Retirement