How to bridge the gap until an inheritance

CPP/OAS strategy without other pensions

You can begin your Canada Pension Plan (CPP) retirement pension as early as age 60 or defer it as late as age 70. For each month you defer it after age 60, the pension rises.

If you start your pension at 60 and continue to work, you must continue to contribute to the pension until at least age 65. This will generally increase your pension, with an adjustment each year, but not as much as deferring it.

Since you already started your CPP, there is not much of a strategy there, Esther. But for others reading along, a healthy senior who expects to live well into their 80s should strongly consider deferring the start of their pension. They will receive more cumulative CPP dollars if they live to their late 70s. Even after accounting for the time value of money from drawing down other investments, or not being able to receive and invest the payments, someone living to their mid-80s and beyond may be better off financially. 

There is also the benefit of having more guaranteed income that is simple and indexed to inflation, providing cost of living and longevity protection—especially for someone without a defined benefit pension plan. 

Although you plan to start your Old Age Security (OAS) at age 65, Esther, you may want to think twice about this for two reasons:

1. The same logic as CPP applies. You can defer your OAS as late as age 70 and it, too, rises for each month of deferral. If you are healthy and expect an average or longer than average life expectancy, deferral may give you more lifetime retirement income, despite the temptation to have more cash flow today. 
2. There is an OAS pension recovery tax if your income exceeds about $95,000 in 2026. If you are still working and receiving both CPP and OAS, you want to be careful about losing some of the OAS pension you are hoping to begin. This means-tested clawback of OAS is 15 cents on the dollar above that threshold, causing an effective tax rate of 43% to 52% and rising at $95,000 depending on your province or territory of residence. 

Given your expected low income in retirement, it could be a costly decision to start OAS. There is also a low-income supplement called Guaranteed Income Supplement (GIS) that an OAS pensioner with a modest income may qualify for that could factor into your future income planning, Esther. 

Travelling in retirement

Your plan to travel while you are young and healthy is an important reason not to work too long or wait to do things too late into your retirement. There needs to be a fine balance between saving for tomorrow and living for today—it is one of the biggest risks of retirement planning. 

Conventional retirement planning methods focus on minimizing the risk of running out of money before you are 100, but this can also maximize the risk that you miss out on life experiences.

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Counting on an inheritance

You must be careful budgeting for an inheritance that could be lower than expected, and may come later than anticipated. It is a risky part of retirement planning even if you have full visibility about a parent’s finances. 

The substantial nature of the inheritance you foresee, Esther, is an important factor in your own retirement planning. Given that you are 64, I assume your mother is well into her 80s or beyond. 

In your case, the key to bridging the gap until that inheritance is definitely real estate. 

Real estate strategy in retirement

The benefit of owning vs. renting from a financial perspective is overblown, in my opinion. Until recently, real estate prices appreciated at an extraordinary pace in many Canadian cities, leading some to believe it is the key to wealth creation.

Real estate should not be an investment, unless it is a rental property earning rental income. A principal residence should probably grow at slightly above the rate of inflation, in line with wage growth. Perhaps this is the reason prices have flatlined or declined recently. Although interest rates have risen, they have only gone up to normal levels, not extraordinarily high rates. 

A discussion of real estate price appreciation often ignores property tax, maintenance, renovations, and interest costs, as well. 

All that to say that selling and renting would not be a failure in this financial planner’s opinion, Esther. But you would want to consider an apartment or seniors’ community where you could live as long as you wanted, as opposed to a condo with a landlord that has risk with regards to being a long-term residence. Being forced to move in your 70s or 80s on 90 days’ notice may not be a good risk to take. 

One solution you may not have considered is borrowing against your debt-free condo. You can apply for a mortgage or home-equity line of credit based on your income and qualifying ratios. A line of credit may be more flexible than a lump-sum mortgage deposited to your bank account, because you can withdraw funds as needed and pay interest as you borrow. 

If your borrowing capacity is limited due to your income, or a decision to retire before applying, a reverse mortgage can allow you to borrow up to 55% of your home value with no income assessment. The interest rate will generally be a couple percent higher than a line of credit, so that is the catch. But if you just need a few years of cash flow to carry you to an inheritance, borrowing in one way, shape, or form should be considered. You can pay off the debt with the inheritance and supplement your savings, and that may allow you to delay a condo sale for many years to come—or possibly forever, Esther.

Summary

The sooner you start to plan for your retirement, the better. But even if you are close to the end of your career, there is no better time to start planning than today. And the next best time is tomorrow. And the next best time is the day after that, and so on. 

Real estate equity may play a role for some, and there are different ways to access home equity.

Read more from Ask a Planner:

• What to do when you get laid off
• Why late-career savers need to be careful with RRSPs
• Taxes halved their inheritance. Could anything be done?
• What is the Canada Pension Plan death benefit?

About Jason Heath, CFP

Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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