We’re all getting older and one of the hot topics for us aging boomers is when to take our OAS and CPP.
The rewards for deferring these pensions can be substantial. For CPP, the monthly benefit increases by 7.2 per cent per year for each year you defer past age 60 – meaning that putting off collecting CPP until age 65 increases your pension by 36 per cent. Between 65 and 70 the benefit increases by 8.4 per cent per year. So holding off between age 65 and 70 means you get a pension 42 per cent higher versus what you would get at age 65.
The numbers for OAS are similar, although you can’t get OAS until 65, you can elect to defer it until age 70. At 70 your pension benefit will be 36 per cent higher. OAS is a more complicated decision than CPP because the Government can claw back your OAS benefit if your income exceeds $81,761. You currently lose 15 cents of OAS for each dollar your income goes above $81,761.
There can be very good reasons for taking pensions as soon as you can get them. If you have health problems or a family health history that suggests you won’t live to a typical life expectancy it may make sense to take CPP early. The break-even for taking your CPP at 60 instead of 65 is age 74 – so you are better off taking CPP at 60 if you think you won’t be alive past age 74. If plan to be around after 74, and if the numbers are your only consideration – then you’re better off waiting until 65.
All of the above is worth an in depth discussion with your advisor to make sure that your financial plan reflects the optimal strategy that gives you the most income while honouring your personal goals.
But numbers aside, there are some other reasons you might consider putting off receiving a pension. A big one is if you don’t have a pension from your employer. Some combination of pension and investment capital is a great way to approach your financial life in retirement.
When asked in a survey, people who have defined benefit pension plans would almost never give up their pensions in exchange for cash – even when the terms presented to them are extremely attractive. People who have lots of cash are reluctant to buy pensions (say through an insurance company) even when the terms presented to them are pretty attractive. So what gives – who is right?
It turns out the reason that people choose to stay with what they have isn’t a strictly about the math. People are most comfortable continuing to do what they have always done. But wouldn’t it seems to make sense to hedge your bets and create both a stream of income from pensions and from investments? We think so.
A good way to achieve such a hedge is to defer your OAS and CPP until later in life, thus creating a larger Government pension, and perhaps using up some of your RRSPs and investment capital in the years between when you retire and when you draw your OAS and CPP.
While there is always the worry that there might be a market disruption in the years where you are deferring your pension, the right investment policy will take that risk out of the picture. Click here if you would like our thoughts on crash proofing your retirement income.
At the end of the day, the best strategy is the one that creates the highest income, the best result for you and your family, and preserves wealth for your legacy. Managing the timing of OAS and CPP can play a significant role in optimizing your overall financial plan.
This article is supplied by Alan MacDonald, an investment advisor with RBC Dominion Securities Inc. Member–Canadian Investor Protection Fund.
