In my previous two blogs in this series, I took a look at the pure mathematical decision as to when you should take your CPP (hyperlink to CPP blog) and OAS (hyperlink to OAS blog) to maximize their payout.
In my final entry on government pensions, let’s examine a couple of cases to get a sense of how personal circumstances can affect the decision.
If I stop working is it still better to defer?
Jim is planning to retire next year at age 55 and not work thereafter. He is single and his assets and future income are such that his decision to take the CPP at 60 or 65 will not affect his OAS clawback. Jim has a Statement of CPP Contributions that shows for the first five years he made 50% of the maximum contributions and then 75% of the maximum for the following three years. After this point he has contributed the maximum every year. Should Jim defer his pension to age 65 or take it at age 60? Continue Reading…
The rules surrounding Old Age Security (OAS) changed as of July 1, 2013 with full implementation of these changes by January 2029.
The recent election of the Liberal government, promises to change the age of eligibility back to 65. Thus, we will assume that everyone is eligible to receive OAS at age 65. Continuing with the theme of government pensions, this is the second in a three-part series where we will examine how the remaining changes to the OAS rules will affect your pension payment in retirement.
What is the best age to take OAS?
As of July 1, 2013 you are able to defer your OAS pension for a maximum of 60 months in exchange for a higher pension amount. For every month you delay receipt of your OAS pension, your payment will be increased by 0.6%, to a maximum of 36% at age 70. Deferring GIS will not cause an increase in those benefits.
Looking at the math behind the breakeven calculation and ignoring the personal retirement circumstances that may influence this decision, the following are the breakeven points for taking OAS under the new rules.
Using the current maximum OAS payment and ignoring inflation, the total OAS pension received is greater just before the pensioner reaches the age of 84 if you defer the pension from age 65 to age 70. If 2% inflation is factored in over the time period, then the breakeven age drops to just after age 82. Comparatively, these ages are much later than the deferral breakeven for CPP as seen in part one.
The rules on how CPP works changed as of January 1, 2012 with full integration of the changes to be implemented by this coming January (2016).
As this is a part of almost every Canadian’s retirement, it is important for everyone to have a good understanding of how to maximize this government benefit.
What is the best age to take CPP?
This is a common question from many people approaching retirement. How will these changes affect when you should take the pension to maximize the benefits payable to you?
First, a brief look at the changes implemented. Previously, if you chose to take your CPP early or defer past age 65 the reduction or increase in your pension was 6% per year, or 0.5% per month, to a maximum of 30%. Upon full implementation, the reduction for taking CPP early will be 7.2% per year, or 0.6% per month, to a maximum of 36%. The increase in pension from deferring, which is already fully implemented, is 8.4% per year, or 0.7% per month, to a maximum of 42%.
From a purely mathematical perspective, the following are the breakeven points for taking CPP under the new rules. We will touch on how your personal retirement circumstances may effect this decision in a later blog.
If the effects of inflation are ignored, by the time the pensioner reaches age 73, the total CPP received is greater by taking it at 65 instead of 60. Similarly, by deferring CPP to age 70, the total CPP received is greater when the pensioner reaches age 81 than if taken at 65. If inflation of 2% is factored into the calculation then the breakeven ages drop to just before 72 and just after 79 respectively.
You may find yourself with both debt and accumulated RRSP savings. This often happens when people are enrolled in automatic savings programs at work or when debt accumulates due to illness or time off work late in life.
Perhaps the most important factor will be the return you expect to receive on your RRSP versus the interest you are paying on your debt. The higher the interest you pay on your debt, the more likely it is that you will want to consider using your RRSP to pay off your debt. For example, if you owe $10,000 on credit cards with a 20% interest rate, and you are earning 1% in a GIC in your RRSP, cashing in your RRSP to pay off the debt, and saving 20% interest, may make sense.
Taxes may complicate calculations
Of course, the math is not quite that simple because taxes must also be considered. If your marginal tax rate is 50%, you need to cash out $20,000 from your RRSP to generate the $10,000 required to pay off your debt.
That leads us to the next consideration. Will withdrawing funds from your RRSP solve your debt problem and will you have time to replace those savings before retirement? $10,000 in debt may appear to be a manageable amount, but what if you have $70,000 in unsecured debt (which happens to be the amount owed by seniors when they became insolvent in our recent Joe Debtor study)?
In many cases, individuals can be insolvent even while having savings inside their RRSP. If your only significant asset is your RRSP, and if you don’t have the income to service your debt, another option to consider may be a consumer proposal or personal bankruptcy.
The campaign of Working Canadians to save the $10,000 limit on Tax-free Savings Accounts is really gaining momentum.
We have always known Canadians love their TFSAs for their simplicity, flexibility and as a valuable tool to permit tax-efficient retirement savings.
Just this week our campaign was bolstered by an Angus-Reid public opinion poll, which reveals that the promise by the new federal government to reduce the TFSA limit is opposed by a majority of Canadians. So of the 11 million who have money in a TFSA, more than 5.5 million of them like the higher limit of $10,000 implemented by the Conservative administration earlier this year.
As well they should. The facts have convincingly shown that the justifications the Liberals claim to support the limit reduction – that “TFSAs are mostly a tool for the rich and cost the treasury too much in foregone revenue” – are just plain wrong.
All we want is pension parity for the middle class
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