Tag Archives: CPP

Delay CPP & OAS until 70? – Some case studies

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By Ed Rempel

Special to the Financial Independence Hub

Planning the income for seniors often has the coolest opportunities to increase after-tax income.

The government pensions, CPP [Canada Pension Plan] and OAS [Old Age Security], are full of opportunities, because:

  • Seniors often have flexibility in taking taxable and non-taxable income.
  • OAS is subject to several “clawbacks” in addition to income tax.

To see these opportunities, you need to think creatively about pensions, tax and investments.

For example, in my recent article “Should I start my CPP early? – Real-Life Examples,” I found the single most important factor in whether to take CPP early before age 65 is how you invest.

Here you will see that the single most important factor in deciding whether to delay CPP after age 65 is: Will you withdraw more from your investments if you delay starting?

A quick review of the facts:

Delayed CPP Rules

  • The maximum CPP benefit in 2016 at age 65 is $1,092.50 per month, or $13,110 per year.
  • You can delay starting up to age 70 and you get 8.4% more for every year after age 65. If you start at age 70, you get 42% more for life, so the maximum is $18,616 per year.
  • New rules in 2012 allow you to start CPP even if you are still working.
  • If you are over 65 and still working, you can choose whether or not to pay into CPP.
  • Your 8 lowest earning years since age 18 (plus years when you had kids under age 7) are “dropped out” in calculating how much CPP you get.

Delayed OAS Rules

  • The maximum OAS benefit in 2016 at age 65 is $578.53 per month, or $6,942 per year.
  • You can delay starting up to age 70 and you get 7.2% more for every year after age 65. If you start at age 70, you get 36% more for life, so the maximum is $9,442 per year.

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Should I start CPP early? Real-Life Examples

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Piggy bank with national flag of CanadaBy Ed Rempel, CPA, CMA, CFP 

Special to the Financial Independence Hub

The most common Canada Pension Plan question I am asked is: “Is it smart to take my CPP early?”

A quick review of the facts:

  • The maximum CPP benefit in 2017 at age 65 is $1,092.50 per month, or $13,110 per year.
  • You can start as early as age 60, but you get 7.2% less for every year before age 65. If you start at age 60, you get 36% less, so the maximum is $8,390 per year.
  • New rules in 2012 increased the penalty for starting early, but you can start CPP even if you are still working.

The simple breakeven calculation misses many important factors. For example, if John starts receiving $8,390 per year at age 60 and Jane starts receiving $13,110 at age 65, it will take her nine years to catch up. The simple breakeven is age 74. John gets more before age 74 and Jane gets more after.

This implies that if you expect to live past 74 (and most people will), you should delay your CPP. But this is not the full answer.

The answer depends on five main factors:

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The case for early RRSP withdrawals

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Fram Oil Filters: “Pay me now or pay me later.” (YouTube.com)

My latest MoneySense Retired Money column was published earlier today: click on the headline Retirement Tax Tips for full version.

As I say at the end of the column, after decades of the RRSP contribution habit, I admit it goes against the grain to start decumulating.  And even more so, it’s counterintuitive to pay taxes on investment funds before you HAVE to.

However, to paraphrase the famous Fram Oil Filters TV commercial, you can pay me now or you can pay me more later — much more later. (For the famous 1972 “Pay me now or pay me later” Fram Filter ad, click on this YouTube link.)

Since tax is one of the biggest, if not THE biggest expense in retirement, I’d rather pay a little tax now prematurely than a lot of tax later.

Live on early RRSP withdrawals and defer CPP benefits

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Emeritus’s Doug Dammer

So what has this got to do with RRSPs and taxes? As the column points out in detail, citing Emeritus Retirement Solutions’ Doug Dahmer, at some point those great tax refunds from decades of RRSP contributions eventually come back to haunt you. Usually that’s when you turn 71 and are forced to start making annual, and taxable, withdrawals from Registered Retirement Income Funds or RRIFs. (you can opt instead to annuitize or to cash out and pay a ton of tax upfront).

In practice, most will choose to take RRIF withdrawals starting at the end of the year you turn 71, but if you also have a good employer pension, the usual government pensions and other income sources, there’s a good chance some of those withdrawals will be at or near the top marginal tax rate, which these days ranges from 46% to more than 50%, depending on your income and the province in which you reside. And as the MoneySense column mentions, if you’re in the OAS clawback zone, you may have to add a further 15% to the government’s haul.

But if you’re semi-retired and “basking” in a relatively low tax bracket in your Sixties, you may be able to start withdrawing RRSP funds earlier than necessary, which may make sense if it’s only being taxed at 20 or 30%. Plus, as Dahmer suggests, by living on some of this relatively low taxed early RRSP funds you can defer the receipt of Canada Pension Plan (CPP) benefits and possibly Old Age Security benefits to as late as 70.

Every year you can defer taking CPP by living instead on early RRSP withdrawals, the CPP benefit will be 8.4% higher. Dahmer poses the rhetorical question whether your RRSP can generate an annual return of 8.4%. These days you certainly can’t generate that return with fixed-income and after all, we’re talking about people who by now should have a good percentage (perhaps 50%) in fixed-income. You may or may not get 8.4% from stocks but if you do, you’re also subjecting your portfolio to possible capital losses.

For one of Dahmer’s decumulation blogs published here at the Hub, click on Timing of CPP Benefits: Get both a bird in the hand and two in the bush.

Optimizing CPP: the later you start taking it, the better

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rpcvr-cppyr-engHere’s my latest MoneySense Retired Money blog, which looks at the perennial topic of when to take the Canada Pension Plan, or CPP. Click on the highlighted text that follows: The best time to take CPP to maximize payouts. (It may be necessary to subscribe to get full access to the piece after a certain limited number of monthly views to the site).

In an earlier blog in the series, I revealed why personally I planned to take Old Age Security as soon as it was on offer, at age 65.

In this followup, I come to the diametrically opposite conclusion that the longer you commence deferring the onset of CPP benefits, the better — assuming normal health and longevity expectations.

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Doug Dahmer

I consulted three major sources for the piece. One is Doug Dahmer, founder of Burlington-based Emeritus Retirement Solutions. You can also access a useful CPP tool he runs at www.cppoptimizer.com. Run Dahmer’s name in the Hub’s search engine and you can find a number of guest blogs on the topic of decumulation.

In a nutshell, Doug thinks most of us — including me and my wife — should defer CPP as late as 70, choosing instead to start withdrawing from RRSPs in our 60s, assuming the money is needed on.

Another useful source I consulted is Doug Runchey of Victoria-based DR Pensions Consulting. For a small fee, Runchey — who used to work with the CPP — will take your government-issued CPP contribution statements and crunch the numbers to tell you how to optimize your benefits.

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Early retirement? Half of us in trouble if we miss a single paycheque

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CPA CEO Patrick Culhane

As my Financial Post blog today summarizes, far from being confident about a comfortable or even early retirement, almost half of working Canadians (48%) say it would be hard to make ends meet if their paycheque were delayed even a single week. Click on the highlighted headline for full story: Nearly half of Canadians are living paycheque to paycheque — and that has big consequences for retirement security.

Almost one in four (24%) don’t think they could come up with $2,000 if an emergency arose in the next month, according to the Canadian Payroll Association (CPA)’s eighth annual Research Survey of Employed Canadians, which is being made public on Wednesday.

The survey of 5,600 employees across Canada (conducted by Framework Partners between June 27 and Aug 5) found 40% spend all or more than their net pay, while 47% are able to save only 5% or less of earnings. Little wonder that 75% have saved a quarter or less of their retirement goal. Even among those aged 50 or more, a “disturbing” 47% are still less than a quarter of the way to their retirement savings goal.

Half think they’ll need $1 million to retire, and will need till 62 to do so

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