Tag Archives: CPP

How much Savings do you need to delay starting CPP and OAS?

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By Michael J. Wiener

Special to the Financial Independence Hub

 

Canadians who take their CPP at age 60 instead of 70 “can expect to lose over $100,000 of secure lifetime income, in today’s dollars, over the course of their retirement,” according to Dr. Bonnie-Jeanne MacDonald in research released by the National Institute on Ageing (NIA) and the FP Canada Research Foundation.

However, those who retire before 70 need savings to tide them over until their larger CPP pensions start if they want to live at least as well in their 60s as they do later in retirement.  Here we look at the amount of savings required by a retired 60-year old to be able to delay CPP and OAS pensions.

Incentive for delaying is strong

We’re used to thinking of CPP and OAS pensions as just a few hundred dollars per month, but a 70-year old couple just starting to receive maximum CPP and OAS pensions (but not any of the new expanded CPP) would get $61,100 per year, rising with inflation for the rest of their lives.  If the same couple were 65 they’d only get $43,700 per year.  If this 65-year old couple had taken CPP at 60, their combined CPP and OAS would be $32,700 per year now.  The incentive for delaying the start of CPP and OAS is strong.

We can think of the savings needed to delay the start of CPP and OAS pensions as the price of buying larger inflation-indexed government pensions.  This price is an absolute bargain compared to the cost of buying an annuity from an insurance company.  Those in good health but worried about “losing” if they delay pensions and die young can focus on the positives.  Delaying pensions allows retirees to spend their savings confidently during their 60s knowing that their old age is secure.  Taking small pensions early can leave retirees penny-pinching in their 60s worried about their savings running out in old age.

The table below shows the amount of savings a retired 60-year old requires to delay starting CPP.  This table is based on a number of assumptions:

  1. The current maximum age 65 CPP pension is $1203.75 per month.  Before you take your CPP pension, it grows based on national wage growth as well as an actuarial formula, but after you take it, it grows with “regular” inflation, the Consumer Price Index (CPI).  We assume wage growth will exceed CPI growth by 0.75% per year.
  2. We assume the retiree is entitled to the maximum CPP pension.  Those with smaller CPP entitlements can scale down the savings amounts.  For example, someone expecting only 50% of the maximum CPP pension can cut the savings amounts in half.
  3. We assume the retiree holds savings in an RRSP/RRIF so that withdrawals will be taxed in the same way that CPP pensions are taxed.  Retirees using savings in non-registered accounts won’t need to save as much because they only need to match the after-tax amount of CPP pensions.
  4. The retiree is able to earn enough on savings to keep up with inflation.  (Online banks offer savings account rates that put the big banks to shame.)  The monthly pension amounts in the table are inflation-adjusted; the retiree’s savings will grow to cover the actual CPP pension payments.
  5. We assume the retiree doesn’t have a workplace pension whose bridge benefits end at age 65.  This bridge benefit replaces some of the savings needed to permit delaying CPP and OAS.
CPP % of  Inflation-Adjusted Months of Savings
 Start  Age 65 CPP Monthly CPP Spending from  Needed at
Age Pension Pension  Personal Savings Age 60
60 64.0% $770 0 0
61 71.2% $863 12 $10,400
62 78.4% $958 24 $23,000
63 85.6% $1054 36 $37,900
64 92.8% $1151 48 $55,200
65 100.0% $1250 60 $75,000
66 108.4% $1365 72 $98,300
67 116.8% $1481 84 $124,400
68 125.2% $1600 96 $153,600
69 133.6% $1720 108 $185,800
70 142.0% $1842 120 $221,000

You can’t start OAS till 65 but can delay it till 70

Unlike CPP, you can’t start your OAS pension until you’re at least 65.  But you can delay it until you’re 70 to get larger payments.  The table below shows the amount of savings a retired 60-year old requires to delay starting OAS.  The table is based on a number of assumptions:

  1. The current maximum age 65 OAS pension is $615.37 per month.
  2. We assume the retiree is entitled to the maximum OAS pension by living in Canada for at least 40 out of 47 years from age 18 to 65.
  3. We assume the retiree won’t want to live poor before age 65, which means spending from savings from age 60 to 64 to make up for not receiving OAS.
  4. We assume the retiree holds savings in an RRSP/RRIF so that withdrawals will be taxed in the same way that OAS pensions are taxed.  Retirees using savings in non-registered accounts won’t need to save as much because they only need to match the after-tax amount of OAS pensions. Continue Reading…

Burning questions Retirees face

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Retirees face a myriad of questions as they head into the next chapter of their lives. At the top of the list is whether they have enough resources to last a lifetime. A related question is how much they can reasonably spend throughout retirement.

But retirement is more than just having a large enough pile of money to live a comfortable lifestyle. Here are some of the biggest questions facing retirees today:

Should I pay off my mortgage?

The continuous climb up the property ladder means more Canadians are carrying mortgages well into retirement. What was once a cardinal sin of retirement is now becoming more common in today’s low interest rate environment.

It’s still a good practice to align your mortgage pay-off date with your retirement date (ideally a few years earlier so you can use the freed-up cash flow to give your retirement savings a final boost). But there’s nothing wrong with carrying a small mortgage into retirement provided you have enough savings, and perhaps some pension income, to meet your other spending needs.

Which accounts to tap first for retirement income?

Old school retirement planning assumed that we’d defer withdrawals from our RRSPs until age 71 or 72 while spending from non-registered funds and government benefits (CPP and OAS).

That strategy is becoming less popular thanks to the Tax Free Savings Account. TFSAs are an incredible tool for retirees that allow them to build a tax-free bucket of wealth that can be used for estate planning, large one-time purchases or gifts, or to supplement retirement income without impacting taxes or means-tested government benefits.

Now we’re seeing more retirement income plans that start spending first from non-registered funds and small RRSP withdrawals while deferring CPP to age 70. Depending on the income needs, the retiree could keep contributing to their TFSA or just leave it intact until OAS and CPP benefits kick-in.

This strategy spends down the RRSP earlier, which can potentially save taxes and minimize OAS clawbacks later in retirement, while also reducing the taxes on estate. It also locks-in an enhanced benefit from deferring CPP: benefits that are indexed to inflation and paid for life. Finally, it can potentially build up a significant TFSA balance to be spent in later years or left in the estate.

Should I switch to an income-oriented investment strategy?

The idea of living off the dividends or distributions from your investments has long been romanticized. The challenge is that most of us will need to dip into our principal to meet our ongoing spending needs.

Consider Vanguard’s Retirement Income ETF (VRIF). It targets a 4% annual distribution, paid monthly, and a 5% total return. That seems like a logical place to park your retirement savings so you never run out of money.

VRIF can be an excellent investment choice inside a non-registered (taxable) account when the retiree is spending the monthly distributions. But put VRIF inside an RRSP or RRIF and you’ll quickly see the dilemma.

RRIFs come with minimum mandatory withdrawal rates that increase over time. You’re withdrawing 5% of the balance at age 70, 5.28% at age 71, 5.40% at age 72, and so on.

That means a retiree will need to sell off some VRIF units to meet the minimum withdrawal requirements.

Replace VRIF with any income-oriented investment strategy in your RRSP/RRIF and you have the same problem. You’ll eventually need to sell shares.

This also doesn’t touch on the idea that a portfolio concentrated in dividend stocks is less diversified and less reliable than a broadly diversified (and risk appropriate) portfolio of passive investments.

By taking a total return approach with your investments you can simply sell off ETF units as needed to generate your desired retirement income.

When to take CPP and OAS?

I’ve written at length about the risks of taking CPP at 60 and the benefits of taking CPP at 70. But it doesn’t mean you’re a fool to take CPP early. CPP is just one piece of the retirement income puzzle. Continue Reading…

Another emotional reason to take CPP early

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By Michael J. Wiener

Special to the Financial Independence Hub

 

For some reason, people seem wired to want to take their CPP and OAS benefits early, myself included. They grasp for reasons to justify this emotional need even though a rational evaluation of the facts often points to delaying the start of these pensions to get larger payments. I recently read about another emotional reason to justify taking CPP and OAS early.

We can choose to start taking CPP anywhere from age 60 to 70, but the longer we wait, the higher the payments. Less well known is that we can start taking OAS anywhere from age 65 to 70 with higher payments for waiting loger. It’s hard for us to fight the strong desire to take the money as soon as possible, and we tend to latch onto good-sounding reasons to take these pensions early.

But the truth is that most of us have to plan to make our money last in case we live long lives. Taking CPP and OAS early would give us a head start, but the much-higher payments we’d get starting at age 70 allow us to catch up quickly. If we live long lives, taking larger payments starting at age 70 is often the winning strategy.

Here I examine reasons to take these pensions early, ending with a longer discussion of the reason newest to me. Many of these reasons are inspired by other writing, such as a Boomer and Echo article on this subject. However, you’ll find my discussion different from what you’ll see elsewhere.

Let’s start with the best reason.

1.) You’re retired and out of savings

This is a good reason to take pensions early if you’re really running out of savings other than a modest emergency fund. However, just wanting to preserve existing savings isn’t good enough on its own. It makes sense to do a more thorough analysis to see what you’re giving up in exchange for trying to preserve your savings.

2.) You have reduced life expectancy

If you’re sufficiently certain that your health is poor enough that you’d be willing to spend down every penny of your savings before age 80, then this is a good reason to take pensions early. This is very different from “I’m worried I might die young.” If as you approach age 80 you would try to stretch out your savings in case you live longer, this has repercussions all the way back to how much you can safely spend today. Almost all of us have to watch how we spend now in case we live a long life. In this case you need to do a thorough analysis to see what you’re giving up in exchange for taking pensions early.

3.) You have long periods before age 60 with no CPP contributions

If you don’t work after age 60, but delay taking CPP until 65, the 5 years without making CPP contributions can count against you. Everybody gets to drop out the lowest 17% of their contribution months in the CPP calculation. So, if you never missed a year of CPP contributions from age 18 to 60, you can just drop out the years from 60 to 65, and you won’t get penalized. But if you had many months of low contributions over the years, then having additional low months from 60 to 65 will reduce your CPP benefits.

I am in this situation. However, from 60 to 65 you go from receiving 64% to 100% of your CPP plus any real increase in the average industrial wage. Taking into account all factors, I expect my CPP to rise by about 47% by delaying it from 60 to 65. This is less than it could have been without the penalty of not working from 60 to 65, but it is still a significant increase.

Delaying CPP further from 65 to 70 is a simpler case. There is a special drop-out provision that allows you to not count the contribution months between 65 and 70. CPP benefits increase from 100% of your pension at 65 to 142% at 70.

CPP benefits rise significantly when you delay taking them. Even if you can’t use your 17% drop-out for all the contribution months from age 60 to 65, you may still benefit from delaying CPP.

4.) You want to take the CPP and OAS and invest

People don’t generally get this idea on their own. It often comes from a financial advisor. You’re unlikely to invest to make more money than you’d get by delaying CPP and OAS, particularly if you pay fees to a financial advisor.

5.) The government might run out of money to pay CPP and OAS

The government might introduce wealth taxes on RRSPs too. Despite what you might have heard from financial salespeople, CPP is on a strong financial footing. Many things may change in the future. It doesn’t make sense to overweight the possibility of cuts to CPP or OAS.

6.) You want the money now to spend while you’re young enough to enjoy it

My wife and I are retired in our 50s. When I analyze how much we can safely spend each month, the number is higher when we plan to take both CPP and OAS at 70. That’s right; we can spend more now because we plan to delay these pensions. It works out this way because CPP and OAS help protect against the possibility of a long life. Continue Reading…

CPP survivorship benefits (and OAS Allowance for low-income Survivors)

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By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

Long-time readers of this blog will know I remain many years away from full-on retirement – so I have tons of time to consider when to take our Canada Pension Plan (CPP) benefit and our Old Age Security (OAS) benefit.

For those who might be closer to retirement age and/or you want to know when to take CPP or OAS, make sure you read these posts below!

These are the best options when to take CPP.

Should you defer CPP to age 65 or even age 70? Here’s when to consider that.

One factor rarely covered on many blogs or financial forums is the subject of survivorship benefits for either program. It can be a major factor when determining when to take CPP or OAS for some.

What are the pros and cons of taking CPP or OAS early or late, when you factor in survivorship benefits?

Doug Runchey; DRPensions.ca

Like other financial subjects, I have my own ideas based on our financial plan but I wanted to talk to an expert. I reached out again to Doug Runchey, a pension specialist who has more than 30 years of experience working with both CPP and OAS programs.

In our latest discussion, we tackle the survivorship subject and what general rules of thumb apply.

Doug, welcome back.  Good to chat again and I hope you’ve been well …

Thanks for having me back again Mark.

I always appreciate the outreach for a take on this important subject. I agree, this isn’t talked about enough: how survivorship factors into government benefits decision-making.

For those folks not familiar with the benefits of CPP, can you remind them about the factors they should consider – when to take CPP?

The most important thing is to know exactly what your real choices are, because the numbers on your SOC or online at the MSCA website are not always very accurate. Once you have accurate numbers, you should consider factors like life expectancy, taxation, impact on other benefits (e.g., GIS), estimated expenses and other income streams.

When to take your CPP should be integrated with your overall financial retirement plan.

As we discussed in a previous post, there are some reasons to take CPP or OAS as early as possible:

  1. you need (and want) the money to live on now (probably the biggest reason)!
  2. you have good reason to believe that you have a shorter-than-average life expectancy; take the money now and spend as you please.
  3. you already have a good reliable defined benefit pension with full indexing and the CPP and OAS are “gravy”;
  4. you want to delay taking your portfolio withdrawals since you may wish to maximize the amount of money in your estate; and/or
  5. you are a “bird in hand” investor so you take Canada Pension Plan money now while you can.

Great reminders. So, what about the survivorship benefits of CPP? How are these calculated? Should that play into the decision, when to take CPP?

They should Mark.

CPP survivor’s pensions are based on two different formulas, depending on the age of the surviving spouse.

For now, let’s just consider the formula for survivors over age 65 and that is 60% of the deceased contributor’s “calculated CPP retirement pension.”. By “calculated,” I mean prior to applying the age-adjustment factor if they started receiving their retirement pension before/after age 65. This 60% is reduced however, if the surviving spouse is also in receipt of their own CPP retirement pension, under what are known as the “combined benefit” calculation rules.

These combined benefit calculation rules should definitely be a factor in deciding when to take your CPP if the survivor’s pension is in play prior to making that decision, but probably not otherwise.

Shall we look at an example, from a couple that prefers the “bird in hand” income?

To demonstrate these combined benefit calculation rules, let’s use an example where the husband’s calculated CPP was $1,000 and the wife’s calculated CPP was $700.

If they both took their CPP early at age 60, they would each receive 64% of their calculated CPP, which would be $640 for the husband and $448 for the wife.

If the husband passed away at age 70, the wife would normally be eligible for 60% of his calculated CPP, which is $600. Under the combined benefit rules though, that amount is reduced by 40% to $360.

As a result, the survivor’s retirement pension is increased by a “special adjustment” in the amount of $86.40 (36% of the $240 reduction to the survivor’s pension). The net combined benefit that the wife would receive is then $894.40 (her original retirement pension of $448, the reduced survivor’s pension of $360 and the “special adjustment” increase to her retirement pension of $86.40). Continue Reading…

CPP timing: A case study for taking benefits at age 70

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By Michael J. Wiener

Special to the Financial Independence Hub

There are many factors that can affect your decision on whether to take CPP at age 60 or 70 or somewhere in between.  Here I do a case study of my family’s CPP timing choice.

Both my wife and I are retired in our 50s and had periods of low CPP contributions because of child-rearing and several years of self-employment.  So, neither of us is in line for maximum CPP benefits.  If we both take CPP at age 60, our combined annual benefits will be $11,206 (based on inflation assumptions described below).

The “standard” age to take CPP is 65.  If you take it early, your benefits are reduced by 0.6% for each month early.  This is a 36% reduction if you take CPP at 60.  If you wait past 65, your benefits increase by 0.7% for each month you wait.  This is a 42% increase if you wait until you’re 70.

However, there are other complications.  If you take CPP past age 60, any months of low CPP contributions between 60 and 65 count against you unless you can drop them out under a complex set of dropout rules.  If my wife and I take CPP past age 65, we won’t be able to use any dropouts for the months from 60 to 65, so we’ll get the largest benefits reduction possible for making no CPP contributions from 60 to 65.  Fortunately, CPP rules don’t penalize Canadians any further if they have no contributions from 65 to 70.

Inflation indexing

Another less well-known complication is that before you take CPP, your benefits rise based on wage inflation.  But after your CPP benefits start, the payments rise by inflation in the Consumer Price Index (CPI).  Over the long term, wage inflation has been higher than CPI inflation.  So, when you start taking CPP benefits, you lock in lower benefit inflation.

In this case study, I’ve assumed 2% CPI inflation and 3% wage inflation.  These assumptions along with the CPP rules and our contributions history led to our annual benefits of $11,206 if we take CPP at 60.

If we wait until we’re 70, our combined annual CPP benefits will be $29,901.  However, don’t compare this directly to the figure at age 60 because they are 10 years apart.  If we take CPP at 60, it will grow with CPI inflation for those 10 years.  The following table shows our annual CPP benefits in the two scenarios: early CPP at 60 and late CPP at 70.

Age Early CPP Late CPP Age Early CPP Late CPP
 60    $11,206  75    $15,081   $33,013
 61    $11,430  76    $15,383   $33,674
 62    $11,658  77    $15,690   $34,347
 63    $11,891  78    $16,004   $35,034
 64    $12,129  79    $16,324   $35,735
 65    $12,372  80    $16,651   $36,449
 66    $12,619  81    $16,984   $37,178
 67    $12,872  82    $17,324   $37,922
 68    $13,129  83    $17,670   $38,680
 69    $13,392  84    $18,023   $39,454
 70    $13,660   $29,901  85    $18,384  

 

$40,243
 71    $13,933   $30,499  86    $18,752   $41,048
 72    $14,211   $31,109  87    $19,127   $41,869
 73    $14,496   $31,731  88    $19,509   $42,706
 74    $14,785   $32,366  89    $19,899   $43,560

It would certainly feel good to start collecting CPP benefits when we’re 60, but by the time we’re 70, we’d never notice that our payments could have been 119% higher.  That’s why we plan to wait until we’re 70 for our CPP benefits. Continue Reading…