“Should I delay OAS”?
This a common question that gets asked during a financial plan. Along with CPP payments, OAS payments will increase the longer you delay them. This creates a big incentive to delay both OAS and CPP.
Delaying OAS until 70 can lead to monthly OAS payments that are 36% higher than at age 65. This can make delaying OAS, as well as CPP, very appealing to soon-to-be retirees.
That being said, even though receiving the maximum OAS benefit sounds appealing as a retiree, the decision to delay OAS needs to include many factors, some of them are “soft” factors that have nothing to do with the financial breakeven.
OAS benefits are significant for retirees. A retiree with over 40-years in Canada between age 18 and 65 can expect to receive over $7,000 per year in OAS benefits. A couple can receive over $14,000. This makes OAS benefits an important component of any retirement plan.
But OAS benefits have one unique factor that makes the decision to take OAS at 65, or delaying OAS until 70, much more difficult, and that is the clawback. Officially called the OAS recovery tax, this clawback is 15% of every dollar earned above a certain threshold. Above this threshold, the OAS recovery tax takes $0.15 from every $1 of income until OAS is gone.
When we consider the impact of this recovery tax it may make delaying OAS very appealing in certain situations. In this post we’ll look at some of the soft factors to consider when deciding whether or not to delay OAS.
When is the best time to take Old Age Security (OAS)? Should you delay OAS to get the maximum benefit? Or should you take OAS as early as possible?
Old Age Security is a government retirement benefit paid to seniors over the age of 65. Unlike Canada Pension Plan, Old Age Security payments come from government revenue. It has nothing to do with contributions. It has everything to do with how long you’ve been in Canada. And unlike CPP, it can be “clawed back”.
It can also be substantial. Old Age Security is worth over $7,000 per person per year if you receive the maximum benefit. For a couple that’s over $14,000 per year in retirement income. This increases with inflation every 3-months.
And like CPP, OAS payments increase the longer you delay it. The earliest OAS can start is at age 65, but for every month you delay OAS payments the benefit increases by 0.6%. If you choose to delay for a full year your OAS benefits would be 7.2% higher. If you choose to delay the full 5-years to age 70 your OAS benefits would be 36% higher!
Delaying OAS may seem appealing, but should YOU delay OAS to get the maximum OAS benefit in retirement?
Perhaps not, but it depends on your situation.
There are many different risks when it comes to retirement, but one risk that isn’t talked about very often is the risk of living a long and healthy life. It may seem odd to call this a risk, but from a financial planning perspective a long and health life increases the risk of running out of money in retirement.
According to the guidelines from the Financial Planning Standards Council of Canada, for a couple who is currently 55, there is a 25% chance that either partner in a couple will live to age 98 and there is a 10% chance that either will live to age 101.
Living a long and healthy life isn’t some obscure risk… for pre-retirees the chance of living to age 100 is around 1 in 10.
This risk becomes even greater for those aiming for early retirement in their 50’s or even 40’s. Retiring at age 55 could mean a 43+year retirement period for 1 in 4 couples and a 46+ year retirement period for 1 in 10 couples.
With such a long retirement period, and such a high possibility of reaching age 90+, we want to ensure that we’re taking steps within our financial plans to avoid the risk of a long life.
There are a few things that anyone can do to avoid this risk…
TFSAs are an amazing tax sheltered account that every Canadian has access to regardless of income. Unlike RRSP contribution room, which is based on employment income, we all get the same amount of TFSA contribution room every year.
The TFSA is a perfect way to save for retirement. In fact, for many young people they are better off starting with their TFSA rather than their RRSP, especially when they’re starting out at a lower income.
At lower income levels the TFSA can provide many advantages versus the RRSP. Namely that future withdrawals aren’t taxed and won’t count towards government benefit claw backs.
There are other benefits to the TFSA too, like if you have a habit of spending your tax refund. If that’s the case then maybe a TFSA contribution is a better idea.
My wife and I have a BIG goal for our TFSAs. Our goal is to grow our combined TFSAs to $1 million by the time we reach early retirement at age 55. This is an ambitious goal, one that we may not meet, but it’s fun to have a BIG financial goal like this. We find it motivating to have BIG financial goals and it gives us something to work toward.
Two years ago I provided an update on our progress to our one million TFSA goal and I think it’s time to do it again. Not just for the accountability but also because it’s good to share how amazing the TFSA is for these kinds of goals.
When we do our own financial planning we’re often too close to our own situation to have an objective perspective. We may focus on the wrong problems… or take a narrow view of the potential solutions… or miss potential issues entirely.
One of the benefits of working with a financial planner is that they provide a second set of eyes for your financial plan. Most people are already on the right path, but there are common issues that may end up working against you. A financial planner can help find these common mistakes that may otherwise go unnoticed.
Financial planning isn’t rocket science, it’s something that can be done on your own. The math itself isn’t terribly difficult, and there are tools available online to help, but one of the major downfalls of the DIY approach is that we can be somewhat oblivious to our own personal biases.
Basically, we’re too close to our own financial situation to be entirely unbiased (This goes for financial planners too!) There are certain financial planning mistakes that we all tend to make if we’re not careful.
These mistakes can lead to potential issues over time. These issues can create more risk, or decrease investment return, or increase taxes, or create a higher risk of running out of money in retirement.
These mistakes are quite common and identifying these potential issues is the first step to creating a stronger financial plan.
Planning for retirement is all about spending. Spending impacts almost everything about a retirement plan. More spending means more withdrawals and more taxes. Less spending means less withdrawals and less taxes.
More spending could mean there is a higher risk of running out of money. Less spending could mean that we need to be careful around estate planning because there may be a large amount of assets being passed on.
But spending needs to be supported by investment assets, so how much do we need to have invested? How much does it take to retire?
In this post, we’re going to take an interesting look at this question. We’re going to look at how much we need to retire depending on the province we live in. We’re going to look at how much you need to have invested to support the same retirement spending.
Disclaimer: Nothing in this post should be considered financial planning advice. We’re going to use averages and province wide tax rates with only general deductions. Because we’re all unique in some special way, the numbers in this post won’t apply to you, but the relative amount you need to have invested between provinces is interesting!