“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.
For many retirees, CPP and OAS make up a significant portion of their retirement income. A disruption to either of these income sources can be very stressful. Even more so because this disruption follows the unexpected death of a partner or spouse.
Many retirees may not realize, but OAS and CPP survivor benefits are significantly reduced, anywhere from a 40% reduction to a full 100% reduction!
For lower income households, pension benefits like CPP and OAS can provide 50%-75% of their retirement income. For very low income households, CPP and OAS, when combined with other low-income benefits like GIS, can easily make up 100% of retirement income for some couples. Losing these benefits can be a big change to their retirement plan.
Even for higher income households, who may have significant assets in either RRSPs or TFSAs, it’s not uncommon for CPP and OAS to make up 25%-30% of their retirement income.
A disruption to this income can be devastating for some retirement plans, and what many people may not realize is the extent to which some of these benefits can be reduced when a partner passes away.
Although difficult and unpleasant to even think about, the impact of a partner passing is an important consideration for many retirement plans. It’s important to understand what changes there might be to both retirement income and retirement spending if the unfortunate were to happen.
For some plans, those which have a large amount of investment assets, the risk is smaller. Investment assets inside RRSPs and TFSAs can be transferred through spousal rollovers with no tax consequences. So, the disruption to these plans may be smaller.
But for most plans, the risk and disruption of an unexpected death can be quite large, especially in certain circumstances. In the worst-case scenario, the loss of CPP and OAS combined can represent more than $20,000 per year in lost retirement income!
In the last blog post we looked at the financial considerations when deciding to take CPP early or late. But personal finance is never just about the money. Half of personal finance is personal. The “best” path varies from person to person even when the numbers are exactly the same. When it comes to taking CPP early or late these personal considerations can make a big difference.
There are many “soft benefits” to taking CPP early or late. These benefits can make taking CPP early look more favorable… or it can make taking CPP later look more favorable… it just depends on how much YOU value each benefit.
Before deciding to take CPP early or late it’s important to understand what your goals are for retirement. Not just financial goals but personal goals. What do you want to do in retirement? What does your retirement look like? This may inform some of your decisions around these “soft benefits”
It can also help to have a financial plan and see how taking CPP early or late helps you achieve your financial goals. Everyone is different, and the decision to take CPP wont be the same for everyone.
Should you take CPP early or late? Are you considering taking CPP early? Are you wondering if you should delay? Should you take it early at age 60? Should you wait until regular retirement age at 65? Should you delay until age 70, the last date possible?
When to start taking CPP is just one of the many difficult decisions soon-to-be retirees face as they approach their retirement date.
It’s a big decision, and like many financial decisions there are many aspects to consider when deciding when to take CPP.
When a soon-to-be retiree is deciding to take CPP early or late there are both financial considerations as well as non-financial considerations to weigh.
Taking CPP late can provide a financial benefit if you plan to live past a certain age. This is a number and it’s easier to evaluate but it’s based on longevity, which is a big unknown.
Taking CPP late also has non-financial considerations. There are “soft benefits” to delaying CPP. Depending on how much you value these soft benefits they can be worth quite a bit as well.
Even when two people have the exact same financial situation, they may choose different times to start CPP simply due to these longevity questions and soft benefits.
When deciding to take CPP or delay its first important to get basic understanding of how CPP works and how CPP payments change each year as you delay.
The Canada Pension Plan is expanding this year and that’s going to make retirement easier in the future. This expansion is part of a multi year effort to increase the size of CPP payouts in the future. The increased CPP benefits will make retirement easier for many people. It will mean less personal savings are needed for retirement and if you continue to save at the same rate as today you might actually be saving too much!
CPP is one of the best pension funds in the world. Actuaries have stated that CPP is solvent for 75+ years. That means anyone contributing to CPP now has very little to worry about when it comes to future CPP payments.
Despite Canada Pension Plan being one of the best pension in the world I still come across comments from people who are negative about CPP and OAS. They prefer not to count these retirement pensions in their financial plans. Instead they prefer to save more for retirement.
While I understand the desire to be prudent, this line of thinking makes things more difficult than they need to be. Retirement pensions like CPP and OAS provide an enormous amount of retirement income and ignoring them just means you have to save more.
Ignoring CPP and OAS is like running in a windstorm with a parachute tied to your back!
Why add that extra resistance when it’s already hard enough to save for retirement?!?
The good news for many people is that CPP enhancement will now fund even more of their retirement. Future CPP payments will make up an even higher % of retirement income. Before CPP reform the original goal for CPP was to cover 25% of earnings (up to the max) but with CPP enhancement the goal is to increase this to cover 33% of earnings (with a higher max too!). The result is that CPP payments will be up to 50% higher in the future!
This expansion will happen in two phases and the impact on your financial future will depend on how much you’re earning today and how long you’ll contribute under the new rules.
Unfortunately, if you’re retiring this year you won’t see much of an increase. But if you’re retiring in the next 5, 10, 20+ years you’ll likely see your CPP payments increase anywhere from $1.44/month up to $500+/month depending on timing and contributions! That’s an extra $6,000+ per year at age 65 or $8,500+ per year if delayed to age 70! And double that for couples!
The new Canada Pension Plan expansion won’t impact everyone equally, some people will gain more than others. Let’s look at the two phases of the expansion and how it will impact us.