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Low Income Retirement Planning
Low-income retirement planning requires a very different set of tools than your average retirement plan and this can sometimes lead to trouble when a soon-to-be low-income retiree gets advice that has been tailored for someone with a much higher income.
What we need to consider for a low-income retiree is very different than for your average retiree and the recommendations in a low-income retirement plan can sometimes be the opposite of a regular retirement plan.
The drawdown of investment assets, the timing of CPP and the timing of OAS are among many factors that differ in a low-income retirement plan.
When it comes to low-income retirement planning we’re primarily concerned with one thing, government benefits. We want to ensure that the way we save pre-retirement and the way we create income after retirement does not impact the amount of government benefits received.
This can be very tricky and can often lead to some less than obvious recommendations.
Before we get into some ideas to consider around low-income retirement planning lets look at why government benefits are the main consideration.
Are Most People Taking CPP Early Or Late? Some Real Numbers From Real Retirees
Are most people taking CPP early or late? Delaying CPP can have many advantages (and a few downsides). Delaying CPP to age 70 can see monthly CPP benefits increase by over 220% vs benefits taken at age 60.
Delaying CPP provides a lifelong inflation adjusted pension, and for those with no defined benefit pension this can be very appealing.
But as it turns out, very few people choose to delay CPP to age 70.
So, if delaying CPP has so much appeal, why aren’t more people choosing to delay?
In the analysis below we’ll see that the vast majority of people are taking CPP at or before the age of 65. Using these statistics for CPP starting age we’ll see that very few people choose to delay CPP past age 65 and only a very small percentage choose to delay all the way until age 70.
If delaying CPP to age 70 has so many advantages, why are most people choosing to take CPP early?
“Should I Delay OAS?” Four “Soft” Factors To Consider
“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.