At Matthews & Associates, we get a lot of questions about Canadian Pension Plan and Old Age Security timing. Our clients want to know what these are, what the difference between the two is, and how to go about calculating them. So, in this episode, we have Lindsay Wilson, Client Care Coordinator, joining the show to help me shed light on these very important but sometimes misunderstood government benefits.
Listen in as we discuss the penalties you may face if you decide to delay your OAS, as well as when you should look into starting both CPP and OAS. You will learn the importance of thinking ahead to ensure you have enough money to last you throughout retirement, why you should not make retirement decisions lightheartedly, and the benefit of consulting with a professional about your retirement plan.
What You’ll Learn In Today’s Episode:
- The difference between CPP and OAS.
- How to calculate your CPP.
- When you can start on OAS.
- What you need to know about OAS.
- The impact of delaying OAS.
- When you might want to take CPP early.
- The importance of looking at the bigger picture.
- Why you should think about longevity risk.
Ideas Worth Sharing:
“The difference between taking your CPP at age 60 versus delaying to age 70 is actually 122% difference in the monthly benefits.” – Joseph Curry
“Don’t just look at what’s best at the moment and look at the bigger picture.” – Joseph Curry
”[Your retirement plan] is not a decision that should be made during a conversation with friends or just your feeling on it.” – Joseph Curry
Resources In Today’s Episode:
- Lindsay Wilson: LinkedIn
- Joseph Curry: LinkedIn
- Timing Decisions for CPP/QPP Benefits (December 2020)
- OAS Overview
- CPP Overview
If you like Your Retirement Planning Simplified…
“Canada Pension Plan (CPP) and Old Age Security (OAS) Timing”
There are many questions surrounding Canada Pension Plan (CPP) and Old Age Security (OAS) timing for retirement and there are some important nuances to be aware of. In many cases, people make their decisions based on advice from friends or their own intuition which can lead to a less than optimal financial outcome. We feel it’s worthwhile to take a deep dive into Canada Pension Plan and Old Age Security benefits and timing and we’ll start by defining the difference between the two and then how they work.
CPP and OAS: The Differences
With Canada Pension Plan, as a Canadian in the workforce, you contribute between ages 18 and 65, or even up to 70. The CPP benefit is based on the amount you contributed during the years you contributed.
Old Age Security is paid based on residency in Canada. It’s calculated based on the number of years you lived in Canada between age 18 and age 65. For example, if you live 40 years in Canada during that time, then you’ll get the full OAS benefit. However, if you only lived here for 20 years, you’ll get half the benefit. It’s a pro-rated system and to receive it you must have lived in Canada for at least 10 years between the ages of 18 and 65. OAS is not based on any kind of work that you’ve done or contributions you’ve made, it’s strictly based on residency in Canada.
The Question of Timing
An important question we encounter in retirement planning is about timing. Specifically, when does it make sense to start these benefit income streams?
Financial Planning Canada and the National Institute for Aging recently did a study on delaying CPP and OAS benefits. They concluded the optimal timing is to wait until 70 if you are trying to maximize financially. The difference between taking your CPP at age 60 versus age 70 is a 122% difference in the monthly benefit. In other words, if you were to receive one thousand dollars a month at age 60, if you waited until age 70, that would be a $2,220 per month benefit.
You can start Canada Pension Plan as early as 60, and as late as age 70. But if you take it at age 60 there will be a penalty. In fact, if you take it any month before age 65, there will be a penalty. The bonus of delaying CPP is a little bit higher than the penalty for taking it early. The way that it works is there’s 0.7% monthly or 8.4%
yearly increase annually. If you go all the way to age 70, it works out to about 42% increase in the benefit which can be a compelling reason to delay.
Old Age Security, you can start as early as age 65 and as late as age 70. However, there are some things you need to know that will inform your decision and calculations. With Old Age Security you can’t take it earlier than age 65. And every month you delay there is a 0.6% increase in the OAS benefit which means a 7.2% increase every year. If you delay the full five years, that’s a 36% increase in the monthly income that you’re receiving, which can result in a significant income enhancement.
Another point to consider when looking at Old Age Security is clawbacks and how other income might affect the ability to get this benefit.
The government officially calls OAS clawbacks “recovery tax.” If your income is over the threshold of $130,000 you will not receive Old Age Security at all, and as of 2022 clawbacks begin at around $81,761.00. If your income is $81,761.00 or under, including OAS, you don’t have to worry about a clawback, but where some people find they run into the potential of a clawback is when they’ve chosen to continue to work past age 65 and receive the OAS benefit.
While they’re still working, they might be making over that $81,000 a year. We’ve seen clients who have done this, and they’ve gone back and canceled/delayed their OAS benefit and decided to take it after they stop working. In that scenario, aside from the financial benefits of delay, it just makes sense to refrain from taking the income because you won’t be able to receive the full benefit anyway making it a better idea to wait until age 70, or at least until you’re done working. An added bonus is that while you’re not taking it, there will be a monthly increase in the overall benefit.
When Does it Make Sense to Take it Early?
However, although there are real benefits to delay, there may be instances where it makes sense to take the benefit early. The first example is if you retire and stop contributing to CPP by age 55 or earlier. The reason for this is the way that CPP is calculated. As we mentioned earlier, it’s based on the number of years that you’ve contributed between the ages of 18 to 65. But in addition to this, the government lets you drop out your worst eight years from the calculation which means they look at your best 39 years. However, if you take CPP at age 60, they will only look at your best 35 years which means fewer years included in the calculation. Further to this, if you’ve stopped contributing at age 55, but you don’t take the
benefit until age 65, that’s 10 years where you haven’t contributed, and you can only throw at eight, leaving two. In this situation, it’s guaranteed that you’re not going to get the maximum benefit. In that scenario, it might make sense to try to maximize your benefit by taking it at age 60.
Another example of when you may want to take it early is as a business owner. You may still be working but not contributing from 55 onward. You may pay yourself dividends and avoid CPP contributions. If you only receive dividends, you have no earned income and are, therefore, not contributing to CPP.
Another reason is if you find that you really need the money. At the end of the day, you need to eat and pay your bills. If you really need the income that would be a time you might want to take it.
Lastly, if there’s any reason to expect a shortened life expectancy or you have health issues that make it reasonable to expect a shortened life expectancy, it may make sense to start taking that income earlier. The disadvantage of taking at age 70 would be, that if you were to pass away at age 70, you took very little in the way of benefits.
On a quick note, it’s a totally common response that we hear from speaking with clients who want to take CPP at age 60 that they’ve been paying the government forever and could die tomorrow and want to receive some of their benefits back. However, at the end of the day, we want to try to look beyond the moment and think of the bigger picture. What we’re solving for is how to make sure you don’t run out of money in retirement to maintain dignity and independence which, at the end of the day, is what people generally want.
A Benefit for the Rest of Your Life
We’d like to gently suggest that deciding when to take CPP and OAS benefits is not really a decision that should be made in conversation with friends, or just your gut feeling. There is, as mentioned before, a significant difference in the amount of CPP and OAS benefits if delayed to age 70.
The timing of Canada Pension Plan and Old Age Security benefits is a topic that’s at least worth digging into a little bit deeper on your own or talking to someone who’s experienced working with retirees. Remember, this is a benefit you’re going to have for the rest of your life – you want to make sure you make the right decision on that as you plan cash flow for retirement.
Whenever you’re ready… here are 2 ways I can help you with your Retirement Planning:
- Are you ready to retire? Use my FREE Retirement Readiness Calculator to run your numbers to see if you’re truly ready to retire.
- Book your Intro Call with me to see if my expertise matches your situation. If I’m not the right fit for you, I will happily point you in the right direction to get the advice you need.