When should you take your government retirement benefits?

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To CPP or not to CPP? With all due respect to Prince Hamlet, that is the question for those who have contributed to the Canada Pension Plan (CPP) and are approaching their 60th birthday.

The answer, however, isn’t quite as simple. Ditto for those pondering whether to collect Old Age Security (OAS) when they first qualify to do so at age 65.

At Bobcaygeon-based McInroy and Associates Private Wealth Management, executive financial consultant Adam McInroy CFP, CLU says, “It’s a big decision” – a do-I-or-don’t-I fork in the road that involves a number of factors.

“There’s a ton of research and there are tons of opinions, but I always go back to that great answer of ‘It depends,’” says Adam, referring to the simple fact that everyone’s financial situation is different and is the most important consideration when making a decision.

“How does taking CPP or OAS fit into your bigger financial plan?” Adam asks. “CPP and OAS and when to take them need to be looked at through a bigger holistic lens. What are your other income sources? What are your other taxable sources? If you continue to pay into CPP, how much more money will that get you down the road?”

Before making any decisions about when to collect CPP or OAS, Adam says you first need to understand what each benefit provides and, more importantly, the impacts of taking each when you first qualify to do so versus holding off.

For many Canadians, CPP is an important piece of their retirement income. To qualify, you must have made contributions into CPP while working. You can take the taxable benefit early at age 60 — or any point leading up to 65 when eligible for the full benefit — but the benefit is reduced by 0.6 per cent for each month before age 65.

You can also choose to defer CPP and take it between ages 65 and 70, resulting in an increase of 0.7 per cent for each month after 65 you start taking it. A factor that is often overlooked when deciding when to take CPP is that the benefit is adjusted for inflation.

Adam refers to a December 2020 research report by the National Institute on Ageing, a think tank at Toronto Metropolitan University, that concludes Canadians should consider delaying the start of their CPP benefits for as long as possible, if they are in reasonable health and can afford to wait.

“The report presents an interesting theory that Canadians should start to assume that age 70 is normal retirement age for starting CPP, and that the 0.7 per cent per month enhancement for deferring CPP past age 65 should rather be considered as a 0.7 per cent per month reduction for starting prior to age 70. If viewed in this manner, a person has their CPP retirement pension reduced by 55 per cent by starting to collect CPP at age 60 versus age 70.”

For example, a $100 monthly benefit at age 60 will increase to $222 per month if the person waits until age 70.

“To implement this strategy, a person needs to be willing to assume the risk they will have the average life expectancy of a Canadian,” Adam points out.

According to the National Institute on Ageing report, the life expectancy for a man and woman at age 60 is approximately 25.9 years and 28.5 years — meaning that, on average, a man aged 60 is expected to live until age 85.9 and a woman until age 88.5.

If people don’t consider life expectancy, Adam says, it’s understandable why they may be anxious to start collecting CPP at age 60

“Our natural mindset is ‘I’ve paid into this thing forever. I don’t know what tomorrow is going to bring. I want to get something out of it. Who knows? I could be dead tomorrow. If I don’t start collecting something now, it’s all for naught.’”

Having said that, Adam adds there are cases where it makes good sense to not defer collecting CPP. The National Institute on Ageing report lists eight of them:

  • Those who already have sufficient lifetime secure retirement income
  • Those who cannot afford to delay
  • Those with shortened life expectancy
  • Those eligible for GIS and other income-tested benefits
  • Those who are on the threshold of the GIS phase-out, the start and end of OAS clawbacks, or other tax-reducing strategies
  • Those who continue working
  • Those receiving a CPP survivor’s benefit
  • Those who would face a reduction in average pensionable earnings by delaying CPP

“More often than not, that’s the conversation we walk through with clients,” Adam says. “While they can certainly take your CPP at 60 if they want, they need to understand what it means for them.”

Another variable people sometimes forget to include in their calculations is the tax impact of taking the benefits earlier.

“CPP is 100 per cent taxable just as OAS is,” he points out. “How does that factor into your retirement income stream plan? It may not make sense to take CPP at age 60 instead of 65 if, from a tax efficiency standpoint, you can bridge that five-year gap by withdrawing from your investments instead. It all goes back to building your financial plan — that puzzle picture of what your retirement looks like and what makes the most sense for you.”

With OAS, Adam says it’s important to remember the benefit is subject to being clawed back depending on the amount of income received from all sources.

“You can start collecting OAS at 65 or defer it until age 70, or anywhere in between, but again it goes back to ‘When do I need it? When does it make the most sense?’” he explains.

“For some people, what makes the most sense is using some pension income or registered assets between the ages 60 and 70. You don’t have to worry about income testing and claw backs, and you can collect the maximum OAS and CPP benefit at age 70 and beyond because you’re in a lower tax bracket.”

While there are a lot of opinions on the internet about when you should or shouldn’t take CPP and OAS, Adam says you should speak with your financial adviser before making any decision. He provides an example of how impactful such a conversation can be.

“We were working with someone who was beyond the age of 65 and he asked ‘Should I continue to pay into CPP even though I don’t have to?’ We looked at various factors including unused RRSP space, pensionable income sources, and his contributions history into CPP and, for this individual, determined it continued to make sense for him to do so. The end result for him will be an additional $48,000 of cumulative income over his lifetime because of this one simple yet complex decision.”

Adam stresses how important these conversations can be, given the potential impact of CPP and OAS benefits for any retirement plan.

“With defined benefit pension plans going by the wayside for many, CPP and OAS can be one of the foundational income streams we have through retirement that has no market exposure and that’s guaranteed to provide as long as we live. And it gets indexed with inflation.”

For clients approaching retirement age, Adam and his team will walk them through various scenarios to make them aware of their pending qualification for CPP and the options available based on their unique financial situation.

“If you’re working with a CFP professional, you need to have these conversations as part of the bigger financial puzzle you’re putting together,” he points out. “When we work with clients, there’s the emotional component and there’s the dollars and the cents component. All money decisions come down to what makes sense for you.”

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