Synopsis: The following case study was prepared to demonstrate how investors may consider structuring their asset drawdown plans, including when to take Canada Pension Plan (CPP) in retirement. Thanks to a reader, Cindy (changed for privacy/publishing purposes), for sharing their information.
When to take CPP in retirement
Cindy has worked hard, has maintained a great paying job for many years, and is now ready to enjoy her retirement in the coming years.
With a solid workplace pension on the horizon, she is not worried about having enough money to meet her retirement income needs. In fact, based on her annual, upcoming spending goals, she might have a challenge in spending what she has!
Our case study participant today wanted to figure out when to take her Canada Pension Plan (CPP) payment to specifically minimize the Old Age Security (OAS) clawback – where possible.
After a few Old Age Security (OAS) reminders let’s see what Cindy’s projections say!
Old Age Security 101
The Old Age Security (OAS) pension is a monthly payment from the Government of Canada available to most Canadians who are 65 years of age and older.
You know from our site already, that many Canadians should consider a retirement plan that includes savings, investments, and any private pension plan – beyond Old Age Security (OAS) or even Canada Pension Plan (CPP).
However, depending on how much income you make, the government could claw back the amounts that are paid to you. The amount of your OAS payments are adjusted each year to keep up with inflation.
OAS starts when you turn 65 years old.
In some cases, Service Canada will be able to automatically enroll you for the OAS pension. In other cases, you will have to apply for the Old Age Security pension. Service Canada will inform you if you have been automatically enrolled.
In most cases, you do not have to apply to get this benefit.
You can qualify regardless of your employment history, as it is not a determining factor.
If you are living in Canada at the time of your OAS application and have resided in Canada for at least 10 years after turning 18, you should qualify.
If you live outside of Canada, but were a legal resident before leaving and lived in Canada for at least 20 years after turning 18, you should also qualify.
There are other scenarios that allow you to qualify as well, as Canada has certain social security agreements with other countries.
OAS pension amount
You can receive up to $615.37 per month (latest payment information at time of case study).
The amount you receive depends on how long you lived in Canada or specific countries after the age of 18.
You will have to pay tax on the Old Age Security pension payment.
We’ll have much more to write about OAS in future articles.
How to minimize OAS clawbacks
Before we get to our case study details, we believe there are a few strategies an investor can implement to reduce OAS clawback amounts.
Our member (Cindy) has already considered all of these options:
- Split your pension with your spouse. If your spouse has a lower income, you can transfer up to 50% to your spouse; reducing your own income. Pension splitting could also include a Registered Retirement Income Fund or annuity income.
- Draw down your Registered Retirement Savings Plan (RRSP) before you turn 65. You already know everything there is to know about the RRSP here. Since the RRSP is a tax-deferred account, you’re taxed on RRSP withdrawals. If you plan to have a high income, after age 65, taking funds out of the RRSP before age 65 can be one way not to lose any OAS benefits.
- Draw down your Tax Free Savings Account (TFSA) to generate investment income. You already know everything there is to know about the TFSA here. Since the TFSA is a tax-free account, you will not be taxed on TFSA withdrawals regardless of your income. TFSA withdrawals are not taxed and will not count towards net income.
- Consider when to incur any capital gains. If you are planning a sale of any sizeable asset (such as a secondary home, stocks that have appreciated in a taxable account, other), that sale could trigger capital gains. Whatever the outcome, you are required to report all capital property sales in your income tax return. While capital losses can be used to offset capital gains, you may want to consider selling assets that could trigger significant capital gains before age 65 – when OAS payments begin.
There will be much more we will write about on the subject of tax strategies in future articles!
Let’s get back to Cindy’s case study and results.
Case study inputs and assumptions
- Age: 60
- Retirement Age: 65
- Current income: $150,000
- Cash return: 1.5%
- Bonds return: 2.5%
- Equities Return: 6.5%
- No plans to take on new debt.
- Expected CPP benefit age 70: $15,895.
- Start OAS age: 65.
- Defined benefit pension: $4,213.64 per month; $50,563.68 per year; start October 2025.
- Pension was indexed by 1.9% in 2020; assuming 2% indexing going-forward.
- Pension has equal employer and employee contributions as per Cindy.
- No TFSA contribution room left.
- No part-time work nor any income in retirement.
|Non-registered||$55,672.83||4.5%||50% equities, 50% bonds|
|RRSP/RRIF||$10,912.80||2.1%||80% GIC, 10% equities, 10% bonds, Annual RRSP contributions = $4,000 due to pension adjustment|
|TFSA||$86,170.97||50% equities, 50% bonds. Annual TFSA contributions = $6,000 (already maxed out for this year)|
|House||$400,000||Plans to downsize in a few years into a condo.|
|Defined contribution pension (former employer)||$594,341.12||6.5%||100% equities|
- Want to spend $50,000 after tax in retirement.
- Plans to sell house and buy condo (downsize) ~ $250,000 in a few years.
- Lives in SK.
Case study results – how to minimize OAS clawbacks
First all, congratulations Cindy and being so well prepared financially for retirement!
When should Cindy take her CPP at age 65 or 70 – will this minimize any OAS clawback?
Let’s look at her projections.
Whether Cindy takes CPP at age 65 or 70 , overall, she is in outstanding financial shape!
Cindy can certainly decide to spend far more than $50,000 per year after tax at time of retirement.
Option 1 – CPP at age 65 with maximum spending
We can see her income spike at age 66, the latest date in our assumptions Cindy will downsize her home.
We also see a number of income streams coming online for Cindy in the year she retires (age 65) as full-time employment income disappears.
Again, readers can see that Cindy can easily meet her income needs when she retires – sustaining a maximum annual withdrawal of about $88,000 per year (with inflation/real spending assumed at 2% throughout retirement).
Finally, her net worth value (if Cindy takes CPP at age 65 and spends to her maximum annual projection each year) will only leave her real estate asset at age 100. This is the condo she purchased. Again, inflation for that asset is assumed at 2% growth.
Option 2 – CPP at age 70 with maximum spending
Similar to taking CPP at age 65, we see a similar income spike around age 66 (the latest date Cindy takes possession of her condo).
Where things get a bit more interesting is when you factor in the after-tax spending.
By delaying CPP until age 70, our member Cindy can spend another $1,000 per year as part of her maximum annual spend but she’ll also get more OAS payments clawed back given her overall income has risen.
So, for Cindy, it’s all about trade-offs:
- With so many great assets and income sources to draw on, taking CPP earlier at age 65 will reduce OAS clawbacks, but
- Taking CPP as late as possible, at age 70, while it will increase the maximum annual spend this decision will incur more OAS clawbacks – thousands of dollars per year in her 80s in fact.
When to take CPP in retirement
For some prospective retirees, minimizing or avoiding OAS clawbacks altogether is a legitimate concern.
Depending upon how long one wants to remains in the workforce though, there is the real potential that OAS clawbacks cannot be avoided at all.
With a healthy defined benefit pension income at age 65, generous CPP benefits from a long career of contributions, along with a sizable defined contribution pension from her former employer, it appears Cindy will be unable to avoid OAS clawbacks.
Cindy will however be able to enjoy a very comfortable retirement and can look forward to multiple incomes streams to spend well beyond her initial but desired $50,000 after-tax income goal.
This case study was prepared to demonstrate how investors may consider structuring their asset draw down plans. We thanks our member for sharing this detailed information.
To help you plan for your retirement, we’ll have more case studies on our site over time. So, this is a great time to remind you to become a subscriber so you never miss a post!
Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only.
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