When to Take CPP in Retirement – A Case Study

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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 Eligibility

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:

  1. 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.
  1. 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. 
  1. 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.
  1. 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

Profile

  • Age: 60
  • Retirement Age: 65
  • Current income: $150,000

Assumptions

  • 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. 

Assets

AccountBalanceAssumed ReturnNotes
Non-registered$55,672.834.5%50% equities, 50% bonds
RRSP/RRIF$10,912.802.1%80% GIC, 10% equities, 10% bonds, Annual RRSP contributions = $4,000 due to pension adjustment
TFSA$86,170.9750% equities, 50% bonds. Annual TFSA contributions = $6,000 (already maxed out for this year)
LIF/LIRA$0
House $400,000Plans to downsize in a few years into a condo. 
Cash savings$11,292.651.5%
Defined contribution pension (former employer)$594,341.126.5%100% equities

Liabilities

  • None.

Retirement goals

  • 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. 

If you would like to inquire about a case study or projections services for your financial scenario, please contact us here.

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14 thoughts on “When to Take CPP in Retirement – A Case Study”

  1. Really enjoyed reading the case study and hope to see more coming mainly with scenarios for people without a pension plan and relying more on RRSP/TFSA/Taxable investments. The only question I have is while the RRSP/LIF balance is only around 10K but why on the income charts it represent a significant part of Cindy’s income over the 35 years in retirement?

    Reply
    • Good question Kevin. To recap, Cindy also has a very healthy DC pension so that becomes essentially a LIF whereby she can start drawing down $32K+ per year in retirement over time based on LIF rules. You are very correct Cindy’s small personal LIF could not generate that income!

      Thanks for your kind words and absolutely we will have case studies and more from folks that have no pension to rely on at all. It’s important for us to show a spectrum of examples about how to invest and/or draw down a portfolio on the site. Personal finance is personal!

      Thanks for your readership.
      CAP

      Reply
    • Smart call Joel, re: yes, DC plan becomes registered and managed as a LIF.

      We are using software called Snap Projections but it is not offered to consumers at this time.

      CAP

      Reply
  2. I think I have the same question. The pink in Option 1 and 2 shows source of income as LIF funds yet the example shows zero holdings as a LIF and it is not represented by the pension as that is stand alone income. Where does this income come from?
    Per the scenario outlined I’d suggest putting on my “I Quit” shirt and walking into work tomorrow to announce getting a head start on enjoying that wonderful nest egg she built over time.
    Curious… when drawing down any of the vehicles for income is there any merit to taking it monthly, quarterly etc versus the advantage of taking it all at the beginning of the calendar year in order to get it working for you immediately wherever you plan on moving it?

    Reply
    • Thanks Jeff – see reply to other reader, the DCPP becomes a LIF.

      Your comment made us laugh re: “I Quit” shirt. It seems our reader Cindy is enjoying her job, wants to stay working, and that’s great! But yes, she does have enough income to meet her spending needs for sure.

      When it comes to RRIF monthly, quarterly, annual, etc. withdrawal schedules I think there are pros and cons of each. I can’t speak to what you might need to help you budget of course, but I know what works for my parents (Mark here) is I have told them to consider annual withdrawals at the start of every year. This way, they keep more monies invested throughout the year (the good and the bad) and hopefully more often than not they ride the market returns to positive territory where possible with time. Again, just a thought from me but certainly there are options.

      CAP

      Reply
      • I’m curious, CAP (Mark) – you provided that you recommend to your parents to consider annual withdrawals at the start of the year. But then you explain this is to keep more monies invested. Isn’t that contradictory – to achieve “more monies invested” would it not be best to only withdraw as much as is needed, when needed (eg: monthly)?

        Reply
        • Depends how much you take out Rob.

          They are doing the RRIF min. so at the start of the year, they take out a few thousand and let the rest stay invested over the rest of the year. Most financial institutions will say: if you do not require income from your RRIF to meet your financial needs, you may consider receiving the annual minimum payment at the end of the year to maximize the tax-deferral benefits of your RRIF. My parents decided the start of the year was best for them, so be it.

          Whether at end or beginning, a minimum amount has to come out and usually lump sum withdrawals beat dollar cost averaging, which is what monthly payments essentially are in reverse. No right or wrong here.

          The punchline is withdrawals from RRSP/RRIF accounts are fully taxable income. The best way to manage this is to spread the withdrawals over the largest number of years at the smallest amount each year whether monthly, quarterly or annually. Just me maybe? Thoughts?

          CAP

          Reply
          • Ahhh ok. Thanks for the explanation. Makes more sense to me now, I wasn’t taking all factors into account.

          • Pros and cons to every decision Rob. We’ve personally found that financial management is both about math and managing your emotions and mind.

            Have a great weekend,
            CAP

          • I have a lofty goal of living off dividend income in retirement. I plan to retire in 2027. At that time some of our nest egg will be in our rsp accounts (about 30-40%) that I plan to convert to a rif.

            Until then, my dividend payers are on a drip. Then I will turn the drip off and plan to withdraw dividends (up to the minimum, or as needed) as they arrive and leave the actual investments untouched (until my yield is less than the minimum – then that will of course change, forcing me to start divesting my dividend payers).

            Are there any negative consequences ( tax or otherwise) to withdrawing this cash as it arrives in the rif?

          • Great to hear from you James.

            That is my (Mark here) thinking as well, DRIP as much as I can now, and then turn off DRIP taps when I need the income stream. I will do that for my taxable account for sure and likely for my TFSAs and RRSPs in the coming decade.

            The beauty of RRIF, as a tax-deferred account, I think it makes sense to DRIP as much as you can as often as you can. Money that makes money can make more money! More money to withdraw from the RRIF and mandatory withdrawals occur.

            Thoughts?
            CAP

      • I’m inclined to take payments up front as well as early as possible in the year.
        I’ve seen similar responses as your parent’s choice so I was curious to see if anyone would respond with reasoning to spread the withdrawal out.
        The money drawn early can be used to make your TFSA contribution as early as possible. Again if you can get away from the misnomer “Savings Account” and truly see the potential of viewing the TFSA as an account to invest in, generating either passive income from dividends or putting some solid growth stocks in there to achieve pure returns, it should be a priority each year to max out. Also if you haven’t converted your RRSP yet and still have unused contribution room you could utilize the money to add to your RRSP if it provides any beneficial relief on your taxes especially if you have other streams of income.

        Reply
        • Yes, that’s part of the reason why I advised they set up the RRIF early in the new year. TFSA room opens up 🙂

          But I suspect they won’t contribute to it but rather spend the money, which is fine. It’s their money!

          I went as far to say on My Own Advisor to rename the TFSA as TFRA = Tax Free Retirement Account.

          I agree all Canadians should be placing a priority to max out the TFSA, first, every year. If they make great income, they maximize RRSP contributions next. There is no reason a lower-income earner should be using a RRSP these days unless they will even in a lower tax bracket in retirement.

          Smart thinking Jeff.
          CAP

          Reply

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