CPP = Canadian Pension Plan
OAS = Old Age Security
One of the most frequent questions of retiring farmers is when you should commence CPP and OAS benefits. Typically, most people answered this question themselves years earlier being influenced by human behavior. They want cash as soon as possible; they want to maximize the financial benefit from the system as they fear dying early and not getting back what they have paid into the system.
Based on 2016 federal government data, of the 312,251 Canadians applying for CPP, 41% did so at age 60, 30% at age 65 and only 1.5% at age 70.
Wanting to get the most from CPP or OAS is not a defective strategy, but in my judgement, it is only one of three alternative objectives when converting savings to income.
Consider which objective best fits your situation:
- Wanting to receive CPP and OAS benefits as soon as possible
- Wanting to get the largest financial benefit from CPP and OAS
- Wanting the most financial security for yourself and spouse throughout retirement
People generally do not act in their best interest as they look for a simple answer to a complex question. Most are simply not experienced in financial matters, nor do they have access to professional advice.
Consider Gary and Sherri, retired farmers age 63 and 64 respectively. They previously worked through the lifestyle, financial and tax planning issues of their farm sale with Assante advisors using The Retiring Farme, process. Gary’s first thought was like most, he wanted to get his CPP and OAS when first eligible whereas Sheri, who was more focused on planning, wanted to know their alternatives.
Now, before analyzing the details, let me quickly explain how taking CPP earlier, or later, works. If you take CPP before 65, you take a 7.2% penalty per year on your CPP payments (up to 36% at age 60). For each year you wait after 65, you gain 8.4% annually in your CPP payments (up to 42% at age 70). For 2019, at age 65 the maximum monthly CPP benefit is $1,154. Commencing benefits at age 60 would reduce the maximum monthly pension to $738 whereas deferring to age 70 would increase the maximum monthly benefit to $1,638. Deferring from age 60 to 70 increases annual benefit by $10,800.
As to OAS, at age 65 the monthly OAS benefit is $613. You cannot take benefits prior to age 65 but you can defer to age 70 at which time your monthly pension would increase $221 to $834 per month. For each year you wait after 65, you gain an 7.2% annual increase in your OAS payments (up to 36% at age 70). Deferring from age 65 to 70 increases maximum annual benefit by $2,652.
On face value, 42% more CPP and 36% more OAS does seem like a compelling case for waiting, but is it? The puzzle here will be best solved by first making an informed judgement of the following two assumptions and then clarifying your objective that fits your situation.
Your Life Expectancy
Average life expectancy in Canada is approximately 82 in 2019. The probability of dying between the age of 60 – 69 in 2019 is about 1%. Statistically, the likelihood of dying early is small.
Average Rate of income Tax
For 2019, marginal Canadian tax rates vary between 0% and 47.5% on various levels of income. For most, the effective rate of tax will drop significantly during retirement as compared to our working years.
For individuals who have inadequate savings and need cashflow to fund their month to month lifestyle needs, they will likely have no alternative but to start receiving CPP and OAS benefits as soon as possible even though deferring to a later commencement date may make financial sense. Those with poor health will likely be better off commencing pension benefits earlier rather than later. Those in higher tax brackets during pre-retirement years expecting to be in a lower tax bracket in post-retirement years should likely defer benefits to lower taxation years.
Considering Gary and Sheri’s Situation
Gary and Sheri have a life expectancy of 83 and 88 respectively; 2. Marginal tax rates for both Gary and Sheri pre-retirement of 47.5% and 16.5% post
As Gary and Sheri have adequate savings from the sale of their farm:
► their lifestyle would not be hampered by deferring CPP and OAS benefits to a later date;
► savings from the farm sale has provided adequate financial security.
Illustrating Alternatives for Gary
Considering this, Sheri was able to convince Gary that the appropriate strategy is to get the largest financial benefit from CPP and OAS assuming life expectancy. Complex calculations determine this would be accomplished by both Gary and Sheri commencing benefits at age 67. Graphs below illustrate for Gary projected cumulative benefits at various ages of life expectancy assuming various benefit commencement dates. Sheri’s results would be similar.
Determining when to commence CPP and OAS benefits is not straightforward. It is best answered through consulting with experienced professional advisors who have the tools to make the necessary complex calculations and explain the results to you. To discuss how an Assante advisor can help you understand your alternatives with CPP and OAS, contact Donavon Tofin at 306.244.8696.