Retirement is an exciting time, as it should be! You have worked your entire life, and now you get to celebrate. You get to spend more time with grandchildren, working on that hobby you were always interested in, or travelling the world - or plan to travel once this crazy pandemic passes!
But you probably have some questions before you enter the next chapter in your life. Do you have enough savings to retire? Will you be able to afford that cabin or go on that 3 month trip across Canada?
Although I will not be able to answer all of these questions in this article, I will answer one question that my parents asked and is a very common question that we get. When should you take CPP and OAS?
CPP
If you take CPP at age 65, you receive the full amount you are eligible for. There is an online calculator provided by the Government of Canada to determine what that amount is:
You can start taking CPP at any point between the age of 60 and 70. When you take it earlier than age 65, the percentage you receive is reduced by 0.6% per month. If you defer taking CPP to a later age, the amount you will receive increases by 0.7% per month.
In summary, the CPP pension amount changes when if you decide to take before or after age 65:
Increases by 0.7% monthly or 8.4% annually after age 65
Decreases by 0.6% monthly or 7.2% annually before age 65
Let me provide you with some examples. Let's say you are eligible to get the full CPP amount of $1,155 each month if you take CPP at age 65.
Example # 1: You decide to take CPP at age 60. Instead of receiving $1,155 per month, you will receive $739 per month for the remainder of your life.
Example # 2: You decide instead to take CPP at age 70. Now you will receive $1,640 per month for the remainder of your life.
There is no blanket correct answer for every individual out there, however, there are two questions you must ask yourself to determine what makes the most sense for your situation:
What is your expected rate of return on investments? Speak to your financial advisor about this. For most individuals, earning a conservative return in retirement makes the most sense. You do not want your investments to be impacted by market downturns as much with a shorter time horizon.
How long you will live? I know this is a morbid question to ask yourself. I will discuss this in greater detail below.
Life Expectancy
It may be an uncomfortable topic to think about or to discuss with your partner. There are many factors that play into life expectancy, including health and genetics. There are several ways you can determine this:
You can use the current life expectancies in Canada. The current life expectancy is 80 years for males and 84 years for females in Canada.
Another generally accepted way to determine this is to take an average age of your parents, parent's siblings, and/or grandparents.
The final way I suggest is using a calculator. I found this website that asks a series of questions on health and family history to determine your life expectancy. https://media.nmfn.com/tnetwork/lifespan/#0
Calculator
We have developed a calculator to help determine when you should take CPP. We simply input your average rate of return on investments and life expectancy to determine when you should take CPP.
You want to maximize the future value at life expectancy. As you can see above, the darkest green is the optimal solution, whereas the red cell cells are the least optimal. For this individual who expects to live to age 85 and earn an average rate of return of 5%, they are best suited to take CPP at age 64.
Below is another example. This individual has a life expectancy of 75 years and an average rate of return of 6%. For this person, it makes sense to take CPP at age 60.
Generally speaking, the longer that you expect to live, the later you should wait to take CPP. However, there are very few cases where it makes sense to defer CPP pension until age 70. For most individuals, the latest they should wait is age 68.
OAS
OAS is very similar to CPP, however, there are a few key differences:
You can not take OAS before age 65. You must take OAS between ages 65 and 70.
For each month you defer OAS, the amount you will receive increases by 0.6%. This is 0.1% less than what CPP offers.
OAS will be begin being clawed back when you earn a net income over $79,054. If you earn more than $128,137 in net income, you will not receive any OAS. CPP is not clawed back in this way.
Both CPP and OAS are considered taxable income and subject to income tax.
Calculator
The below calculator shows an example of an individual who expects to live to age 85 and earn a rate of return on investments of 4%.
As you can see, the optimal age to take OAS in this situation is age 65. The future value is $225,251. In fact, for most individuals taking OAS at 65 is the optimal age. Unless you are the Queen of England and plan on living to age 95+, you are best suited to take OAS at age 65 or 66.
If you have questions about CPP or OAS, please contact us. I would also be happy to determine what age you should take CPP and OAS at. If you would like this calculated, please send me an email at blaine@cpahorizon.ca
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