Retirement Planning, Tax Informed Planning Service

When to Apply for CPP and OAS

The optimal time to apply for the Canada Pension Plan (CPP) payments and the Old Age Security (OAS) is different for everyone and largely depends on when income from other sources like employment decrease or stop. For instance, if you work up to age 65, it is likely best to wait till then to apply for the government pensions. If you are selling your business and winding things up and still expect some taxable income after 65, then it might be worth delaying as far as age 70. All amounts received under the CPP and OAS are taxable and will add to your taxable income for the year.

Canada Pension Plan payments are based off your prior contributions from your salary over your working years in Canada. It automatically excludes your 8 lowest income earnings years from the calculation. Also, if you earned little or no income while raising young children, the calculation for those years will be based on the five years before having children. The child rearing benefit needs to be applied for at the same time as applying for CPP in general.

The maximum retirement benefit paid by CPP in 2020 is $1,175.83 per month at age 65. CPP can be applied for as early as 60 years of age or as late as 70. If taking it early, there is a 0.6% penalty per month on the amount received (ie. if taken 10 months early, you would receive 6% less) and there is a 0.7% bonus if delayed after 65 (ie. if taken 10 months later, there would be a 7% bonus).

Old Age Security is based simply on how long you have lived in Canada. If you have been here for over 40 years before applying, you will receive the full amount of $613.53 a month at age 65. The OAS is income tested and starts to be clawed back at $0.15 for every $1 made over the prescribed limit if a person makes too much taxable income (over $79,054 in 2020). Delaying the OAS after 65 will give a 0.6% bonus a month on the amount and will increase the taxable income threshold before it is clawed back. Most people will receive a letter automatically enrolling them in OAS at age 65, but if you choose to delay it, you can do so at Service Canada or with your online Service Canada account.

For low income earners, there is an additional OAS benefit called the Guaranteed Income Supplement (GIS) to make sure seniors have at least a minimum income level. It is based on household taxable income and varies for singles and couples.

What do you need to save for retirement?

The amount needed for retirement is different for every person because it depends very much on what amount that person wants to be able to spend every year. Some people have very simple pleasures while others enjoy travelling in style. It will also depend whether the person is single or not. The spending is higher for two people, but that can be offset with tax savings from being able to split income.

The following chart is an estimate of how much needs to be saved in order to have a certain spending level in retirement. This assumes that $20,000 is provided through the Canada Pension Plan and Old Age Security. You will notice that it increases disproportionately the higher the spending is. This is because higher spending usually means a higher taxable income, so more of the savings are having to go to tax, leaving less for actual spending.

If this is giving you a sinking feeling, remember that you may not spend as much in retirement as you are right now. You may currently be supporting a mortgage that will hopefully be paid off in retirement. You may also be supporting children or aging parents. The trouble usually comes when debt gets carried away and when a person spends beyond their means.

As an advisor, I highly recommend that people set up systematic savings plans if they have a tendency to spend whatever comes in to their bank accounts. It takes discipline to say no to buying things that aren’t essential. Setting up a budget and putting in a set amount for extra things like eating out can help to manage the spending while also rewarding your hard work. Delayed gratification can be sweeter than just feeding whatever desires come up in the moment. Is a cold drink more gratifying after a hike or when sitting on a couch watching Netflix?

If you would like help planning for retirement or just planning your cash flow in general, please don’t hesitate to check out my services and contact me.