OAS and CPP – When is the best time to take them?
Old Age Security (OAS) and the Canada Pension Plan (CPP) were designed to provide basic protection to Canadians in retirement. Like most western countries, Canada instituted this program as part of a great leap forward associated with the baby boom, post WWII prosperity, and an increasing social conscience. Therefore, Canadians who qualify, (particularly as co-habituating married couples) will have a minimum guaranteed income as a first defense against poverty once they are retired.
For these pensions, the short answer is taking them as soon as they are needed.
Both the OAS and CPP offer similar premiums to benefits depending on your age at the time when you begin to receive payments.
For each month after the age of 65 that an OAS recipient defers, your payment will increase by 0.6% to a maximum of 36% at age 70 (60 months x 0.6% = 36%)
For OAS recipients whose income exceeds $72,809 in 2015, you will have 15% of your OAS “clawed-back”. Your OAS will be totally eliminated by this claw-back if it is $118,055 or higher.
This is most relevant if you work past age 65, when you become eligible for OAS and could increase your benefit rate by deferring; especially if you would have it clawed-back.
For each month after the age of 65 that you defer, your payment will increase by 0.7% to a maximum of 42% at age 70 (60 months x 0.7% = 42%).
Additionally, if you are to collect your payments prior to age 65 you will have your benefits reduced by 0.6% per month to a maximum reduction of 36% (60 months x 0.6% = 36% when CPP is collected at its earliest possible time).
Key Factors to Know
The average life expectancy for 65 year-old Canadians is 86 and 88 for men and women, respectively. Taken as early as possible, these government pensions will be collected for 26 and 28 years ON AVERAGE!!
If taking your CPP early, at age 60, it will take you almost 6 years (70.3 months) at age 65 to “catch up”.
Example: At age 71 an individual who took their CPP early and someone who waited until age 65 will have collected the same amount of money.
The simple math for “average” men living to age 86 is that a 64% pension (taken at age 60) for 26 years is equal to a full pension for 16.64 years. Waiting until age 65 and collecting a 100% pension for 21 years is just less than waiting until age 70 and collecting a 142% pension for 16 years (142% x 16 years = 22.72 years).
For many, “a bird in the hand is worth two in the bush” and human nature tells us that most people believe that they won’t achieve the average age, so there will be solace in collecting early.
At the average, there is no advantage in payments to defer the OAS since the break-even is at age 84.5. Unless your income exceeds $72,809 in 2015, then defer until the claw-back has ended for you.
The Bottom Line
Assuming “average” health and “average” life expectancy, defer CPP for as long as possible.
If there is an OAS claw-back that will disappear, then defer until the claw-back is eliminated. If the claw-back will remain unchanged, then take OAS at age 65.
Plan your cash flow and income requirements carefully, and determine if and when OAS and CPP can and should be deferred until.
Jeff Devlin, CFP
Elementus Wealth Management Inc.