When Should You Retire? A CPP and OAS Case-Study

Did you know that 21% of young boomers (ages 55 to 64) have not set anything aside for their retirement while 46% are considering a delayed retirement? This is according to a survey by 2019 DAC Sponsor Franklin Templeton*. That’s why it’s so important for financial advisors and pre-retirees (Gen Z and Boomers) to consider the question – “Should I delay my CPP or even my OAS?” A case study follows.

Raymond is a single individual who is now 60 years old, earning $75,000 annually who has just recently broken free of funding family financial obligations. Raymond has no workplace pension and has no retirement savings, but owns his home outright. It is worth $485,000. He is wondering whether he should contribute to an RRSP before the 2020 deadline of March 2.

Option 1: Retire in 2024 (at age 65)

If Raymond contributes say 20% of his income over the next five years to an RRSP using his unused contribution room he has earned in prior years, he’ll have accumulated just over $90,000 (assuming 2% indexation and a 5% rate of return). This will yield a retirement income of about $5,900 annually over a 20-year retirement.

In addition, he’ll get his OAS of approximately $8,000 annually (current rate indexed by 2% for 5 years) and CPP of about $9,000 (based on the average CPP pension indexed by 2% for 5 years.)

Together, these sources represent a total annual income of $22,900.

Raymond is squarely in a low-income category according to Statistics Canada ($22,133 for a single person in 2018). Likely, Raymond will need to take more from his RRSP/RRIF to makes ends meet and will deplete it during his lifetime, but this depends on where he lives in Canada. To supplement his income he will probably have to downsize by selling his home and living off some of the principal.

Option 2: Retire in 2029 (at age 70) While Delaying his OAS and CPP Pensions

Assuming Raymond has unused RRSP contribution room and can keep his income level at $75,000 (indexed) for the next ten years until he reaches age 70, it is possible to “power save” if he can manage to contribute 20% of his annual income to his RRSP. The amazing results: he’ll have accumulated just over $215,000 in his RRSP. This will yield a retirement annual income of about $17,400 over a 15-year retirement.

By delaying his OAS for five years to age 70, he will receive an extra 36% or $12,000 annually. By delaying his CPP by five years, he’ll have increased his pension entitlement by continuing to contribute, plus he’ll receive 42% more than he would have had he retired at age 65. Thus, his CPP pension will be about $16,600 annually. All of this yields a total annual income of about $46,000.

In short, by working an additional five years and delaying the start of OAS and CPP to age 70, Raymond is able to double his retirement income. While Raymond will certainly not be living an affluent lifestyle, this option does provide a liveable retirement lifestyle.

Of course, Raymond is an extreme case with a reasonable income and no savings. Those on lower incomes with no savings will likely have no options but to rely on government support and live at or near the poverty level. Those with some retirement savings will do better but, if they can delay their retirement, the bump in the OAS and CPP rates, as well as any increase in RRSP contributions, will lead to a more secure retirement.

Bottom Line: Especially in light of promised changes to CPP and OAS in a couple of the federal election platforms, savers need to understand their public pension plan options better. Tax and financial advisors can help, as part of the annual year-end tax planning opportunity. Check out these additional resources:

· Details of the proposed changes for seniors in the election platforms are available in our ongoing summary – The Election Tax Promises are Adding Up .

· Check out Franklin Templeton’s 2019 Retirement Income Strategies and Expectations (RISE) Survey

Additional Educational Opportunities . Be sure to register for the Distinguished Advisor Conference in Puerto Vallarta, Mexico this November 10-13.Final registration deadline is October 15. Visit the agenda page for full details and register online today.

Or Enrol in the MFA™- Retirement and Succession Services Specialist designation program today to earn new credentials in time for tax season.

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