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A Case for Delaying CPP and OAS Thumbnail

A Case for Delaying CPP and OAS

Decisions regarding when to take CPP (Canada Pension Plan) and Old Age Security (OAS) payments are high on the minds of retiring or soon-to-be retiring Canadians.

I came across this article by Michael James and I wanted to share some highlights.  The article makes a strong case for delaying CPP and OAS for Canadians.   

Reasons to delay CPP and OAS payments

1) Delaying CPP and OAS increases your future guaranteed income stream

You receive an additional 0.7% per month you delay CPP beyond age 65.  Same goes for OAS (0.6% bump per month).  Based on the examples outlined in the article, the CPP delayer receives 42% more benefit by delaying to age 70 than the person who takes the benefits early - this is a big difference.  36% more benefit for the OAS delayer.

2) The combination of longer lifespans and potential lower future stock and bond returns makes delaying a good choice

Today's retirees are living longer than previous generations.  That's good news for retirees, but bad news for retirees' portfolios that need to generate income for longer retirements.  Added to that, there is reasonable concern that future stock and bond returns (at least in the near term) will be lower than they have been in the recent past.  The combination of these factors makes higher future CPP and OAS entitlements quite attractive to retirees.

3) Delaying CPP allows you to enjoy your money more today

While this seems counter-intuitive, Michael describes how the knowledge that he is going to have a significant bump in his retirement income at age 70 gives him confidence to spend more in the early part of his retirement.  

Other Interesting Points

Michael also points out that a lot of common advice is to take CPP and OAS payments earlier, and he offers counter arguments:

1) taking CPP and OAS early lowers a fully taxable income source throughout your retirement and allows you to keep your income low for tax reasons.

This is true for high-income retirees.  People who will have modest retirement incomes this is less of a concern.

2) it will reduce the inheritance that you will leave behind for your Heirs

Since CPP and OAS don't leave much or anything behind for your heirs, people don't like the idea of spending down their own assets and leave CPP/OAS money on the table.  This is a reasonable concern, but Michael argues that people need to change their mindset to one of expecting to live long and have the government pay you more than you would have received had you started taking benefits earlier.  Also, in my experience, most retirees that I work with place low importance of creating a legacy for their kids from their retirement portfolios.   They are more concerned with enjoying their retirement savings for themselves and leaving things like houses and property to their heirs. 

My thoughts

Michael does a great job highlighting the benefits and possible objections to the strategy of delaying CPP and OAS benefits.  The decision to time your CPP and OAS benefits personal are unique to your own situation so make sure to review this with your advisor and/or tax professional.

Photo by Jens Lelie on Unsplash

The information in this material is not intended as investment, tax, or legal advice.  Please consult your advisor or tax professionals.  The opinions expressed and material provided are for general information, and should not be considered a solicitation for the purchase or sale of any security.