CPP Timing
To Defer or Not?
This is a different type of blog - it is an actual, verbatim written discussion between a bank financial advisor (Advisor) and readers of this blog (Readers in italics), modified only to ensure anonymity:
Advisor: I just wanted to share some of my thoughts with you two. I think that I need to communicate some of my concerns with your choices otherwise I wouldn’t be doing my job and I’d be doing you a big disservice.
Readers: Firstly, I appreciate your comments and I value your input. I take it as a sign of our friendship that you are concerned about our decisions.
Sorry it took me a few days to respond. I had to look again at the reasons and the calculations we did to arrive at our decisions.
Having said that, we are comfortable with the direction we have chosen. Much of our research is based on the book “Retirement Income for Life” by Frederick Vettese.
1.In my 25 yrs of doing retirement planning for my clients and having a retirement planner construct a plan, I’ve never had them recommend to clients to defer and take their CPP at age 69. I think you are also deferring your OAS to age 69 as well and again you’re the first clients to do this as well. It doesn’t mean you’re wrong and I know you’ve done a lot of your own research on the topic. So instead of taking $ 1507 CPP for you now and $ 743 OAS also for you now, you are deferring this $2250 p/m amount now to get 33.6% bonus in 4 yrs. I think you’re thinking is “well that’s 8.4% p/yr annualized for 4 yrs” and you feel a certainty with that fact.
The reasons to defer CPP and OAS and to draw the RIF and LIF monies down sooner are both insurance against the risk an extended period of reduced investment returns and the risk of a long life. I believe you that most people don’t do this, as this is not the traditional strategy. Many industry experts and professional associations endorse these enhancements but there is a great divide between the academics and the practitioners in the field.
2.Generally the only time it may make sense for a client to wait until 69 yrs old I guess would be if they are in great health and expected to live a long time. Another reason may be that perhaps the client may still be working at age 65 and thus will defer these pmnts so not to taxed on these pmnts as increased income. Another reason may be that the clients have monies in a non-registered (investment) acct and are in the highest tax bracket and figure they might as well wait, get the bonus, and not pay extra tax now.
If one of us passes early, this will cause an income gap to our target income, but this can’t be solved by taking CPP early. The gap will be small enough that it can be managed with a little tinkering.
3.So by waiting until 69 yrs old, you will be drawing more monies from your RIF and LIF accts. You will be paying withholding tax for your RIF and LIF withdrawals in 2026 and withholding tax on withdrawal amounts above your minimum pmnt amount for 2027 and thereafter.
As we joked this weekend, love paying higher taxes as this means you have higher income!
4.Please note that your OAS is only payable to you while you are alive. So if I take OAS at age 69 and I pass away at age 72, my spouse will NOT get receive any OAS pmnts after my death. There are no back pmnts or retroactive pmnts. For CPP in the same scenario, if I take CPP and pass away at 72 yrs old, my spouse will only receive her CPP + some of my CPP to a maximum of $ 1507 in 2026. So if my spouse was already getting CPP of $ 1000 and I passed away, then her CPP would only be increased to $ 1507. I hope this makes sense. This is very important. My spouse will also receive a one-time CPP death benefit pmnt of $ 2500.
Yes, it will suck if I die at 70 having never taken any CPP or OAS. But the household spending will reduce by about 30% and my spouse will have the benefit of her increased CPP and OAS due to the deferral.
5.So basically you are waiting 4 yrs to get a larger monthly amount on CPP and OAS, but if you pass away before approx. 82 yrs old, then you’d have been better to take the CPP and OAS at 65 yrs old.
Looking at it from an estate point of view this might be true, but we will have benefitted from decreased stress in the case of low market returns.
6.You suggested that by deferring OAS and CPP to age 69 that you would be creating more certainty. I’m not sure that’s really the case though. You will be reducing your RIF and LIF accts faster than you normally would and you run the potential of really gaining very little if one of you passes away before approx. 82 yrs old. So the extra 33.6% in returns you’d receive by waiting to age 69 yrs old would be certain, but again it all depends on how long you live for after 69 yrs old. Nobody knows how long we’ll live for. The general rule is if you have a shortened life expectancy, then take your CPP earlier.
I get that if you want to have more money left in the bank when you die, but that is not our goal. Our goal is a high enough income to do the things we want to do without the stress of worrying about whether we will have enough income when/if we grow old.
So no stress. I just wanted to share my thoughts with you and make sure you had all the information. Hope this helps. Any questions, please let me know. If you want to do a Teams call to discuss, we can plan that.
Would be happy to discuss this over a pint if you like, but I think we are happy with the path we have chosen.
For additional resources, I recommend the Retirement Income for Life book mentioned above and covered in the Decumulation blog last summer. You could read The CPP Paradox: Why Canadians Are Taking Less Money on Purpose. There is also considerable information online via Google and YouTube, including Why Delaying CPP is a Smart Move, ironically posted by a large Canadian bank.
I hope this blog is helpful to you and/or someone you know. Invest in yourself with knowledge. Be Prepared.