When to Delay Old Age Security

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Over the past couple of years, the Government of Canada has phased in a laudable process: auto-enrolling eligible seniors at age 65 for Old Age Security (OAS) payments.  Instead of you having to proactively apply for OAS, the government will determine eligibility a month after you turn 64.  If eligible, you will get a letter notifying you of automatic enrolment beginning at age 65.  Nothing else you need to do.

Simplifying access to government benefits should be celebrated, and will benefit almost everyone.

Almost.

Working past age 65 is no longer uncommon.  Canadians work past age 65 for many reasons.  Some have to, and some want to.  For working seniors, receiving OAS at 65 may not be desirable and you may want to delay receipt of your OAS benefit.  Here’s why:

  • Canadians can defer OAS payments to age 70.  If you delay receiving your OAS pension, your monthly pension payment will be increased by 0.6 percent for every month you delay receiving it, up to a maximum of 36 percent at age 70.
  • Old Age Security begins to be “clawed back” when total net world income is above a certain amount.  For 2017, this amount is $74,788. OAS is recovered at a rate of 15 cents per dollar above this amount, until it is completely clawed back at income of $121,314.
  • Even if OAS is not clawed back, working seniors are likely in a higher tax bracket than when they retire.  This means they’ll pay more tax on their OAS payment than if they waited to collect in a lower income year.

In short, working seniors can lower their taxes, avoid OAS clawback and receive a higher OAS benefit if they delay OAS.

Sign me up!  I mean, don’t sign me up, for OAS.  Find out how to delay OAS here.

Rich regards,

Morgan

 

I have to save how many million for retirement?

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Pat and Curt would like an above average retirement with income of $70,000 per year.  They figure they will receive $25,000 through government benefits, leaving them responsible for $45,000 per year.  The “Rule of 20” tells them to multiply this amount by 20 and presto! that’s how much they’ll need to save for retirement: $900,000.  In 25 years when they retire, they’ll actually need $1.5 million to account for inflation.

$1.5 million!  Pat and Curt are 40 with two kids, a mortgage, line of credit debt and a dog.   Assuming they have $150,000 saved for retirement, they’ll need to save $1300 per month – per month! – to get to their goal.

There are two methods of planning your retirement savings: goal-based planning and budget-based planning.  Goal-based planning by all accounts sounds like the rational and superior method.  Choose your future goal and then do what you need to do to reach it.  It’s proactive, logical and motivating. But what if it’s not?  What if saving $1300 per month is such a ridiculous notion to you that you do the exact opposite – save nothing.  It’s paralysis caused by an impossible goal.

That’s where “second-rate” budget-based planning comes in.  Budget planning is what it sounds like – make a budget and see what you have left over to save for retirement.  You have $200/month to save? $100? $50? Great, start there.  It’s a lot better than saving nothing under high-pressure goal-based planning.   Maybe you can’t save anything right now.  But you make a plan to obliterate your credit card debt and attack retirement savings afterwards.  Or maybe you expect a raise in six months, so you make a plan to start saving then.

Really the answer, as it does so often, lies in the middle.  Calculating a goal-based amount using the Rule of 20 is a good idea because it gives you a (very) rough number to shoot for.  If it’s possible to save that much, wonderful for you!  If the number makes you want to crawl under a rock, forget it for now.  Save what you can now.  Adjust when you can later.

That’s not second-rate.  That’s real-life.

Rich regards,

Morgan

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