I spent the better part of last week in Chicago for a conference where my business partner, Bryce Matlashewski, and I were able to rub shoulders with some of the finest financial planning and investment minds on the continent, and perhaps the world. I started attending conferences like this a few years ago when I realized that in order to ensure our clients are receiving the best advice, we need to be aware of what the best really is. If you are going to be a world class provider, you need to know what the best in the world are doing. By sharing ideas with some of the brightest advisors not only outside of our company but also outside of our country, we gain a better understanding of what the best really is.
It became evident to me while participating in a few idea sharing sessions over the weekend, that one of the biggest difference makers for our clients is attention to detail. One of the details I have been advising several clients on over the past twelve months is, when they should take their Old Age Security Pension (OAS)? I’ve found it to be a highly misunderstood topic.
One of the most common misunderstandings with OAS is when you can start receiving the benefit as there has been several changes over the last few years, a result of federal governments changes. In the 2012 federal budget, the Conservative party announced that on a graduated basis the age which Canadians could start receiving OAS was changing to 67 years old. In 2016, this decision was reversed by the current Liberal government back to age 65 which is where it stands today. For most people, taking the benefit at 65 makes sense but there are considerations to make. Especially as it relates to the OAS claw back.
For those of you who aren’t aware, the benefit you receive is based on the amount of time you have lived in Canada and your income level. If your income is in excess of $75,910 per year then your OAS benefit will be reduced by $0.15 for every $1.00 above the threshold. For example, the maximum OAS benefit in 2018 was $586.66 per month before tax. If, however, your income in the previous year was $80,000 your benefit would be reduced by $51.13 per month approximately. If your income exceeds $122,843 then your entire OAS benefit would be clawed back leaving you receiving nothing from it. The claw back essentially becomes another tax on your income and this scenario has become more and more common as many people are choosing to work longer in life as they are remaining healthier and enjoying their work. The good news is that you do have some options available.
If you can control your taxable income either through managing your income from a corporation or controlling which investment accounts your retirement income comes from, then you may be able to reduce your taxable income to limit or avoid the claw back. This type of planning is best done years ahead of time. Alternatively, what most people don’t know is that you can also choose to defer your OAS payment to as late as 70 years old and your benefit will increase over that time. For every month after you turn age 65 that you defer your OAS, your benefit will increase by .6%. This means that if you make the maximum deferral to age 70 your benefit could increase by 36% or over $211 per month. This option becomes especially attractive for someone who may plan to work past 65 but retire before age 70, if their retirement income will be lower than their working income.
For example, let’s look at an individual who is earning $90,000 per year at age 65 but would like to work until age 70. If they choose to take OAS now their benefit will be about $410.54 per month, a claw back of $176.12 per month. The consideration they need to make here is whether the extra $410.54 per month will add value to their life and if not then the decision to defer becomes more appealing. Between age 65 and 70, this individual will receive $24,632.40 in OAS benefits that they wouldn’t receive if they choose to defer to age 70. However, if they do defer the benefit, at age 70 their monthly benefit has now increased to $797.86, which is approximately $387.32 higher than what they would receive taking it at age 65. What we want to determine is, at what point would you have received enough of the higher payments to cross over the original $24,632.40 we missed out on in earlier years? If you take $24,632.40 and divide by the additional monthly income of $387.32 you will get 63.59. In terms of years, the cross over point is approximately 5.3 years (63.59 / 12 months) and so if you live past age 75 , there on after you will have receive more money from the OAS benefit by deferring.
The decision on when to take OAS is certainly a personal one and it depends on your own individual situation. What is most important to know is that you have options available and you should not just accept having to pay claw backs. The only way to know exactly what the right decision is for you, is to know the day you are going to die. With that said, we can still increase your odds of making the right choice by knowing as many of the variables, understanding mortality rates and making an educated decision. That’s what Smart Money is all about.
- Grant White, CIM, CFP®
Grant White is an award-winning Portfolio Manager/Investment Advisor at Endeavour Wealth Management with Industrial Alliance Securities Inc. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.
This information has been prepared by Grant White who is a Portfolio Manager for Industrial Alliance Securities Inc. (iA Securities) and does not necessarily reflect the opinion of iA Securities. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Portfolio Manager can open accounts only in the provinces in which they are registered.