Deferring Old Age Security payments is a smart strategy for maximizing retirement income that got some bad publicity lately.
People who aren’t receiving OAS because they chose to defer benefits past the usual start date at the age of 65 are not eligible to collect the $300 COVID-19 emergency benefit the federal government is paying this summer to seniors eligible for OAS. The reasoning is that people deferring OAS don’t need the money.
Missing out on the one-time $300 benefit ($200 more is available for people eligible to get the Guaranteed Income Supplement) may reinforce the prejudices people have about delaying retirement benefits to get higher payments in the future. You can delay Canada Pension Plan retirement benefits as well, but few people do it.
The damage done to public opinion about OAS deferral might not amount to much, though. A federal government survey found that just 17 per cent of respondents were aware OAS could be deferred for up to five years – from 65 to 70, in other words. Women had slightly lower awareness levels than men, which is unfortunate because women live longer and thus stand to benefit more by delaying benefits to collect a higher amount over their lifetime.
Some basic education on OAS deferral would clearly be helpful. Let’s start with the reason for deferring: Every month you defer to the age of 70 brings you 0.6 per cent more in benefits. Over the maximum five years of deferral, the total increase amounts to 36 per cent. Using 2020 OAS numbers, the monthly amount is $613.53 at the age of 65 and $834.40 at 70.
Jackie Porter, a certified financial planner (CFP), said your health and expected longevity are key considerations in looking at OAS deferral. She pointed out some calculations by pension expert Doug Runchey showing the age you need to reach the break-even point where payouts from deferral offset the loss of income during the deferral period. The break-even ages are 80 for starting OAS at the age of 66, 81 at the age of 67, 82 at 68, 83 at 69 and 84 at 70.
“The reality is that if you know you’re not healthy or you’ve had health issues throughout your life, then it doesn’t make sense to defer,” Ms. Porter said. “The math only works if you have the time.”
Also consider whether deferring would make you vulnerable to the dreaded OAS clawback (also known as the recovery tax), which starts with incomes of $79,054 in 2020 and takes back all your benefits when your income exceeds $128,137.
“Making a decision to delay OAS is more complex than delaying CPP because of the recovery tax,” Sandra Foster, an estate planning expert and author of You Can’t Take It With You: Common Sense Estate Planning for Canadians, said by e-mail.
Ms. Foster said OAS deferral has to be considered alongside the decision on when to convert a registered retirement savings plan to a registered retirement income fund. RRSPs must be converted into RRIFs by the end of the year you turn 71 – once you’re in RRIF-land, you have to make mandatory minimum withdrawals every year.
If you start OAS at 70, the plus-size payments combined with your RRIF withdrawals and other sources of retirement income could push you into clawback territory. A financial planner can help you corral your retirement income in a way that minimizes the clawback. Tax-free savings accounts have to be part of the conversation because withdrawals do not increase your taxable income and thus won’t trigger a clawback of OAS benefits.
OAS deferral might also be worth a look for people who plan to work past 65 because they’re concerned they don’t have sufficient retirement savings, Ms. Porter said. The extra years of earning income plus the additional OAS received by deferral at 70 could be a difference-maker in having enough money.
She urges women in particular to consider OAS deferral because they tend to live longer and they have lower benefits in retirement, partly because they take time out of the work force to raise children.
A strategy suggested by Ms. Porter for couples where there’s an older husband and a younger, lower-income wife: The husband starts OAS at 65, while the wife defers her OAS. “They can live comfortably on his income and delay OAS and thus have more income for her later on.”
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