When to Start Col­lect­ing Your Gov­ern­ment Pen­sion?

The Miracle - - front page -

Un­der­stand­ing what you’re en­ti­tled to at dif­fer­ent ages can help you sort out when you should do what

A pop­u­lar reg­u­lar fea­ture in Good Times magazine is “Your Ques­tions,” where Olev Edur pro­vides an­swers to ques­tions from our read­ers re­gard­ing their rights, per­sonal fi­nance, and es­tate plan­ning. Here’s one on Canada Pen­sion Plan pre­mi­ums and ben­e­fits:

Q.: I’m 64 and will be turn­ing 65 in June. I’m em­ployed full-time and plan to con­tinue work­ing for at least a few more years. How­ever, I read some­where that at 65, I should can­cel my Canada Pen­sion Plan (CPP) pre­mi­ums, which are cur­rently paid through my em­ploy­ment. I have some RRSPs, but no other fu­ture sources of in­come. I would ap­pre­ci­ate your ad­vice and sug­ges­tions as to what I should do about CPP. I also won­der whether I should con­vert my RRSPs into a RRIF or TFSA at this point. I un­der­stand that I will have to do so any­way af­ter I turn 71, but I’m won­der­ing if it’s ad­vis­able to do so now. My gross in­come level is cur­rently $50,000 an­nu­ally.

A.: The first ques­tion you have to ask your­self is: Do I need the ex­tra in­come? If you’re com­fort­able enough with your work earn­ings, then you should prob­a­bly de­fer your CPP ben­e­fits un­til you stop work­ing. That’s be­cause: a) if you start tak­ing ben­e­fits now, they’ll be taxed at your top mar­ginal rate (rather than a lower rate once you’ve quit work­ing) and b) ev­ery month past age 65 that you forgo ben­e­fits and keep pay­ing pre- mi­ums, your ben­e­fits will be in­creased by 0.7 per cent. So if, for ex­am­ple, you work for an­other three years, your ben­e­fits at that point will have in­creased by more than 25 per cent. This strat­egy is par­tic­u­larly ad­van­ta­geous since your em­ployer would be pay­ing half your CPP pre­mi­ums, al­though the ex­act re­sult would de­pend on your ac­tual CPP en­ti­tle­ment, based on how long you have worked and how much you have earned since age 18 (with some al­lowance for your low­est-in­come years). The cur­rent max­i­mum CPP re­tire­ment ben­e­fit is $1,134.17, or about $13,610 a year, but let’s as­sume you’ll be en­ti­tled to $10,000 a year at 65. If you work for an­other three years past your 65th birth month, you must pay 4.95 per cent of your in­come (less the first $3,500) in pre­mi­ums, or about $2,300 a year; over three years, you’d pay $6,900. You’d also lose out on three years’ ben­e­fits, or $30,000 (we’ll dis­re­gard in­dex­a­tion for sim­plic­ity’s sake), so your to­tal loss would be $36,900. But when you re­tire, you’ll be en­ti­tled to an ex­tra $2,500 a year in ben­e­fits. The break-even point at which you will have re­cov­ered all your losses would be at about 14¾ years of ben­e­fits, mean­ing that by the time you’re near­ing age 83, any fur­ther ben­e­fits would amount to free money. And that’s not count­ing the amount you’ll also save through lower taxes on the de­ferred in­come. Of course, if you pass on ear­lier, you’ll have left some money on the ta­ble. But as­sum­ing you’re in good health (as would seem to be the case since you’re still work­ing full-time), and given that the av­er­age life ex­pectancy of a 65-year-old Cana­dian male is now 83.8 (i.e., an­other 18.8 years), the odds are that by de­fer­ring your ben­e­fits you’ll gain money rather than lose, and the longer you live, the more you’ll gain. It should also be noted that you can now de­fer the re­ceipt of Old Age Se­cu­rity (OAS) ben­e­fits un­til age 70 as well, and each month of de­fer­ral re­sults in a 0.6 per cent in­crease in ben­e­fits, mean­ing that if you waited an­other three years, you’d be en­ti­tled to an ex­tra 21.6 per cent—the cur­rent ben­e­fit for any­one who’s lived in Canada most of their lives is $7,025 an­nu­ally, so this three-year de­fer­ral would net you an ad­di­tional $1,517 a year. As for your RRSP, once you move the plan con­tents into a RRIF, you must start with­draw­ing a min­i­mum amount ev­ery year, and this will be tax­able on top of your work in­come, mean­ing that it could be taxed at a mar­ginal rate of around 30 per cent (depend­ing on prov­ince). So it’s prob­a­bly bet­ter to leave the money in the RRSP where it can all com­pound un­taxed un­til it’s needed. One notable ex­cep­tion to this ad­vice is that once you’re 65, you can claim the pen­sion in­come credit of up to $2,000 a year on RRIF with­drawals—so it makes sense to move per­haps $10,000 into a RRIF right away, so that you can avail your­self of that credit ev­ery year un­til you start mak­ing big­ger with­drawals.

Source: Canada’s magazine for suc­cess­ful re­tire­ment

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