This is a very common question among retirement-age people. If you’ve worked and lived in Canada, you’re likely entitled to receive Canada Pension Plan (CPP) as well as Old Age Security (OAS).
Canada Pension Plan (CPP) provides monthly payments to people who contributed to the plan during their working years. The amount you will receive every month depends on how long and how much you contributed, as well as the age you start receiving it. You can choose to take your CPP as early as age 60 or as late as age 70. As of January 2022, the average monthly amount paid is $779.32.
Old Age Security (OAS) is a monthly benefit for Canadians who are age 65 or older. You can receive OAS even if you’re still working or have never worked – you don’t need to have contributed to it to benefit from it. You’ll typically be eligible for OAS if you are a Canadian citizen or legal resident and have lived in Canada for at least 10 years. As of January 2022, the maximum monthly benefit is $642.25.
There are several factors to consider when deciding when to start receiving CPP & OAS.
1. What will your retirement look like?
Do you have your heart set on exotic travel vacations? Pursuing hobbies? Want to buy that cabin at the lake? Plan to leave something for the next generation? A great starting point is to think about what your life is going to look like in retirement and what’s important to you.
2. What age do you plan on retiring at?
Although you can begin receiving CPP and OAS while you’re still working full-time, for most people it makes more sense to wait until they’re fully retired.
If you do choose to start receiving your CPP and OAS while still working, the payments will be added to your taxable income and very likely taxed at a higher rate than they would be after retirement. On top of that, if your net income exceeds $79,845 (for 2021), you will be required to repay 15 cents per dollar of your OAS due to the OAS pension recovery tax, commonly referred to as the OAS claw-back. If your net income reaches $129,757, your OAS will have to be completely repaid. You’re also locking in payment for life at a lower amount than what you would be entitled to if you waited.
Bottom line? It usually makes the most sense to start receiving these benefits after you’ve fully retired and your taxable income from employment has decreased.
3. How much retirement income will you have coming from other sources?
Do you have other sources of retirement income lined up? Company pension? RRSP’s? If you have enough set aside from other sources to meet your retirement expenses in your early retirement years, it makes sense to do so. However, if you have a set-in-stone retirement date and need to receive CPP and OAS payments to make that happen, then you’ll need to take them sooner.
It is important to recognize that by taking payments earlier, the amount you receive will be reduced. For each month before your 65th birthday that you take CPP, your benefit is reduced by 0.6%, with a maximum 36% reduction if taken at age 60. For example, someone who is 65 and entitled to CPP of $1,254 per month would only receive about $800 a month if they began drawing at age 60.
On the other hand, for each month you wait after your 65th, you gain 0.7% or a maximum 42% increase in benefits if you wait until age 70.
With OAS, payments are available from age 65 but can be deferred until age 70 with a 0.6% increase per month of delay.
If possible, it makes the most sense financially to fund your retirement expenses prior to age 70 from other income sources, so you can enjoy a higher stream of income from CPP and OAS.
4. What is your expected lifespan?
Obviously, no one knows exactly how long they will live. Life expectancy these days is longer though, which means you’ll need your money to last longer – potentially into your 90’s!
Statistics Canada says that if you’ve made it to age 60, you’re likely going to live into your 80’s. It’s safe to say that reasonably healthy people should plan to delay the start of CPP and OAS as long as possible.
However, if you know that you have a health condition that will shorten your lifespan significantly, you’ll probably want to start those payments earlier.
Summary
When to start receiving CPP and OAS depends on several factors that are very specific to your situation. Working with an advisor is the best way to determine how these government benefits will fit into your retirement plan.
No matter what age or life stage you’re at, it’s never too early – or too late - to get your retirement plan on track!