An important topic for our clients nearing the age of 65 is how to best structure potential income sources during the retirement years. Timing of Old Age Security (OAS) benefits will be considered in the context of such discussions.
OAS is a government benefit funded by Canadian taxpayers. According to government reports, seniors will account for more than 23% of the population by 2031. On average, a senior will receive OAS for a total of 21 years. The government anticipates OAS will cost around $104B annually(?)by then. As such, changes to the OAS program are not completely out of question and have been considered before.
For now, there is some flexibility on when to apply for Old Age Security (OAS). This decision should be based on your need for income, life expectancy, tax considerations and the desire to maximize benefits. When in good health and need to protect against longevity risk, deferring the OAS may be a useful tool. In making such decision, you need to ensure that you will still qualify to receive the increased OAS at the deferred time.
When & How much?
You may apply for OAS up to 11 months before you want your OAS pension to start. The start date for your OAS pension can be deferred up to 5 years, resulting in higher pension payable by 0.6 % per month that the pension is deferred. By age 70, you would see a total increase of 36 %, should you choose to defer. A rough estimate shows the maximum monthly payment at age 65 around $615.37 (year 2021), or $7,384 annually. If deferred until the age of 70, the annual OAS pension would be $10,013, an increase of $2,651 per year for your lifetime (indexed to inflation).
Factor in overall income
Eligible high income earners (65+) will repay all or part of their OAS pension. Claw back applies if your overall (net world) income exceeds $79,845 (2021). This means that for every dollar of income above the threshold, your OAS pension is reduced by 15 cents. OAS is fully clawed back when your overall income exceeds $129,075 (2021). That is why deferring OAS to a calendar year when you are in a lower tax bracket makes a lot of sense. Further, some or all of your OAS benefits may be clawed back once your RRSP becomes a RRIF at the end of your 71st year.
To summarize, if you fear running out of money in old age, are in good health and expect to live a long life (consider family history, etc.), you should postpone OAS to guarantee a higher base level of income later in life. If in relatively poor health, you should take OAS (and CPP) as soon as possible. Generally, if you need the money you should take it. If you don’t need it, then you should consider deferring it.
As always, we are happy to meet and review your personal circumstances in helping you consider other deferrable income sources and maximizing your overall income. Call or email us with your questions.
