## Monday, November 12, 2018

### The Value of Delaying CPP and OAS

Few people realize that you can delay receiving CPP and OAS until age 70 in return for permanently higher payments. Among those who know this is an option, very few choose to wait. I went through the exercise of calculating my safe level of annual spending when taking CPP and OAS at different ages and found that I can start spending more today if my wife and I wait until age 70 for our pensions.

You can start CPP anywhere from age 60 to 70, and OAS can start anywhere from 65 to 70. I created a spreadsheet that calculates our CPP and OAS payments for chosen starting ages of these pensions. Then the spreadsheet calculates our estimated safe annual spending level throughout retirement.

Consider two scenarios:

Scenario 1: We both take CPP at 60 and OAS at 65
Scenario 2: We both take CPP and OAS at age 70

In both scenarios, we’re both retired now with no expectations of earning income in the future. The results were that Scenario 2 allows us to spend \$3920 more per year (starting right now) compared to Scenario 1. This breaks down as \$3100 per year extra for delaying CPP and \$820 per year for delaying OAS.

To be clear, the \$3920 per year is not how much the pensions increase due to taking them at age 70. In fact our total annual pension payments are \$16,900 higher (in today’s dollars) in Scenario 2 than they are in Scenario 1.

Delaying our government pensions has two main effects:

1. We will dip more heavily into our savings during our 60s.
2. We’ll need to spend less of our savings after age 70.

Because we have to make our savings last in case one of us lives to be quite old, the total extra we spend from our savings in our 60s is less than the total of the boosted pension payments we’ll enjoy after age 70. This is what leads to being able to spend \$3920 more per year (adjusted for inflation), starting right now.

It’s paradoxical that delaying receiving money leads to being able to spend more this year and every year going forward, but that’s what happens. Knowing that sizeable pensions are coming at age 70 makes it safer to spend more today.

Our circumstances don’t apply to everyone. Delaying government pensions won’t work if you don’t have enough savings to live on comfortably until age 70. If you’re so sure that you’ll die before you’re 80 (and your spouse will die young as well) that you’re willing to spend all your savings before you’re 80, then delaying taking government pensions doesn’t make sense.

However, the most common reason I hear from people for why they want to take their pensions early is that they want to spend some money while they’re young enough to enjoy it. But as I’ve explained, my wife and I get to spend more while we’re younger because we’re delaying our pensions. Your mileage may vary.

1. How does the loss of pension income over 1 year when you are 60 compare to the cost of inflation adjusted annuity providing annual income at 61 equal to 7.2% of the CPP value?

1. @BHCh: I could go through the exercise some time, but annuities never pay as well as the actuarial adjustment of CPP for taking it later.

2. Are you 100% certain that each OAS and CPP will be available? Governments have a history of changing future taxes and benefits. In such a case, what is an appropriate discount rate for each future dollar expected to be received?

1. @Anonymous: If we're going to start applying discount rates for such concerns, we'd need to account for many other things as well, such as the possibility that governments will start taxing assets instead of just income. CPP is currently on a solid financial footing. If we're going to treat payments as uncertain, then we should consider the possibility that our other financial assets may simply be confiscated with asset taxes.

3. Another good post MJ! I'm 59 and was going to take CPP next year when I turned 60 but now I am reconsidering as I don't need the money. My dividends/interest ETF income pay me more than I need now.

4. Does this assume that you are managing withdrawals from your portfolio yourself at a safe rate so you don't run out of money?

Does it change if you converted part of it to an annuity to offload that risk? It may be necessary to look at annuities offered at times of more normal interest rates to really see how well this would compare.

1. @Richard: If running out of money before you reach 70 is an issue, then you may be better off taking CPP earlier. But if getting to 70 isn't in doubt, then taking CPP at 70 improves your likelihood of success because you get a bigger guaranteed income for life.

Annuities can certainly be a useful way to avoid running out of money. But they seem to work well in combination with taking CPP and OAS later. Have a look at anything Fred Vettese has written about taking CPP later.

5. Does delaying taking CPP, add years of no/low income to the CPP calculation?

1. @aB: For the years before age 65 the answer is yes. After 65 there is a special dropout that can eliminate the years from 65 to 70. You can use the dropout years we all get to eliminate the years from 60 to 65, but this has limited effect if you have other years of low income. In my case, adding zero income years between 60 and 65 hurts my income a little, but the boost of 0.7% per month (for CPP) more than makes up for it.

6. Hi Michael,

Hope your well. After reading this I did a Google search on "How does CPP calculate the maximum payout?". This brought me coincidentally to a "Retire Happy" post where you commented in the comments. (Kind of Ironic) It's updated for 2018, lots of replies + good info there.

The math behind getting the maximum payout and the requirements really can mess up what an individual actually receives, delay or not by not meeting the required NCM's alone.

For example if you are to retire at 55(ish), live off some combination of your TFSA's, RRSP's Savings, non registered savings, maybe a downsize etc. This can have a severe impact on your expected payout. It's good that everyone really thinks this through fully. I think there is a general expectation by people to overestimate what they will get in general. I remember reading the average payout is in the \$500.00 per month range. That's kind of scary, as its an average, where half are making less than \$500.00/month.

One really needs to plan and take all the factors and calculations into consideration that look to be designed purposefully to reduce your pension payout.

1. @Paul: I agree that the CPP rules are complex. However, the dropouts are quite generous. If anything, I'd say the rules help people get the biggest pension they can. It's the people who contribute the maximum their whole working careers and can't use any dropouts who are hurt by this.

The most powerful way to increase CPP is to not take it at age 60.

7. Hi Michael, great post - more people need to hear the value of delaying CPP rather than listening to their friends who took it as soon as possible at age 60.

One question about your calculation: Assuming you're delaying CPP until age 70, did you look at the impact of taking OAS at age 65 instead of 70 and what that does to the OAS clawback (if applicable in your case)?

The reason I ask is because I ran some scenarios for a client and determined that taking CPP and OAS at age 70 triggered a large clawback and less net income compared to taking CPP at 70 and OAS at age 65.

1. @Robb: Thanks. Unless the stock market performs better than the 4% real I've been assuming, the OAS clawback won't be relevant to my wife and me. With spending non-registered capital and TFSA withdrawals, we'll be spending more than our declared income. I've also done a lot (legally) to build my wife's assets at the expense of mine. So, our income will be split nicely.

8. Interesting article Michael! I am turning 65 in March 2019. I estimate that I would receive \$900 per month CPP and the max. OAS. That would translate to approx. \$90,000 (\$18,000 x 5) + annual indexing + interest between ages 65 to 70.
How will delaying CPP and OAS to age 70 ever catch up to the more than \$90,000 I would receive from 65 to 70?

1. At age 70 your OAS payment would be 36% higher than at 65, or roughly \$2500 more annually.

For CPP, payments would be 42% higher at 70, or about \$4500 more each year.

Combined, that's \$7000 per year of increased payments, and those will increase every year with annual indexing. If you're in good health and live into your 90s, you'd "break even" at about age 82.

There's a useful calculator for CPP deferrals (which also calculates break-even ages) here: https://www.tridelta.ca/resources/cpp-calculator/

2. @Peter and @Anonymous: Anonymous explained it well. But keep in mind that it's not your best guess of how long you live that matters for most people. It's how long you might live. I have to plan today to make my money last until I'm very old in case that happens.

9. Great post Michael, as always. When you calculated the deferred CPP, did you factor the five extra zero-earnings years into the calculation of CPP payable at age 70? Wouldn't this at least partially offset the increased payments?

1. @George: If you're referring to the years from 65 to 70, there is a special dropout you can use for those years, so they don't reduce your payments. I did factor in the reduction that comes from the years from 60 to 65. In my case this did reduce my pension somewhat, but I am still much further ahead waiting until I'm 70. Anyone who can't make full use of their dropouts could apply some of them to the years from 60 to 65.

2. Very interesting. I wasn't aware of the special dropout for ages 65-70. Thanks!

3. Is there any provision available to pay into CPP in "dropout" years if you retired early so you aren't penalized? It would almost be like upgrading an annuity.

4. @Paul: I'm not aware of any way you're allowed to pay extra into CPP retroactively. However, I'm not a CPP expert.

5. Not retroactively, but proactively. If you have enough to retire a little earlier say 60, to then continue to pay the apx. \$2,000/year amount to CPP for as long as necessary to avoid a dropout or possible prop up years where you may not have met the maximum required. I remember reading something on line a few years ago that was possible.

6. @Paul: I think self-employed people may have some choice in whether they contribute to CPP, but once again, I'm no expert on CPP.