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David A. Townsend, CPA, CFP Professional Corporation

"Baby Boomer Retirement Planning"
an article by David A. Townsend

I congratulate those who have punched the clock for the final time and retired early. However, I suspect many like me did not take early retirement for various reasons. Some "retirees" now work into their 70's and 80's. Freedom 55 is not a priority for everyone.

However, regardless of what form your retirement will take, 60- 70 is where the "rubber hits the road". Not to downplay the investing years, which are also critical, but many important and sometimes irreversible decisions should be made between the ages of 60-70. The different choices can be overwhelming and many just assume default positions, which are not necessarily best for them.

The rules have also significantly changed in the last five years and it is very possible that the present government will tinker with them further. The following addresses the issues as of 2015-16, but watch for changes!

Others may disagree, but my view is that there are no general "rules of thumb" for this type of planning. Platitudes such as "defer as long as possible" and "use your tax paid money first" do not work for everyone and can even be financially harmful in some situations.

This is not information that can always be plugged into a spreadsheet to produce the "correct" answer. As we all know, retirement planning depends on many very personal issues. Sources of income, health, inflation, rates of return, life expectancy, and family issues have to be considered. Do the analysis and make the best judgements for you based on the available information.

When should I take CPP?

This is a decision to be made at the age of 60. Many just go to the default position and wait until they are 65… then they can defer again to the age of 70 if they want. If you take early CPP at age 60, your CPP benefit will be 36% less than if you waited until 65. If you delay again and wait until 70, your CPP monthly payment will increase 42% over your 65-year-old benefit.

Those percentages sound huge, but they do not factor in that the 60-year-old who takes CPP early will receive benefits for five or ten additional years! So do your own analysis and determine your break-even point. Usually it works out to be around 75. Is it more important to have the funds now or later?

Should I continue to pay CPP after 65?

CPP must be paid on salary income up to age 65 — no choice on this now. If you are still receiving a salary after 65, you can file form CPT30 — Election to stop contributing to CPP. Make sure that your employer and CRA get a copy. If you do not file the form, you continue to pay CPP on your salary until age 70.

Paying CPP after 65 entitles you to a Post-Retirement Benefit. The table on the Service Canada website indicates that at the maximum level, you pay $2,458 in 2015 CPP deductions and are entitled to $408 of Post-Retirement Benefit in 2016. Obviously, your Post-Retirement Benefit will increase for each additional year that you pay CPP.

Again, do your own analysis, but at the maximum level, it will take at least six years (6 x $408 = $2,448) to recover the 2015 CPP deduction. If you are self-employed and have to pay both the employee and employer portion, the payback period will double.

Should I defer OAS?

As you probably know, you can now defer OAS until age 70 and your benefit will increase by 36%. Again, the guaranteed increase is tempting and you may not need the funds. However, similar to CPP, you will forego receiving OAS for up to five years. Factor that into your calculations.

To complicate it further, there is the dreaded OAS claw back. In 2015, this kicks in at an income level of $72,809 and if your income exceeds $112,000, the OAS will be fully clawed back. My own view is that the OAS claw back is not as expensive as some would lead us to believe (see my previous article on "Understanding the OAS Claw Back"). And there are other considerations, i.e. RRSP accumulations, future withdrawals, health issues, changes in the tax rules. Analyze your cash position with and without the OAS and make your best judgement.

It makes sense to defer if you are still working and over the claw back threshold, but expect to be below it when you retire. If you can control your income level and keep it below the claw back level, it may make sense to take OAS now. Note also that if you originally choose to defer, you can later reapply for up to eleven months of retroactive OAS.

When should I start withdrawing from my RRSP or RRIF?

An RRSP must be rolled over into a RRIF in the year the taxpayer turns 71. However, there is no withdrawal required until the next year (when the taxpayer turns 72). Many will defer as long as possible and then withdraw the minimum amount. The conventional wisdom is to leave funds in the RRSP-RRIF to grow tax-free as long as possible.

However, there is also an estate planning consideration. Many taxpayers pass away with large RRIF's, which are fully taxable. Depending on province of residence, the tax rate at this point can be 50% or more!

Therefore, if you have accumulated large amounts in your RRSP (or RRIF), you should consider withdrawing a larger amount sooner... especially if tax rates are going up. This was a huge issue in Alberta in 2015 when the 2016 top rate increased by 8%!

Also, note if you are 65, you can receive $2,000 annually from your RRIF and it will be offset by the pension credit. In other words, you get $2,000 out of your RRIF annually tax-free. This will not work for everyone…perhaps you are already drawing pension income and using the pension credit. But it is worth considering.

Final Comments

Many "retirement specialists" are available to advise and help with this. To reinforce what I said previously however, there are no hard and fast rules. Be proactive, do your own due diligence and use your best judgement. Good luck!

Contributing Editor to Canadian Money Saver Magazine