National Post article: Should Ottawa couple defer CPP and OAS if they retire early next year?

The National Post asked me to look at the retirement plan for Arnold, 56, and Heather, 60, an Ottawa couple hoping to retire as early as next year.

They both have strong, inflation-indexed defined benefit pensions, but they’re not sure they’ll actually have the retirement they want if they stop working now. 

They’re also not confident their retirement cash-flow numbers are right, or whether their spending assumptions will hold for the next 30 years.

They want to know whether it makes sense to defer CPP and OAS to age 70, how to minimize tax if they retire early, and whether they can afford to help their three adult children with $100,000 each toward home down payments without putting their own retirement at risk.

Some of the key questions we explore in the article:

• Whether they can really retire now at ages 56 and 60 and still maintain their desired lifestyle
• How to tell if your retirement cash-flow numbers are realistic, or just assumptions based on current spending
• Why conservative, balanced investments often make deferring CPP to age 70 the better financial decision
• How to know whether helping your children financially is affordable — or creates risk later

Early retirement planning is not only about portfolio size. It’s about cash flow, tax brackets, and understanding when guaranteed income provides a better return than investments.

CLICK THE LINK BELOW TO READ THE ARTICLE BY MARY TERESA BITTI:

Should Ottawa couple defer CPP and OAS if they retire early next year?

Could retirement really be just a year away? Arnold, 56, and Heather, 60, are hoping the answer is yes.

The Ottawa-based couple have been running the numbers and scenario planning. They anticipate they will need to generate $118,730 after tax annually in retirement to enjoy a lifestyle that funds their love of travel. They currently spend about $15,000 exploring new destinations around the globe and expect this will continue for the next several years. The empty nesters would also like to help their three young adult children save for down payments on their first homes.

Arnold currently earns $125,000 a year (before tax) and Heather earns $100,000. They both have employer-based defined benefit pension plans that are indexed to inflation. If they retire next year, Arnold’s annual after tax pension income will be about $48,000 (with a monthly bridge of $892 until age 65) and Heather’s will be about $40,000 (with a monthly bridge of $170 until 65) – not enough to meet their target retirement income. However, Heather wonders if their target income is an accurate reflection of the cash flow they’ll need to live comfortably for the next 30 years or more and Arnold is wondering if his budget calculations and assumptions are accurate.

The couple’s investment portfolio includes $350,000 in self-directed Registered Retirement Savings Plans invested in a range of Exchange Traded Funds across asset classes. They also have $1,250 in Tax Free Savings Accounts and $5,000 in cash.

Their primary residence is valued at approximately $1 million with a $245,000 mortgage. They have no plans of moving. They also own a self-sustaining rental property valued at $420,000 with a mortgage of $250,000. The couple will receive an inheritance of $150,000 in Spring 2026, at which point they plan to list the rental property for sale. They want to use the inheritance and the proceeds from the sale to pay off the mortgage on their forever home. Additional funds from the sale of the rental property will be invested either in their RRSPs or TFSAs. “What would the experts recommend?” asked Arnold.

The couple is also concerned about how to best minimize tax. At this point, they plan to start withdrawing from their RRSPs before age 65 and defer Canada Pension Plan and Old Age Security benefits until age 70. “Is this a good strategy?” Most importantly, are they on track to retire next year?

Financial Plan

Could retirement really be just a year away? Are they on track to retire next year?

The good news is that if their desired lifestyle is correct (and that may be a big “if”), they are on track to retire next year. With both their large pensions, they would need only about $50,000 in retirement savings and they should have about $350,000.

Note the pension figures they gave must be before tax, not after tax. They are roughly the maximum pension that a government pension should pay after 30 years in the pension plan. They confirmed this in additional information they provided.

Heather wonders if their target income is an accurate reflection of the cash flow they’ll need to live comfortably for the next 30 years or more and Arnold is wondering if his budget calculations and assumptions are accurate.

They think they would need about $95,000/year to spend in retirement, which is their current lifestyle excluding their mortgage payment. There are 2 reasons to question this. First, they question it themselves. Second, it sounds like that is what they are spending now. With their current salaries, after tax and after allowing for 10% of their salaries to go to their pension contributions, they should be bringing home about $140,000/year total. If they are only spending about $120,000/year (including their mortgage payment), then they should have been able to save about $20,000/year the last several years (unless they had unusual expenses). Have they been able to save it? If not, then they might not be happy with $95,000/year for a retirement lifestyle.

Looking at the items in their retirement lifestyle, they all look typical for retirees and there are no obvious monthly expenses missed. Many people add up their current monthly expenses and assume they can retire on that same lifestyle while forgetting unusual expenses, such as buying a car every few years or modest home improvements or large trips or gifts to their kids. They have not included these types of expenses in their retirement lifestyle.

Questions

They want to use the inheritance and the proceeds from the sale to pay off the mortgage on their forever home. Additional funds from the sale of the rental property will be invested either in their RRSPs or TFSAs. “What would the experts recommend?” asked Arnold.

They are both in high brackets now and should retire in the lowest tax bracket, so they should use their inheritance and proceeds of selling their rental property to maximize their RRSP rooms this year before they retire. If they retire sometime during 2027, then 2026 would be the last year with full salaries to get the maximum RRSP contribution refund. Given their large pensions, they probably don’t have a lot of RRSP room, but this year is probably their last chance to maximize it.

They should clear about $145,000 from selling their rental property. With the inheritance of $150,000, they could pay off their mortgage of $250,000.

It is probably worthwhile selling their rental property. The rent covers the expenses, but nothing more, so they do not get any extra cash flow from their $145,000 equity. If they sell and either invest the proceeds or pay off their home mortgage, they would get a significant cash flow benefit.

If they would invest the money for growth, they could get a return significantly higher than their mortgage interest rate, but with their current balanced ETFs invested “across asset classes”, the return is likely to be similar after tax to their mortgage rate. Their mortgage would take about 14 years to pay off with their current payments, so these investments would need a decent return to cover their mortgage payments.

In short, in their situation with their investments, paying off the mortgage is the simplest option and likely their best choice.

The couple is also concerned about how to best minimize tax.

Their plan works out to be quite tax-efficient. Their desired retirement lifestyle without their mortgage of $95,000/year after tax is about $115,000/year before tax. They should be able to keep their taxable incomes about equal with pension sharing and agreeing to share their CPP, so their taxable incomes should be about $57,500/year each. The lowest 23% tax bracket in Ontario is on taxable income up to $58,500/year, so they should be able to pay the lowest tax rate on all their income.

There would be very little they could withdraw from their RRSPs at the lowest 23% tax bracket, so they would likely end up paying 30% tax on RRSP withdrawals up to $35,000 each in future years, but that is still a reasonable tax rate. They should try to not withdraw more than $70,000 RRSP in one year to give to their children for their home down payment, if they decide to do that.

They plan to start withdrawing from their RRSPs before age 65 and defer Canada Pension Plan and Old Age Security benefits until age 70. “Is this a good strategy?”

A good test of their retirement lifestyle could be if they don’t touch their RRSPs and live only on their pensions. If they can do that, then they can afford their desired retirement lifestyle.

It is best for them to start both CPP and OAS at age 70. Deferring CPP from age 60 to 65 gives them an implied return of 10.4%/year on investments they would have to withdraw to provide the same income. Deferring to age 70 gives them an implied return of 6.8%/year. Since their investments are conservative balanced investments “across asset classes”, both of these are likely higher than their investment returns, so it is technically better to use their low return investments and defer CPP & OAS.

Ideally, they should defer both to age 70. This would mean their pensions would be about $20,000/year less than their spending from age 65 to age 69, which is roughly what their investments should make with just over $400,000 investments making a conservative balanced return of about 5%/year.

If they defer only one of the government pensions, then their pensions should essentially cover their lifestyle every year right through retirement, so they would hardly need to touch their investments. There is a bigger benefit to deferring CPP than OAS, so that is a better one to defer.

In short, they would be about $50,000 better off over their life if they defer both CPP and OAS to age 70, but starting OAS at 65 and CPP at 70 makes their cash flow simpler. They would then basically need to only spend their pensions and try not to touch their investments.

The empty nesters would also like to help their three young adult children save for down payments on their first homes.

If they can live essentially off their pensions and government pensions and not touch their investments, then they should have about $300,000 that they can leave for larger additional spending like buying a car or taking a larger trip, potential cost of a retirement home in the future, and to help their adult children with their home down payments.

If they try living only on their pension incomes and find they need $10,000/year more to retire with the lifestyle they want and cover additional larger expenses, then they would need the $300,000 to provide that extra income through their retirement.

It is advisable to keep at least $100,000 or $200,000 for emergencies or for a potential future retirement home. If they give away all their investments to their children and only have pensions, then they would have nothing to fall back on for cash flow emergencies.

The nicer retirement homes can be quite expensive and might be affordable if they keep their investments and allow them to grow and perhaps double over 15 years or so. Their $300,000 could become $600,000-$800,000 over 15-20 years, which could provide a comfortable retirement home.

They have about $700,000 equity in their home now, so they could pay for a retirement home for quite a few years by selling their home at that time. But that would only work if they both move to a retirement home at the same time. Often one person has health issues and is unable to stay in the home while the other prefers to stay in their home. Having separate investments gives them this freedom.

Ed