National Post article: Should Caroline, 62, defer CPP and OAS until age 70, or even delay retirement entirely?

Should you delay retirement… or are you closer than you think?

I was asked by the National Post to review the finances of a 62-year-old deciding whether to defer Canada Pension Plan and Old Age Security to 70, and whether to keep working longer.

Some of the answers go directly against what most people assume.

In this article, you’ll learn:

• How she can retire with only $700K+ and her pension
• Why she should defer Canada Pension Plan and Old Age Security because of her portfolio, and when the answer would be different
• Why she does not need cash for an emergency fund and can use a credit line instead
• Why she should not use investments to pay off her mortgage
• Why she should renew her mortgage as soon as she can
• Why an annuity can make her retirement less secure
• The difference between the yield of an annuity and the rate of return
• How she can provide reliable cash flow with minimal tax using self-made dividends

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

Should Caroline, 62, defer CPP and OAS until age 70, or even delay retirement entirely?

Financial Plan

Caroline wants to retire in 3 years at age 65 with an income of about $88,000/year before tax. This should give her the same after tax cash flow as she is making now with a salary of $102,000, since she won’t have to pay into her company pension, CPP or EI after she retires.

Good news! To do this, she needs a portfolio of $735,000. She is projected to have $737,000. She should have exactly enough so that she should be able to retire when she wants with the lifestyle she wants.

It is generally advisable to have 10-20% extra to give her a margin of safety, and she has no margin of safety. However, she should be okay to maintain her lifestyle for life.

This assumes that her RRSP and TFSA are 100% equities, but her advisor LIRA is more conservative in a balanced portfolio with a lower return. Her current mortgage payments should pay off her mortgage in 21 years.

Caroline needs this type of planning. She has enough to retire with the lifestyle she wants, but does not know it. She is still wondering whether to delay retirement. A financial plan is the only way to be able to retire confident that you will always have enough for the lifestyle you want.

Questions

She is prepared to take on a part-time job after she retires, but would prefer not to have to work at all. She’s just not sure that will be possible. “Should I delay retirement?” she asked, before stating “I’d retire next year if I could.”

She should be able to retire without having to work and not have to delay her retirement.

She plans to supplement her employer pension by drawing down her registered investments and start taking CPP and OAS at age 70. “At that point, there won’t be as much in my Registered Savings Plan, which should help minimize tax. Is this a good strategy?”

In Caroline’s case, deferring CPP & OAS to age 70 is a good strategy, but it won’t save her tax. Deferring to age 70 gives her an implied return of 6.8%/year, which is likely a bit higher than her investment returns, since quite a bit is in the more conservative balanced portfolio. If all her investments were 100% equities, then she would have a 10% margin of safety in her retirement goal and she could then start CPP & OAS at age 65, since her higher return investments should provide more than the pensions.

Her RRSP & LIRA and CPP & OAS are all taxable, so the deferring will not change her taxable income. Her opportunity to save tax is if she takes some of her income every year from her TFSA and less from her RRSP. She should keep some TFSA in case of emergencies, so she should not take too much of her TFSA.

For an emergency source of funds, she should apply for a credit line secured on her home and an unsecured credit line now while she is working. She can keep these through retirement to use for cash emergencies. This can allow her to use more of her TFSA for cash flow and perhaps keep only $25-50,000 in it.

She has about $14,000 in remaining RRSP contribution room and $16,000 in TFSA contribution room. “Should I continue to fund my RSPs? My TFSA? Or should I pay down my mortgage more?” asked Caroline, who would also like to know how soon she should start looking to renew her mortgage, which matures next year. She is concerned interest rates may start to rise because of the war in the Middle East and all of the geopolitical uncertainty.

Caroline brings home about $5,500/month now which is about the same as she is spending, so she probably is not able to save much. She is in a slightly higher tax bracket now while working than she will be in during retirement, so she should maximize her RRSP room first, even if she has to withdraw from her TFSA to do it.

Her mortgage rate is lower than her investment returns over time, so she should only make the minimum mortgage payments and not do any prepayments.

Generally, banks allow you to renew up to 3 months early if you renew with the same bank. Today’s rates are lower than her 5.45% mortgage, so she should renew as soon as the bank allows.

She should not worry about the geopolitical issues in the Middle East, since they are likely to be short term and should be resolved long before her mortgage comes due. She would pay a penalty to renew now instead of next year, so she can wait until next year and renew when she can to avoid the mortgage prepayment penalty.

Caroline also wonders if she should consider putting her investments into an annuity before she retires. She likes the idea of receiving a regular income stream. If not an annuity, she’d like to know the best way to generate dividend income. 

Annuities are invested more conservatively and have an estimated rate of return inside the annuity of about 4%, which is much lower than her investments. They may quote a yield about 6.7% today, but the yield is the cash flow she would get including her principal amount. The yield is not the rate of return. She would have to work part time for a few years if she decides to invest in an annuity.

Annuities would make her retirement less secure because the income is too low to provide for the life she wants.

The best way to get dividend “income” is with “self-made dividends”, which means just selling a bit of her investments every month for her lifestyle. This gives her a mix of capital gains and the return of her capital, which is taxed lower than actual dividends. Actual dividends are fully taxable immediately, unless she invests only in Canada where returns are generally quite a bit lower than global or US equities.

“Self-made dividends” are better than actual dividends in every way. She would pay less tax, be able to decide the exact cash flow and timing she would get, and she could invest globally for the best risk/return, instead of having to invest entirely within Canada.

Caroline actually needs cash flow, not income. Income is taxable cash flow. She needs a reliable source of cash flow with ideally very little tax.

Ed