For many Canadians,
retirement is a date
circled on a calendar rather than a concept. It is a moment in time when rush hour commutes are replaced by long walks on the beach. The problem is not every senior wants to, or is able to, retire and some mid-career savers could take a different path to financial freedom.
Financial independence instead of the end of work
An alternative approach could be working toward a time when you work because you want to as opposed to because you have to work. Organizations are responding by adopting senior-friendly roles and age-diverse hiring protocols, such as phased retirement and modified roles.
If part-time employment is not an option in a current role, seek out a new one. Self-employment may be another option. According to Statistics Canada, in 2022, 27 per cent of Canadian women and 41 per cent of Canadian men aged 65 to 74 were self-employed, and still working by choice rather than necessity.
Cash flow modelling
Retirement planning often reflects the life-cycle hypothesis, which was an economic concept developed by Franco Modigliani and Richard Brumberg in the 1950s. Its premise is that savers tend to smooth their consumption over their lifetime, saving during their working years, and dissaving, or spending their savings, during retirement. Spending is assumed to remain stable and constant. Its application to retirement planning tends to include an abrupt end to working and saving and a switch to drawing down savings thereafter.
It is a simple solution to the complicated task of planning financially for retirement. And as a result, financial planners often assume steady spending throughout a client’s lifetime, with a full-stop retirement at age 60 or 65. Financial consumers and financial planners alike should challenge each other to look at different ways of accumulating and decumulating.
Retirement is often more variable, including travel early in retirement, gifts to children, home downsizing, and inheritances. Or part-time work can help supplement spending for those whose savings cannot maintain their lifestyles.
CPP and OAS
You can start your
Canada Pension Plan (CPP)
retirement pension between ages 60 and 70. Healthy seniors who expect to live well into their 80s might benefit from deferring their CPP to age 70. They will receive fewer total months of payments during their lifetime, but the monthly payment amounts will be higher. If they live to their mid-80s and beyond, their financial outcome may be better.
Employees aged 65 or older must continue to contribute to the CPP by default. If their CPP is maxed out based on their contribution history these contributions will not increase their pension. However, they could consider starting their CPP at 65. They may not need the income, but the subsequent contributions they make can then boost their CPP, with an adjustment the following year. This is called a post-retirement benefit (PRB).
Alternatively, they can opt out of future CPP contributions once
Canada Revenue Agency (CRA)
approves Form CPT30. Employees must file this form and provide the CRA approval to their company to stop CPP contributions.
Old Age Security (OAS)
can start as early as 65 or as late as 70. If you are still working at 65 and your income exceeds about $93,000, your OAS will be subject to a recovery tax. This clawback of OAS could negate the benefit of applying at 65. Like CPP, its deferral can be beneficial for healthy retirees who live well into their 80s. The cumulative lifetime payments may be more lucrative, even after adjusting for the time value of money. But for high-income retirees still working, applying just to lose some or all of their pension may make deferral even more enticing.
Tax planning for continued work
Pre-retirees planning to work past the traditional retirement age have unique tax considerations. Proactive planning can reduce tax, maximize retirement income and increase estate value.
Registered retirement savings plan (RRSP)
contributions reduce the current year’s tax. But retirees working into their 70s may find their income is higher in their 70s than in their 60s. This can arise due to government pensions such as CPP and OAS beginning and also mandatory withdrawals from their RRSP. Most retirees convert their RRSP to a
registered retirement income fund (RRIF)
, with minimum withdrawals beginning the year they turn 72. If seniors contribute at a low income in their 60s and then withdraw at a higher income in their 70s, it is common to pay a tax rate on these withdrawals that is 15 to 30 per cent higher just a few years later, especially with the means-tested clawback of their OAS. For this reason, RRSP contributions can lead to more lifetime tax despite an up-front tax refund in some situations.
People older than 71 who can no longer have an RRSP of their own can still contribute to an RRSP if their spouse is younger and opens a spousal RRSP. The contributor can be any age if the spouse account holder is under 72. Someone who has carried forward RRSP room or who continues to accrue RRSP room from working should consider whether a spousal RRSP contribution makes sense.
RRIF account holders can base withdrawals on their age or their spouse’s age. If a spouse is younger, the minimum withdrawals will be lower. Up to 50 per cent of RRIF withdrawals after age 65 are considered eligible pension income that can be moved on a couple’s tax returns between spouses. This is called pension income splitting, and it may allow high-income workers to reduce their RRIF income by up to 50 per cent, having this taxed to their lower income spouse instead.
Self-employed seniors who are sole proprietors may benefit from incorporation of their business if their income is significant. Corporate profit does not need to be withdrawn, and the tax deferral can be over 40 per cent. That said, incorporation has legal and accounting costs, so these expenses need to be compared to the potential tax savings.
Involuntary retirement
The primary risk with planning to work well into your 60s or 70s is that you may not be able to choose your retirement date. An employee could be terminated as part of a restructuring.
For those counting on working much longer for financial reasons, this can be difficult. For those counting on doing so for lifestyle reasons, going to work in the morning and being unexpectedly retired by the end of the day can be a tough pill to swallow.
Those who are self-employed may be more able to choose the timing of their retirement but economic forces or industry changes can surprise them. Health is a wild card for many seniors as well, who may suddenly find themselves unable to work for reasons beyond their control.
Some of the healthiest, happiest seniors whom I meet are still working past the traditional retirement age, or after the point when they could afford to retire. Whether by choice or necessity, we should all be more open to the concept of retirement looking different than in the past.
Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever. He can be reached at jheath@objectivecfp.com.
