When Ottawa raised the age of eligibility to qualify for Old Age Security (OAS) from 65 to 67 during its recent federal budget announcement, it ushered in a new era for Canadians planning for their so-called golden years: it's the age of "you're on your own".
So says Dean Owen, Advocis chair and partner at Cherry Financial Services in Saskatoon.
"A lot of the people that were really worried about it (the change to OAS) were those people that are 55 and older, who won't be affected by it," he remarks. "It's people that aren't 55 yet today that will be affected.
"With the changes to Canada Pension Plan (CPP) and OAS, Canadians today are getting the message from the federal government that you're on your own more than ever."
Safe to say being a financial advisor has never been more relevant than it is now.
"People have to start taking care of themselves. They have to start seeing a financial planner. They cannot rely on governments for their pensions and if they want to retire prior to age 67, they have to know what the changes to CPP are going to affect them," Owen says. "They have to know how OAS is going to work into their retirement plans."
OAS changes a necessary evil
Cynthia Caskey, vice-president and portfolio manager, TD Waterhouse in Toronto, says there hasn't been a lot of reaction from the public to the OAS change as of yet but she notes the switch is consistent to what's unfolded stateside.
"The U.S. made these types of changes back in 1983 when they raised their retirement age to 67 for anyone born after 1960," she recalls. "They've had a much longer trajectory in terms of projecting that they would be eligible to receive social security at age 67."
In Canada, OAS continues to be a sensitive issue, but Caskey suggests it's a necessary shift given we're living longer as a population.
OAS changes and your RRSP
Much of retirement planning is based on your investor timeline. Now that the horizon for government benefits has shifted, does this mean our personal retirement plans should be augmented as well?
Presently, you can only contribute to your own registered retirement savings plan (RRSP) until the age of 71. In light of the two-year hike for OAS eligibility should RRSP contributions be allowable until the age of 73? Owen doesn't think so.
"At some point you have to take into consideration a person's own longevity and realize that if you keep contributing past the age of 71, you're building yourself a nest egg that you may or may not use at all," he says.
OAS and RRSP age restrictions have never been aligned, says Tina Di Vito, head, BMO Retirement Institute in Toronto, but she's not opposed to raising the RRSP age limit just to take into consideration those Canadians that continue to work and have earned income beyond that age.
Once Canadians reach the age of 71, investors must transfer the funds in their RRSP into a Registered Retirement Income Fund (RRIF), a tax-deferred retirement plan used to generate income from accumulated savings. Canadians also have the option of purchasing an annuity with their retirement savings, which is an insurance product designed to pay the retiree a fixed amount annually for the rest of their natural life.
"Back in 2007, we saw the conversion of RRSPs to RRIFs move from age 69 to 71," Caskey continues. "That was probably a more impactful change at that time because you had two more years you could contribute to an RRSP if you had an income."
OAS changes and CPP
Di Vito notes OAS change will have an impact on CPP due to legislation introduced a couple of years ago. This is how it breaks down:
- If you take CPP at age 65 you'll receive whatever your maximum entitlement is
- If you take CPP between the ages of 60-65 your benefits will be reduced
- If you receive CPP after age 65, you'll receive an increase in benefits
"With the new OAS, there may be less incentive for people to take CPP later. They might take it at 65 because they might need the money if they have no other sources of income," Di Vito says.
OAS changes and maximizing your TFSA
So how does one maximize their retirement savings before OAS changes take effect? Advocis' Owen suggests looking more seriously at a tax-free savings account (TFSA).
"Statistics show they're not being utilized enough and they're a fantastic means for people to put money away," he says. "Let's say you're under the age of 55 and you still wanted to retire at age 65 and you were counting on that $564 per month (via OAS) coming in. Start saving $100 per month in a tax-free savings account; $100 a month at four per cent will give you an income of $564 for 24 months."
Also noteworthy, TD's Caskey speaks of an enticement mechanism Ottawa will build into OAS whereby if you delay receiving it, you'll get paid at higher rates once you do begin to collect. The full details aren't known just yet, but she suspects it may be somewhat similar to how U.S. social security is structured.
"The largest factor for us dealing with clients, once we have the full set of facts, is understanding when you draw down from your RRSPs and RIFFs versus when you actually take Old Age Security," she adds. "At a certain point, depending on your income level, OAS will get clawed back on you. So you don't want to delay OAS and be taking it at the same time you draw from your RIFF in case you put yourself in that position."