According to the 2016 census, one in five Canadians aged 65 and over were working, with 30% of this group working full time. Some continued in their regular jobs, while others became consultants, entrepreneurs and new business owners.
Although many seniors work strictly for income, others are motivated by the wish to keep physically and mentally active, enjoy social interaction or have a sense of purpose. Whatever the reason, working during the traditional retirement years always involves several components of financial planning.
Timing government benefits
By working in retirement, you may be able to delay taking Old Age Security (OAS) and Canada Pension Plan (CPP)/Quebec Pension Plan (QPP) benefits until age 70 to receive your highest eligible amounts. But that’s not always the favoured choice.
For example, if you work in your 60s, receive CPP/QPP benefits and make CPP/QPP contributions, you are entitled to the CPP post-retirement benefit or QPP retirement pension supplement. This benefit or supplement is added to your monthly CPP/QPP pension for life. Also, if you have part-time earnings, taking government benefits earlier to supplement your income will leave more of your retirement savings untouched.
Various financial and personal factors are involved, so it’s wise to make the timing decision with the guidance of your advisor or accountant.
Minimizing OAS clawback
Some individuals working past age 65 may want to be mindful of the OAS clawback. As an illustration, retirees with OAS benefits from July 2019 to June 2020 will receive a decreased amount if their 2018 net income were to exceed $75,910. The benefit would reach zero at a net income of $123,386.
Depending on your situation, various strategies may be implemented to keep net income below the threshold and help avoid or minimize the clawback. These can include pension income splitting and drawing income from a spousal Registered Retirement Savings Plan (RRSP). Consider also making withdrawals from a Tax-Free Savings Account (TFSA) as the withdrawals do not count as taxable income.
Many employers offer modified life and health insurance benefits to employees who work past age 65. But if you’re not staying with the same company, you’ll need to purchase individual coverage for any protection you require. Say that someone retires at 62, fulfills a dream of opening a tea room and purchases critical illness insurance. If the owner suffers a critical illness, the benefit could pay for a temporary replacement.
Typically, you can purchase life insurance up to age 75, critical illness insurance up to age 65 and long-term care insurance up to age 80. Coverage for disability insurance ends at 65, but you can purchase accident coverage after 65 that protects against lost income if you’re injured.
For some people, earning income during retirement doesn’t affect how their investment portfolio is managed. However, depending on the individual’s net worth and risk tolerance, investments could be less conservative than usual. The extra income, especially if it’s steady, can replace some of the need for vehicles such as guaranteed investments and annuities, and reduce the need for such a large fixed-income cushion to protect against market volatility. There may be a greater focus on growth-oriented investments that will eventually help provide retirement income over the long term.
Let your advisor know if you’re thinking of retiring gradually. They’ll help ensure your financial plans and strategies make the most of your additional income.