How is OAS paid? Does it matter if you are still working?
The old age pension (OAS) is paid based on the number of years the applicant has lived in Canada. If you’ve lived in Canada since age 18, you’ll receive full pension at age 65, which is $642 per month as of the first quarter of 2022 ($7,707 annualized). If you have been a resident for less than 40 years, you can still receive a proportional pension.
You can start your OAS from the age of 65 and 70. For every month you delay your retirement after you turn 65, Charles, it increases by 0.6%. That would equate to an increase of 7.2% per year of delay. The pension is also adjusted for inflation each quarter, so with a target of 2% for the Bank of Canada, OAS could reasonably increase by 9.2% per year with each year of deferral.
To be clear, that doesn’t mean there’s a 9.2% return to defer OAS. You will receive a higher pension if you defer, but you will receive fewer benefit years. If you delay retirement until age 70, you must live to age 81 to receive more cumulative benefits than from age 65.
Things to think about before starting or delaying OAS
Value of OAS
Because of the time value of money, where a dollar today is worth more than a dollar tomorrow, you may have to live in the mid-1980s to be better off delaying OAS until 70 years, depending on the assumptions used. That is, if you can invest your OAS, or withdraw less from your existing investments because you receive OAS, that has a value that needs to be factored into the breakeven calculation.
Your life expectancy is an important factor in the decision to postpone your OAS. A 65-year-old has a 50% chance of living to be 90. So most 65-year-olds should probably consider postponing their OAS retirement.
When you’re at work
In your case, Charles, you are still working and state that your combined household income is $107,000. OAS is a means-tested government benefit that is reduced if your individual 2022 income exceeds $81,761.
So, depending on what your income is this year, if you apply for OAS, you could lose some of it. If your income exceeds the retirement recovery tax threshold, you will repay 15 cents OAS per dollar of income above $81,761 as tax on your tax return.
Do you really need it now?
It sounds like you might not need your OAS urgently if you have $500,000 in savings with your wife, Charles. If you need OAS, especially if your income is relatively low, applying for OAS at 65 may be more beneficial. For singles with a low income and couples who are starting their OAS pension, there is an Associated Guaranteed Income Supplement (GIS).
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