Part 3 of our narrative on the benefits of an Encore Career
Retirement no longer serves up connotations of aimless afternoons drinking tea and playing bingo. Instead – as explored in Parts 1 A Second Chance to Shine: An Introduction to the Important Benefits of Encore Careers – ETF Capital Management (etfcm.com) and 2 Second Chance to Shine: Embrace New Beginnings – ETF Capital Management (etfcm.com) – increased life expectancy now offers a longevity opportunity: the chance to return to neglected passions and enjoy your later years while earning income in the process. However, just like with bingo, the numbers need to be right. A sturdy financial plan is paramount to maximising a fulfilling encore career.
Like any retirement decision, you need to have a clear idea of the life you want to live. These can include prosaic needs like paying off debt and covering monthly expenses, or more exhilarating prospects like turning a hobby into a business or ensuring you have enough for dream vacations. ETF Capital Management’s Financial Life Strategy Team helps their clients tap into these ambitions and tailor their retirement plan to optimize earnings and benefits from a tax perspective.
Delaying Canada Pension Plan (CPP)
If your encore career is providing you with enough income, then it could make sense to defer your CPP until you’re 70 rather than the typical 651. This is because during that five-year deferral period, your CPP earnings ceiling is still growing as it’s based on wage inflation, not prices. As well as protecting you from inflation risk, deferring until you are 70 means you receive up to 42% more. By the same logic, taking CCP early at 60 reduces the amount you receive. There is no benefit to delaying beyond 70 as the maximum amount you can receive is reached when you hit this milestone.
CPP (like OAS, below) is taxable income. However, unlike employment income, taxes are not withheld from your CPP unless you request that Employment and Social Development Canada do so.
Many experts will peg delaying CPP as one way of dealing with longevity risk but, as this series has emphasised, a mindset shift is needed. With life expectancy now extended, starting this benefit at 70 is another longevity opportunity to lead a comfortable, rewarding life into your 80s and 90s with 42% more pension income.
Old Age Security (OAS)
Enjoying the fruits – both financially and mentally – of a rewarding encore career should also mean that deferring your OAS is on the agenda. Like CPP there is the simple benefit of receiving more by waiting until you are 70. The government increases your OAS pension by 0.6% for each month it is deferred past the starting age of 65. Deferring for five years will net you an extra 36%.
Then there’s the emotive issue of the OAS clawback. After a certain amount of income – $86,912 in 2023 – the government claws back this benefit. For every dollar of income above the threshold, the amount of income is reduced by 15 cents until it hits the maximum amount ($133,142), by which point you receive nothing. For high earners, losing your OAS is a foregone cost, but if you’re taking on a part-time job or consultancy work in your “retirement”, the clawback range might be in play. Deferring OAS, therefore, takes this out of the tax equation.
For many hardworking Canadians, however, the OAS is seen as more of a right than a financial strategy and getting the maximum is a must. A planner/advisor can explain the decisions and work your preferences into your financial plan.
First up, a reminder that you can keep contributing to your RRSP until you turn 71, after which it must be converted into a RRIF. If you’re earning through your 60s, for example, you may want to keep building up your RRSP and delay having to make mandatory RRIF withdrawals, which is a percentage of your account determined by your age. This percentage increases as you get older. Crucially, no withholding tax is applied to minimum withdrawals but anything over the minimum is subject to tax deductions.
Every case is different, but an advisor can help you plan your withdrawals and help you decide:
- the best time to convert your RRSP to a RRIF
- whether to delay your CPP and/or OAS benefits, and
- how to protect yourself from the OAS claw back – through the use of TFSA withdrawals.
Pension Income Splitting
A classic way to reduce a couple’s overall taxes, especially if one spouse is keener on an encore career than the other, or if one’s job is considerably more lucrative, is income splitting. This allows an individual to allocate up to 50% of eligible pension income to their spouse or common-law partner for tax purposes. Note: OAS payments are not deemed eligible income and RRSP withdrawals can’t be split. However, CPP, technically, can be split at source, company pensions are eligible, and RRIF withdrawal can be split subject to some age restrictions.
Let’s say early retiree Diana has left her executive role but loved it so much she continues to work on a consultancy basis. She gets a $4,000 monthly defined benefit pension through her old employer and, with added income from consultancy, earns a total of $70,000 a year. Meanwhile, her husband, Dave, has also retired early and makes walking sticks to earn a few extra dollars. He has a work pension that brings in $20,000 a year and, with his little business, brings home about $25,000 annually. Given she is in a higher tax bracket, Diana can elect to give up half her pension income to Dave and drop into a lower tax bracket without pushing Dave into a higher one. This way both spouses are enjoying their dream encore careers as tax efficiently as possible.
Throughout these three blogs, there has been a general retirement theme – choice. Even for people who must keep working to fulfil financial obligations, if they have planned ahead, there can still be significant flexibility over what work they do and when they do it. For others, with a paid off mortgage and enough savings, an encore career is obligation free and pure fun. Whether that’s selling tee times down your local golf club or embarking on a second career as a freelance writer, you have total freedom to reinvent your days.
This new era is not just about managing longevity risk but also about seizing the longevity opportunity to do it all over again but even better. We can help make the numbers work for you.