Delay OAS to 70, spend 8.8% more at 65!

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

For someone without bequest motives, here's how to spend 8.8% more at 65 by delaying OAS to 70.

The same calculation could be done with CPP, but I chose to do it using OAS because most people get full OAS, so they all get the same amount, whereas few people get full CPP, so they all get different amounts.

Let's say that I was 65 in 2015 and just retired with a $1,000,000 portfolio. Let's also assume that I would get to spend, on average, approximately 4% of my initial portfolio, in inflation-adjusted dollars, during retirement. It's an average; some years, I would get to spend more (after good market years), but others I would get to spend less than this (after bad market years).

Scenario 1: If I took OAS in 2015, I would get $40,000 (portfolio withdrawal) + $6,786.90 (OAS) to spend per year, on average, during retirement. That's a total of $46,786.90 per year (in constant dollars), on average.

Scenario 2: If, instead, I decided to wait until 2020 at age 70 to take OAS, I would get an extra 36% per year; that's $9,230.18 in constant dollars. In 2015, I would set aside $46,150.90 into a high-interest savings account and GICs so as to get at least 2% on this money (to match inflation). Between 2015 and 2020, I would withdraw the equivalent of age 70 OAS payments out of it. That would leave me with a $953,849.10 portfolio which would sustain an average $38,153.96 withdrawal per year. So, I would get a total of $47,384.14 per year (in constant dollars), on average.

In other words, starting at age 65, I would get to spend $597.24 more per year by delaying OAS to 70. That's 8.8% more than age 65 OAS payments.

Note that this post was heavily inspired by the following Bogleheads post: https://www.bogleheads.org/forum/viewtopic.php?t=102609.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
gaspr
Contributor
Contributor
Posts: 287
Joined: 10 Feb 2015 11:39

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by gaspr »

Well done. No arguments from me. I would add a couple of other caveats in addition to "having no bequest motive"..."having a large enough nest egg" and "having a reasonably good health outlook".
8Toretirement
Contributor
Contributor
Posts: 225
Joined: 26 Nov 2014 14:55

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by 8Toretirement »

The only issue I would have for myself is the prospect of the government lowering the clawback threshold in the next 12 years. This could leave me with less than full OAS.
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33399
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by AltaRed »

8Toretirement wrote:The only issue I would have for myself is the prospect of the government lowering the clawback threshold in the next 12 years. This could leave me with less than full OAS.
There are at least a few threads on this issue with somewhat heated and repetitive debate. A number of us (a minority) have been pretty vocal on the need for gov't to lower clawback thresholds substantially.

Indeed, OAS is really a social support program funded out of General Revenue (not a pension) and it should be restricted to those in need (whatever the age). Nothing magic about age 65 for suppplementing seniors and a current threshold of circa $80k before clawback begins is obcene (in my opinion of course). An overhaul was floated some 20 years ago I believe and the reaction was 'over the top'. It is just that no recent gov't has the gonads to make necessary change, and thus your fears are likely unfounded for decades to come.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
MarketLost
Contributor
Contributor
Posts: 62
Joined: 16 Jul 2016 12:30

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by MarketLost »

AltaRed wrote:
8Toretirement wrote:The only issue I would have for myself is the prospect of the government lowering the clawback threshold in the next 12 years. This could leave me with less than full OAS.
There are at least a few threads on this issue with somewhat heated and repetitive debate. A number of us (a minority) have been pretty vocal on the need for gov't to lower clawback thresholds substantially.

Indeed, OAS is really a social support program funded out of General Revenue (not a pension) and it should be restricted to those in need (whatever the age). Nothing magic about age 65 for suppplementing seniors and a current threshold of circa $80k before clawback begins is obcene (in my opinion of course). An overhaul was floated some 20 years ago I believe and the reaction was 'over the top'. It is just that no recent gov't has the gonads to make necessary change, and thus your fears are likely unfounded for decades to come.
I agree with you on this, too. In retirement, my father makes an income that is far above the median, but still retains OAS benefits. There were times when his income exceeded mine, and I had to deal with a mortgage, CPP, EI, RPP, as well as saving for retirement, but I certainly wasn't entitled to anything extra. It's obviously a political move based on the fact that seniors vote more.
SQRT
Veteran Contributor
Veteran Contributor
Posts: 5441
Joined: 01 Nov 2012 11:33
Location: Ontario/Arizona

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by SQRT »

Totally agree with last two posts, but we have had this "discussion"before(as Red states) and I have no desire to get into it again. Much too generous for a gov't that plans on running deficits and just raised my personal taxes, in my biased view anyway.
izzy
Veteran Contributor
Veteran Contributor
Posts: 3019
Joined: 19 Feb 2005 19:06
Location: Winnipeg MB

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by izzy »

I think its fairly obvious that those who don't need these tax breaks resent those who do.
"Why should my taxes go to subsidise people with kids-after all I don't have any and why should I have to pay taxes so that the 90% 0f seniors who get OAS can live in comfort -after all I don't need it "
Donald Trump is a living example of the effect of that attitude!
"I disagree strongly with what you say, but I will defend to the death your right to say it."
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33399
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by AltaRed »

Thiink you have to separate out those who are against subsidies 'in almost any situation' with those that don't believe in subsidies for 'well off' people. We've been through this so many times, it is 'getting old'. There are a host of benefits to help 'lower income' people 'in need' participate in society, improve nutrition, health and education, etc. Certainly some of them could be improved, i.e. GIS/OAS, etc. I just don't support subsidies* for those that are well off. IOW, current clawback thresholds are too high and therein lies the debate. Everyone (with perhaps a few disability exceptions) with income of $100k or more can pay their way so that should be a 'no brainer' in elimination of taxpayer support. I'd argue $80k is an even better number but beauty is in the eyes of the beholder.

* As in 2 seniors each with income in the $80k range needing OAS - or even a single senior with income over $80k? As in that professional/executive earning over $100k or so needing child benefits? The issue to me is degree. C'est la vie.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

OK, guys, this has nothing to do with getting 8.8% more at 65. Maybe I should start a new thread, "Delay CPP to 70, spend x% more at 65" ?

As for the political thing, if we're going to put a lower threshold on OAS clawback, we should first put a clawback on free healthcare, which costs a lot more! Why should the "rich" get free healthcare? (Rhetorical).

Aren't we forgetting who pays most of the taxes? Did you know that almost half of the population pays no income taxes? (I think that this is true at the provincial level in Quebec). :wink:
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33399
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by AltaRed »

Yeppers. These things have a way of going off the rails, off-topic, and circular in argument. There is a good reason why I'd never succeed in politics.
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
Flaccidsteele
Veteran Contributor
Veteran Contributor
Posts: 4523
Joined: 06 Mar 2014 12:52
Location: Retired Gen Xer somewhere on the planet earth

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by Flaccidsteele »

AltaRed wrote:Yeppers. These things have a way of going off the rails, off-topic, and circular in argument. There is a good reason why I'd never succeed in politics.
Another good reason not to expect much from any particular government.
slim
Contributor
Contributor
Posts: 225
Joined: 28 Feb 2005 22:52

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by slim »

Reading through this thread you start to realize that details may not be perfect, but people do very well in Canada. Its all good relatively, and we are so lucky to be living here.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

slim wrote:Reading through this thread you start to realize that details may not be perfect, but people do very well in Canada. Its all good relatively, and we are so lucky to be living here.
Thanks.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
User avatar
adrian2
Veteran Contributor
Veteran Contributor
Posts: 13333
Joined: 19 Feb 2005 08:42
Location: Greater Toronto Area

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by adrian2 »

AltaRed wrote:I just don't support subsidies* for those that are well off. IOW, current clawback thresholds are too high and therein lies the debate.
The devil is in the details. The MTR, including clawbacks, can get to over 70% in Ontario and over 100% (sic!) in QC. Move other thresholds lower and it gets worse.

Sorry, longinvest, for being off topic re: thread title.
Imagefiniki, the Canadian financial wiki
“It doesn't matter how beautiful your theory is, it doesn't matter how smart you are. If it doesn't agree with experiment, it's wrong.” [Richard P. Feynman, Nobel prize winner]
izzy
Veteran Contributor
Veteran Contributor
Posts: 3019
Joined: 19 Feb 2005 19:06
Location: Winnipeg MB

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by izzy »

adrian2 wrote:
AltaRed wrote:I just don't support subsidies* for those that are well off. IOW, current clawback thresholds are too high and therein lies the debate.
The devil is in the details. The MTR, including clawbacks, can get to over 70% in Ontario and over 100% (sic!) in QC. Move other thresholds lower and it gets worse.
Not to mention the fact that if even 80% (and I believe its over 90%) of Canadian seniors get OAS calling it a subsidy suggests that the current provision for retirement savings is inadequate without it!!
"I disagree strongly with what you say, but I will defend to the death your right to say it."
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

longinvest wrote: 06 Aug 2016 11:35 For someone without bequest motives, here's how to spend 8.8% more at 65 by delaying OAS to 70.

The same calculation could be done with CPP, but I chose to do it using OAS because most people get full OAS, so they all get the same amount, whereas few people get full CPP, so they all get different amounts.
For the record, I finally did the CPP calculation, using the average payout, in another thread:

http://www.financialwisdomforum.org/for ... 43#p593743
longinvest wrote: 26 Mar 2017 11:18 ...
In other words: Delay CPP until age 70 and safely spend 42% more starting at age 60 while also increasing the lifelong inflation-indexed CPP pension by 119%!
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
Outroupistache
Contributor
Contributor
Posts: 30
Joined: 31 Jan 2007 12:36
Contact:

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by Outroupistache »

Interesting idea gets awkward in implementation ... 1) how to get regular cash flow out of the HISA/GIC package - 5 years of GIC ladder on monthly maturities (OAS is paid monthly) is 60 GICs! yikes!; if you set up bi-monthly or fewer, maturities, it starts to get inconvenient to match income with outgo 2) how to get 2% return - HISAs pay nowhere near 2%, (it's only 0.75% at BMOIL right now); to get 2% on GICs means taking 5 year maturities, which means setting up the 60 step ladder starting five years in advance; 3) 2% is expected / government target inflation but OAS pays actual CPI - there's risk in this strategy.

In short, I am instead simply increasing my withdrawals from my regular portfolio, knowing (hoping!) that higher OAS will replace that income at age 70.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

Outroupistache,
Outroupistache wrote: 10 Apr 2017 13:35 Interesting idea gets awkward in implementation ... 1) how to get regular cash flow out of the HISA/GIC package - 5 years of GIC ladder on monthly maturities (OAS is paid monthly) is 60 GICs! yikes!; if you set up bi-monthly or fewer, maturities, it starts to get inconvenient to match income with outgo 2) how to get 2% return - HISAs pay nowhere near 2%, (it's only 0.75% at BMOIL right now); to get 2% on GICs means taking 5 year maturities, which means setting up the 60 step ladder starting five years in advance; 3) 2% is expected / government target inflation but OAS pays actual CPI - there's risk in this strategy.

In short, I am instead simply increasing my withdrawals from my regular portfolio, knowing (hoping!) that higher OAS will replace that income at age 70.
One can set up a much simpler ladder of 4 GICs* which mature once a year, moving the yearly proceeds into a simple savings account from which monthly withdrawals are taken. The loss of purchase power to inflation in the 10th and 11th months won't really be noticed by the investor.

* The money for the first year should be moved right away in a savings account.

Another approach would be to dump the whole thing into a high-quality short-term bond ETF (such as VSB) which should usually match (or even beat) inflation during the overall period, but with a bit of very mild volatility. Withdraw 1/60 of the (balance + distribution) in the first month, 1/59 the the (balance + distribution) in the second month, and so on until 1/1 of the (balance + distribution) in the 60th month. An investor with a little slack in his budget could juice up things further using a short-term corporate bond ETF (such as VSC) which has more volatility. It's best to have a low-cost broker, though, if one intends to make such frequent transactions. The GIC/savings account approach has no fees attached.

It doesn't have to be complicated.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
User avatar
AltaRed
Veteran Contributor
Veteran Contributor
Posts: 33399
Joined: 05 Mar 2005 20:04
Location: Ogopogo Land

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by AltaRed »

longinvest wrote: 10 Apr 2017 13:51 One can set up a much simpler ladder of 4 GICs* which mature once a year, moving the yearly proceeds into a simple savings account from which monthly withdrawals are taken. The loss of purchase power to inflation in the 10th and 11th months won't really be noticed by the investor.

* The money for the first year should be moved right away in a savings account.
.
.
.
It doesn't have to be complicated.
I agree. Besides it is not difficult to get 1.6-1.8% (perhaps upwards of 2%) in a HISA at a CDIC insured institution for the GIC that matures on an annual basis, and then withdraw monthly needs from that. Just don't expect those HISA rates at the big banks. See https://www.highinterestsavings.ca/chart/
Imagefiniki, the Canadian financial wiki The go-to place to bolster your financial freedom
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

In another thread, I've analyzed the difference between delaying OAS payments and accumulating them to buy a 2%-indexed annuity:
longinvest wrote: 22 May 2019 08:04
Norbert Schlenker wrote: 21 May 2019 16:38
longinvest wrote: 20 May 2019 23:58 The annuity sold by the insurance company is 26% more expensive than the OAS annuity bought by delaying from 65 to 66, for a male, despite not being fully indexed to inflation.
An added note (for males only): This gap disappears by around age 67 1/2, partly because private annuity rates increase with age, and partly because that's the age at which the gap between the OAS (straight line) deferral bonus and a smoothly increasing geometric curve is maximized. Deferring OAS from age 65 to age 66 is the correct decision for almost every male, but deferring past 67 1/2 is probably wrong.
I had not realized this! Here's a detailed analysis.

Male
Source data for annuity rates: 2019 Male Indexed Annuity Rates - LifeAnnuities.com

Code: Select all

                  2%-Indexed                             
                   Annuity      Last-Year     Last-Year    Advantage  
                     Male       OAS Buying      OAS +         of      
 Age     OAS         Rate         Power        Annuity     Delaying   
    65   $601.45                                         
    66   $644.75       $476.68        $34.40      $635.85        $8.90
    67   $688.06       $495.60        $38.34      $683.10        $4.96
    68   $731.36       $515.78        $42.59      $730.65        $0.72
    69   $774.67       $537.42        $47.17      $778.53       -$3.86
    70   $817.97       $560.52        $52.11      $826.77       -$8.80
After age 68, there's no advantage for a male to delay OAS. He could claim OAS at age 68, accumulate (12 X $731.36) = $8,776.32 during the year and buy a (($8,776.32 / $100,000) X 537.42) = $47.17/month 2%-indexed annuity at 69, giving him a total of ($731.36 + $47.17) = $778.53/month, $3.86 more than delaying OAS to age 69.

Female
Source data for annuity rates: 2019 Female Indexed Annuity Rates - LifeAnnuities.com

Code: Select all

                  2%-Indexed                             
                   Annuity      Last-Year     Last-Year    Advantage  
                    Female      OAS Buying      OAS +         of      
 Age     OAS         Rate         Power        Annuity     Delaying   
    65   $601.45                                         
    66   $644.75       $420.60        $30.36      $631.81       $12.95
    67   $688.06       $436.13        $33.74      $678.50        $9.56
    68   $731.36       $452.86        $37.39      $725.45        $5.91
    69   $774.67       $470.85        $41.32      $772.69        $1.98
    70   $817.97       $490.33        $45.58      $820.25       -$2.28
After age 69, there's no advantage for a female to delay OAS. She could claim OAS at age 69, accumulate (12 X $774.67) = $9,296.04 during the year and buy a (($9,296.04 / $100,000) X 490.33) = $45.58/month 2%-indexed annuity at 70, giving her a total of ($774.67 + $45.58) = $820.25/month, $2.28 more than delaying OAS to age 70.
longinvest wrote: 22 May 2019 08:25 If a male was to claim OAS at age 65 and put all payments into a savings account matching inflation for 5 years (0% real annual return), he would accumulate (5 X 12 X $601.45) = $36,087. At age 70, he could buy a (($36,087 / $100,000) X $560.52) = $202.27/month 2%-indexed annuity for a total of ($601.45 + $202.47) = $803.92/month. That's $14.04/month less than what he would get by delaying OAS to age 70.

It would take a 2.8% real annual return for accumulated OAS payments to grow to $38,628.42 and fully match delayed OAS payments.

If a female was to claim OAS at age 65 and put all payments into a savings account matching inflation for 5 years (0% real annual return), she would accumulate (5 X 12 X $601.45) = $36,087. At age 70, she could buy a (($36,087 / $100,000) X $560.52) = $176.95/month 2%-indexed annuity for a total of ($601.45 + $176.95) = $778.40/month. That's $39.57/month less than what she would get by delaying OAS to age 70.

It would take a 8.3% real annual return for accumulated OAS payments to grow to $44,158.02 and fully match delayed OAS payments.
Last edited by longinvest on 22 May 2019 10:44, edited 1 time in total.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

The ideal OAS claiming age is 68 for men and 69 for women to maximize income (see the previous post). The technique of the first post can still be applied, but with the difference that OAS is claimed at 68 (men) or 69 (women) and payments are used to buy a 2%-indexed annuity at age 70.

Here's an example, for a male. The male plans to claim OAS at age 68 and accumulate payments for 2 years until age 70. At age 70, he'll have accumulated (2 X 12 X $731.36) = $17,552.64 which he'll use to buy a (($17,552.64 / $100,000) X $560.52) = $98.39/month 2%-indexed annuity. This would give him a total of ($731.36 + 98.39) = $829.75/month starting at age 70.

At age 65, the male puts (5 X 12 X $829.75) = $49,785 into a high-interest savings account matching inflation and then withdraws $829.75/month from 65 to 69.

If the male had claimed OAS at 65, instead, and left the $49,785 in his portfolio to extract approximately 4% per year on average, his income would have been approximately ($601.45 + ($49,785 X 4%) / 12) = $767.40/month.

Delaying OAS to 68 and accumulating payments until 70 to buy a 2%-indexed annuity allows a male (without bequest motives) to spend (($829.75 - $767.40) / $601.45) = 10.4% more than age 65 OAS payments.
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
gaspr
Contributor
Contributor
Posts: 287
Joined: 10 Feb 2015 11:39

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by gaspr »

Hard to put a value on the reduced inflation risk with fully indexed OAS over a 2% indexed annuity. Inflation matters, but is unknowable in advance.
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

gaspr wrote: 22 May 2019 09:24 Hard to put a value on the reduced inflation risk with fully indexed OAS over a 2% indexed annuity. Inflation matters, but is unknowable in advance.
Inflation is (mostly) predictable in Canada.

As discussed in this post and this post, the Bank of Canada's 2% inflation target is unlikely to change anytime soon.

It might be worth repeating that the "objective of monetary policy [of the Bank of Canada] is to preserve the value of money by keeping inflation low, stable and predictable. This allows Canadians to make spending and investment decisions with more confidence, encourages longer-term investment in Canada's economy, and contributes to sustained job creation and greater productivity. This in turn leads to improvements in our standard of living." (source)
Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
longinvest
Veteran Contributor
Veteran Contributor
Posts: 3956
Joined: 10 Sep 2012 17:26
Location: QC

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by longinvest »

Variable Percentage Withdrawal (finiki.org/wiki/VPW) | One-Fund Portfolio (VBAL in all accounts)
gaspr
Contributor
Contributor
Posts: 287
Joined: 10 Feb 2015 11:39

Re: Delay OAS to 70, spend 8.8% more at 65!

Post by gaspr »

But a proper comparison would be with a fully indexed income annuity, which are apparently available, but priced to payout lower amounts to reflect the risk.
Post Reply