More Canadians are open to working into their retirement years or returning to work after having retired — two scenarios that present numerous tax and retirement planning considerations.
Data from Statistics Canada released in August indicate that more than half of Canadians planning to retire soon would continue working longer if they could work part-time; 43% would do so if the work was less stressful than their current job; and 37.6% said they’d like to take on work that is more interesting than their current job. Statistics Canada data also revealed Canadians are retiring slightly later now: the average retirement age in 2022 was 64.6, up from 64.1 in 2018.
“Why people are working [in retirement] isn’t necessarily tied specifically to income. Work is their connection; it’s their community; it’s where they see people and how they have a schedule and make sure they get up in the morning,” said Laura Whiteland, certified financial planner and founder of Inclusive Financial Planning in Truro, N.S. “You’re starting to see work become more of a focus in retirement, but it’s because of that that people end up in awkward tax situations.”
Tracy MacNeil, certified financial planner and founder of Tracy MacNeil Financial Solutions Inc. with Sun Life in Dartmouth, N.S., said choosing to work in retirement is, for some clients, tied to the discomfort associated with switching from earning income to having to draw on their assets. “It’s a very, very large concern for people,” she said. “People just keep working because it makes them feel better.”
Clients working into their retirement years can affect the decision made about the date on which they begin receiving their Canada Pension Plan (CPP) and old age security (OAS) benefits.
Whiteland said she generally advises taking CPP early. “I’m more of a fan of cash in hand because it gives you more flexibility,” she said. “But if you’re continuing work past 60, what I will sometimes recommend is, if you’re in the 40%–50% tax bracket and not really benefiting from CPP, even just taking it and putting it into an RRSP so you’re really just still saving. It gives you more control on your end and you’re not worried about the tax implications.”
MacNeil said clients who still have debts to pay off or who want to put additional savings toward retirement expenses such as travel can benefit from taking CPP benefits earlier. “Then, when you do trigger your retirement date and are done from work, you have all your debts paid off,” she said.
However, clients who have been consistently earning above the yearly maximum pensionable earnings and plan to continue working into retirement might be better off deferring CPP and receiving the higher amount at age 70, said Aravind Sithamparapillai, associate at Ironwood Wealth Management Group Inc. in Fonthill, Ont. Given CPP’s cost-of-living increases, receiving the higher amount can be especially helpful for longevity planning, and clients will begin receiving CPP benefits when they are in a lower tax bracket.
Clients who still are working after age 65 and already drawing from CPP can choose to make voluntary contributions to CPP. This strategy can benefit clients who were not making CPP contributions throughout their adult lives, such as immigrants who didn’t spend their entire working lives in Canada, people who took years off work, and people who are earning a high income and want to make up for low-earning years in their CPP calculation.
“What many people will often look at is, instead of contributing to CPP, wouldn’t you just save that money yourself?” Sithamparapillai said. “But are they going to potentially be able to invest the same way? Will they have the same behaviour? The same tolerance? They certainly don’t have the same time frame. All of a sudden that [CPP] guarantee may look very beneficial.”
For clients who have already begun drawing on CPP, Whiteland said, contributions after age 65 don’t tend to have enough of an impact on their benefit entitlement to be worthwhile. “It’s almost 6% of your income you’re losing into that pool,” she said. “I’ve never recommended that somebody continue [contributing] if they have the option.”
Given that OAS begins being clawed back after a certain level of income ($86,912 for 2023), Whiteland said, deferring OAS benefits until the client leaves the workforce, or age 70, whichever comes sooner, may make sense.
Clients continuing to work or going back to work after retirement still earn RRSP room and can contribute to an RRSP until they turn 71, Sithamparapillai said. This would be particularly beneficial to clients earning a high income. If the client makes an overcontribution in December of the year they turn 71 — their final opportunity to contribute before the plan must be converted to a RRIF — they will incur the 1% penalty. However, this tactic may be worthwhile because their income will generate RRSP contribution room the following year.