Inflation a scourge for retirees? Ottawa’s silver lining(s)

As CIBC Private Wealth’s Jamie Golombek recently wrote for the Financial Post, come 2024, all five federal income tax brackets are indexed to inflation using the rate of 4.7%. The new brackets are 15% for income between $0 to $55,867; 20.5% between $55,867 and $111,733; 26% between $111,733 and $173,205; 29% between $173,205 and $246,752, and 33% beyond that. Most provincial income tax brackets are also indexed to inflation. 

The basic personal amount (BPA) for 2024 is $15,705. That means most people will pay no tax on the first $15,705 of income.

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TFSA contribution limit rises in January

Early in the new year, stringent savers will be pleasantly surprised to find inflation has bumped 2024 contribution room for tax-free savings accounts (TFSAs) to $7,000, up from $6,500 in 2023. It was $6,000 for the three consecutive years before that. That’s all nicely up from the original $5,000 available when the program launched around 2009.

Recall that in 2015 the TFSA contribution amount was lifted to $10,000 before being cut back by the Trudeau administration. 

As of January 2024, a Canadian who has never contributed to a TFSA before would have a cumulative contribution room of $95,000. That’s a significant amount, which can really add up over the years. (With registered retirement savings plans (RRSPs), however, it depends on your contribution room. Try the MoneySense contribution limit calculator.)

“The TFSA is an account that benefits almost every Canadian investor. The contribution limits for the TFSA are frustratingly low compared to an RRSP so any increase is welcome,” says Chartered Financial Analyst Anita Bruinsma, a Toronto-based financial coach with Clarity Personal Finance.

In November 2023, MoneySense columnist Kyle Prevost wrote about making inflation work for you. He pointed to the pain home owners have when renewing their mortgages at a higher interest rate, and the sticker shock we’re encountering with grocery prices. 

However, “we shouldn’t ignore or discount the more advantageous aspects of inflation, such as increased government benefits and more contribution room in our RRSPs and TFSAs.”

Prevost linked to a spreadsheet posted on X (formerly Twitter) by financial advisor Aaron Hector. Above you will see that the 2024 official inflation rate of 4.7% is below 2023’s rate of 6.3%. But it is well above 2022’s 2.4% and 2021’s 1%. 

While inflation at 2% might go unnoticed by some, “the 10% increase in prices we’ve seen over the last two years is hard to ignore,” Bruinsma says. “Seeing higher CPP and OAS payments land in your bank account will really help to alleviate the anxiety.” 

Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial, agrees that while the pain of paying more for groceries or gas is real, “one of the main benefits is paying less taxes.” Income tax brackets increase with inflation each year. For example, in 2021 the lowest tax bracket in Ontario ended at $45,142 of income. “Starting in 2024, this lowest tax bracket now ends at $51,446. This is a 14% increase over just a few years.” 

For Canadian workers, the benefit may not be as impactful if they received wage increases in line with inflation. If not, then they are keeping more of their after-tax income earned, Ardrey says, and “the same could be said for the self-employed individual and their income.”

The good news is this is even more beneficial for retirees. 

For those on fixed incomes, “their after-tax income would certainly increase,” Ardrey says. “If they were taking the minimum RRIF [registered retirement income fund] payment and government pensions, the government pensions are increased for inflation, where the RRIF payment is a function of the account balance on January 1 and the minimum withdrawal rate. So, if the investments have been impaired in a high inflationary environment, this could lower someone’s taxes in this situation.”

This also provides more flexibility in tax planning strategies like the RRSP meltdown, which is a controversial practice where pre-retirees typically in their 60s withdraw more money from their RRSPs when they’re in a lower tax bracket than they may ultimately be once they the RRSP becomes a RRIF and is subject to forced annual withdrawals, possibly at a higher tax bracket. Ardrey says retirees can draw more from their RRSPs in a given year and still remain in the lowest tax bracket. 

“This can also benefit someone with a personal corporation who is pulling out income in retirement,” says Ardrey. “They can take more from the corporation without increasing their taxes payable.”

Rising RRSP contribution limits

Inflation also influences RRSP maximum contribution savings limits. In 2021, the limit was $27,830. For 2024, it is $31,560, which is a difference of 13.4%. Over a similar time period, 2018 to 2021, it rose from $26,230 to $27,830, a difference of 5.7%. 

“Thus, recent inflation caused the RRSP limit to more than double over a similar time period,” Ardrey concludes. “This of course can increase your tax-deferred savings and also your annual tax deduction for your RRSP contribution.” 

OAS clawback threshold also rises

Among the goodies that will appeal to Canadian retirees is the rising threshold where they may encounter clawbacks of OAS benefits. Many retired couples in Canada pay close attention to this at the end of every calendar year. 

The goal is for each member to maximize retirement income from all sources (pensions, investments, etc.) but to stay slightly below the point where Ottawa starts clawing back OAS benefits. 

After all, OAS payments are for many a welcomed $690-a-month payment (that’s before tax) or $8,300 a year, and it’s inflation-indexed to boot. In 2020, the threshold at which OAS benefits began to get clawed back was $79,054, according to Hector, but that number has risen every year: to $86,912 in 2023 and a projected $90,997 in 2024. 

So, senior couples with similar incomes in Canada should be able to earn almost $182,000 between them before even starting to see their OAS benefits get clawed back. And if that does happen, that’s what many would describe as a “nice problem to have.” 

Is CPP inflation hedging a reason to take CPP a bit early?

Fortunately, CPP benefits are not clawed back at any level, although of course they are still taxable. Here too, inflation indexing comes to the rescue for retirees and semi-retirees. In fact, for the second year in a row semi-retired actuary Fred Vettese argued that Canadian near-retirees hoping to maximize CPP payouts by waiting to age 70 might instead take it a year or two early to take advantage of inflation adjustments that kick in each January. 

Vettese suggested that in late 2022—and more recently in this article—that those thinking of starting CPP in 2024 should start it before the new year. He responded in an email to me: “I determined it definitely made sense to start it in late 2023 instead. Doing so is worth an extra few thousand dollars.”

His reasoning may not be intuitively obvious to the average Canadian retiree or even a personal finance journalist. While CPP benefits rise with wage inflation before benefits start, they rise with price inflation after they start. He wrote in September: “If wages are rising faster than consumer prices, then it is usually best to wait until the following calendar year. If it is the other way around, as happened in 2022, it may be better to start CPP a little early.” Vettese says wage inflation for CPP purposes will rise by 3% in 2024 over 2023, while price inflation is likely to be in the 4.4% to 4.6% range.

Bruinsma is more cautious about taking CPP early. “It can be tempting to start CPP in 2023 for the inflation-indexed boost you’ll get in 2024, but it’s really important to look at your overall income and spending requirements, now and in the future. […] When to take CPP depends on so many factors like your employment status, your other sources of income, your longevity outlook, specific plans like selling a rental property or stocks with big capital gains and personal feelings about income stability.”

Once you start taking CPP, it can be a hassle to adjust should you change your mind. And you can do so only within a year of taking it. 

Vettese doesn’t view inflation as good news “except to the extent it has temporarily lifted nominal interest rates.” He thinks right now is a “rare opportunity” to load up on high-dividend stocks like RBC or BCE, and on government bond ETFs. He says the market has made a pretty good move recently, “but there still seems to be a lot of upside potential.”

When asked about annuities, Vettese says “they look a lot more attractive than they did three years ago. But I’m worried about another inflation spike in the next 10 to 20 years. If you knew for sure inflation would return to the 2% level and stay there, then I’d strongly recommend buying an annuity with maybe 25% of your nest egg. But the chances of another bout of high inflation seem a lot higher than it did three years ago.” 

Yes, like taxes, inflation seems to always be with us. It’s the silent scourge that eats into Canadian retirees’ purchasing power with every passing year. Unlike those Canadians who are still in the workforce and getting regular raises and cost-of-living bumps, retirees largely have to fend for themselves. But, at least Ottawa dulls the pain in a few spots. 

More from Retired Money:

• The best ETFs for retirement income

• Is semi-retirement stressful? You bet—here’s what to do about it
• The five factors of retirement for Canadians

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

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