Retirement planning: Why delaying your retirement can make sense

Would-be retirees are often dismayed when they look at retirement projections based on today’s low interest rates and are told their choice is simply to work longer, increase investment risk and/or scale back their expectations of retirement. Sadly, champagne aspirations on a beer budget are not the recipe for a happy retirement.

But working longer need not be as unpalatable as it might seem on first blush. Governments around the world are doing what they can to encourage workers to stay in harness just a few years longer. They have our interests, as well as their own, at heart. They’ve seen the rising life expectancy stats and would prefer that we work longer and keep feeding tax coffers, while at the same time deferring the moment when we start drawing on our government retirement benefits.

The Stephen Harper Conservatives even tried to bump the qualification age for Old Age Security to 67 from 65, although this was later reversed by the Justin Trudeau Liberals. The Tories were on the right track; fact is, we are living longer and healthier lives, which is both good news and bad. Good news because we all want to live a long and healthy life. But not so good to the extent a long life raises the odds you’ll run out of money before you run out of life.

Add in the fact that many of today’s workers will not enjoy the plush defined benefit (DB) pension plans many Boomers and their parents received. Then throw in the new reality of miserly interest rates with the risk of soaring inflation. What you get, and it’s little wonder, many would-be retirees err on the side of working just a little bit longer if they’re at all in doubt about their financial preparation for a comfortable retirement.

Consider the benefits of working a few years longer. Financially, it means that if you are in a DB pension, the ultimate payout will be that much higher. And if your retirement nest egg is based on a defined contribution (DC) plan or RRSP, a couple more years of growth fuelled by today’s buoyant equity markets will be that much better. And don’t forget that on the withdrawal side, two or three years fewer of annual withdrawals also means your nest egg will be that much more sustainable.

Even if you are not part of a company pension plan, working longer can benefit both your eventual CPP and OAS pension streams, says Matthew Ardrey, wealth advisor and vice president with Toronto-based Tridelta Financial. For every year you defer the receipt of CPP benefits, your ultimate payout from the plan will rise by an extra 8.4%, to a maximum of 42% for those who wait right until age 70.

For OAS, the bonus for deferral is slightly less but still tempting. Each year that is deferred results in 6% higher payments, to a maximum of 36% at age 70. This is an important consideration, since both these government pensions are indexed to inflation, deferral can be a double win. Those who lack a DB inflation-indexed pension will want to consider this option carefully.

Of course, the trick is to make it to 70 using alternate sources of income, a luxury not everyone can afford. Some may choose to start withdrawing money from their RRSPs early (and paying tax as they do), or set up their RRIFs a few years in advance of when it’s required in your early 70s.

Delaying OAS may not make sense for everyone, particularly those who expect to have high enough income that OAS benefits start to get “clawed back,” which kicks in currently at an annual income of about $75,000. OAS is completely clawed back at an income around $121,000. If you’re in those brackets, consider taking OAS as soon as it’s available at age 65. CPP does not generate clawbacks but like OAS is taxable: the case for waiting till 70 if at all possible is, therefore, more compelling for CPP than for OAS.

One of the benefits of a semi-retirement approach to retirement is that it cobbles together multiple streams of income: employer pensions, government pensions, RRSPs and TFSAs, and non-registered savings. And don’t forget the stream of income called part-time work, which can provide a significant boost to your passive retirement income streams. As I have noted in a past MoneySense Retired Money column, even if a single retiree earns just $1,000 a month between ages 65 and 75, it greatly lowers the odds you’ll run out of money in your late 90s. If you’re one half of a couple and both spouses earn that much from consulting or freelance work, so much the better.

The bonus of keeping your hand in the working world is you’ll feel a lot less isolated: continued interaction with co-workers or clients and some semblance of structure to the working week can provide emotional and even mental health benefits. Having some work-oriented purpose gives you a reason to get out of bed each morning.

Part-time work will feel completely different than the wage slavery of full-time employment. With a traditional job, you have a mix of activities – some pleasant, some not so much – but in semi-retirement you can jettison the tasks you don’t feel drawn to and focus on what you’re good at and enjoy. Odds are you’ll find you’re able to be more creative in the assignments you do choose to take on, and ideally find a way to reinvent yourself.

I think of my friend David, who went to a life coach (his sister-in-law) in his mid 50s and discovered he didn’t want to be a financial advisor anymore. She helped him rediscover his childhood ambition to become an actor. He started small, taking improv classes then acquired an agent, landed small engagements in TV commercials, moved on to the big screen for some movie shorts and recently returned from the Middle East where he acted in a PBS production on the life of Jesus.

Like anything else it’s a question of putting in your 10,000 hours and mastering your craft. If you love what you do, it may not even feel like work, in which case why would you ever want to stop?

Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at [email protected]

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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.