In my last “No Dumb Questions,” I looked at your Canadian pension benefits, and what might if you spend part of your career working abroad. Today, let’s take on another variation on the theme of collecting your pension. What if you want to keep earning money into retirement? The bonus income might be sweet … but the results may sour on you if they end up reducing your pension benefits in nearly equal measure. How do you strike the right balance?
Unless it’s REALLY a labour of love, few of us want to work for free! Unfortunately, that’s approximately what can happen if you earn extra income in retirement, but you don’t keep an eye on how it impacts your pension benefits. Even worse, you could end up refunding the government if you work too hard.
Yuck. Let’s take a look at how to balance your income-earning plans with your pension possibilities, so you can make the most of both of them.
First, to review from my last video, there are two main kinds of government pension programs: the CPP and OAS.
The Canada Pension Plan, or CPP, is more of a retirement planning program, dependent on the payments you’ve made into the program through payroll deductions throughout your career. In other words, if you’ve never paid into the program, don’t expect anything back out. And, again, if you’re a business owner, check out my separate “No Dumb Question” on how the CPP works for you.
In contrast, Old Age Security, or OAS, is more of a social security system, with benefits available whether or not you’ve been employed. As a result, OAS benefits are subject to an income cap during the years you are eligible to collect them. In other words, if the government decides you’re doing well enough on your own, then you get to keep doing well enough on your own.
Let’s take a look at what happens if you earn a salary or other forms of income after you’re mostly retired. First, there are your OAS benefits. Bottom line, once you exceed this program’s annual net income limits, you end up having to return 15% of any OAS benefits you collected that same year.
In 2018 as I record this video, the annual net income limit is $75,910 for each individual. So, for example, let’s say your 2018 net income ends up being exactly $85, 910. You’d have to reimburse the government 15% of the $10,000 overage – or $1,500.
Not to worry: The government will conveniently extract that amount for you out of your future benefits. Assessed in handy monthly installments, you’ll scarcely notice it’s missing! But still, it’s money out of your pocket. And, by the way, if you do the math, your eligible OAS benefit will evaporate entirely once your 2018 net individual income exceeds $123,386.
In contrast to all this giving and taking, the CPP rules can actually work in your favour if you continue to work in retirement. Until you reach age 70, you can draw CPP benefits, and keep paying into it at the same time. These extra contributions will go toward extra post-retirement benefits.
So, what are the optimal break-even points when it comes to working in retirement? If you’re thinking it’s going to take a lot of math to figure that one out, you are absolutely right. You may have noticed, I was careful when referring to the OAS income limits. They’re not limits on all income. They’re limits placed on your individual annual net income during the time you’re eligible to collect OAS benefits.
That’s a mouthful. But it’s also an important planning opportunity! There are many entirely legitimate tax and financial planning strategies you can turn to if you’d like to continue earning income in retirement while remaining within the proper limits to receive your full OAS benefits. Similarly, as you assess when and how to take your CPP, additional planning strategies abound. And if you’re a couple, there may be twice the possible scenarios to sort through.
In short, as you approach and enter into retirement, it’s worth taking time at least annually to engage in personalized tax and financial planning. If you want to work in retirement, the planning becomes even more important to your bottom line. Depending on your time and talents, you may find it well worth it to hire a professional financial advisor to help you sort through the critical retirement planning details. Consider it job security for you and your favourite financial team.
Speaking of favourites, I hope “No Dumb Questions” is on your “favourites” list as well. If you haven’t yet done so, subscribe to my YouTube channel or connect with me on LinkedIn. Then I can let you know every time I release your next favourite installment.
