Ottawa Couple Considers Strategic CPP Deferral for Early Retirement Next Year
Arnold, 56, and Heather, 60, an Ottawa-based couple, are actively planning for early retirement next year, carefully examining their financial options to ensure a comfortable transition. With retirement potentially just twelve months away, they face crucial decisions about their Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, alongside strategic withdrawals from their registered retirement savings plans (RRSPs).
Financial Landscape and Retirement Income Goals
The couple anticipates requiring $118,730 in after-tax annual income during retirement, which includes approximately $15,000 allocated for travel expenses. As empty nesters, they also hope to assist their three young-adult children with down payments for their first homes. Currently, Arnold earns $125,000 annually before taxes, while Heather earns $100,000. Both benefit from employer-based defined benefit pension plans that are indexed to inflation.
If they proceed with retirement next year, Arnold's annual pension income would be around $48,000, supplemented by a monthly bridge payment of $892 until age 65. Heather's pension would provide about $40,000 annually, with a $170 monthly bridge until 65. However, these combined pension incomes fall short of their target retirement income, prompting careful consideration of additional income sources.
Investment Portfolio and Property Assets
The couple's investment portfolio includes $350,000 in self-directed RRSPs, strategically invested across various asset classes through exchange-traded funds (ETFs). Their primary residence is valued at approximately $1 million, carrying a $245,000 mortgage. Additionally, they own a self-sustaining rental property valued at $420,000 with a $250,000 mortgage.
An expected inheritance of $150,000 in spring 2026 coincides with their plan to sell the rental property. They intend to use these combined funds to pay off their primary residence mortgage, with any remaining proceeds directed toward investments. This approach aims to reduce debt and enhance their financial stability in retirement.
Tax Minimization and Benefit Deferral Strategy
A central question for the couple involves tax efficiency and benefit timing. They are considering starting RRSP withdrawals before age 65 while deferring both CPP and OAS benefits until age 70. This strategy raises important questions about its effectiveness and whether they are truly on track for retirement next year.
Financial expert Ed Rempel, a fee-for-service financial planner and tax accountant, provides valuable insight into their situation. "Thanks to their large pensions, the good news is that if their desired lifestyle—$95,000 a year to spend in retirement—if correct (and that may be a big 'if'), Arnold and Heather are on track to retire next year," Rempel notes.
Expert Analysis and Lifestyle Considerations
Rempel highlights two reasons to scrutinize their retirement budget. First, the couple themselves have expressed uncertainty about whether their target income accurately reflects their future cash flow needs over potentially thirty or more years of retirement. Second, their current spending patterns suggest potential discrepancies.
"With their current salaries, after tax and after allowing for 10 percent of their salaries to go to their pension contributions, they should be bringing home about $140,000 a year total," Rempel explains. "If they are only spending about $120,000 a year (including their mortgage payment), then they should have been able to save about $20,000 a year in the past several years (unless they had unusual expenses). Have they been able to save it? If not, then they might not be happy with $95,000 a year to pay for a retirement lifestyle."
The expert cautions that many individuals assume their retirement cash flow needs will mirror current spending while overlooking irregular expenses such as vehicle purchases every few years, home improvements, significant trips, or financial gifts to children. These considerations are particularly relevant for Arnold and Heather as they plan to support their children's home purchases.
Strategic Implications of CPP and OAS Deferral
Deferring CPP benefits to age 70 can significantly increase monthly payments, with benefits growing by approximately 0.7 percent for each month deferred after age 65, resulting in a 42 percent increase if delayed until 70. For OAS, deferral increases benefits by 0.6 percent monthly, yielding a 36 percent boost at age 70. This strategic deferral, combined with early RRSP withdrawals, creates a balanced approach to managing retirement income streams.
However, this strategy requires careful planning to ensure sufficient cash flow during the years between retirement and benefit commencement. The couple's pension incomes, combined with strategic RRSP withdrawals, must bridge this gap effectively while minimizing tax implications.
As Arnold and Heather finalize their retirement plans, their case illustrates the complex interplay between pension income, government benefits, personal savings, and lifestyle expectations in early retirement planning. Their approach to deferring CPP while utilizing RRSPs reflects a growing trend among Canadians seeking to optimize retirement income in an era of increasing longevity and financial uncertainty.
