Jason Heath: Financial planning for the reluctant retiree

Pre-retirees planning to work past the traditional retirement age have unique tax considerations. Photo by Getty Images

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For many Canadians, retirement is a date circled on a calendar rather than a concept. It is a moment in time when rush hour commutes are replaced by long walks on the beach. The problem is not every senior wants to, or is able to, retire and some mid-career savers could take a different path to financial freedom.

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Financial independence instead of the end of work

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An alternative approach could be working toward a time when you work because you want to as opposed to because you have to work. Organizations are responding by adopting senior-friendly roles and age-diverse hiring protocols, such as phased retirement and modified roles.

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If part-time employment is not an option in a current role, seek out a new one. Self-employment may be another option. According to Statistics Canada, in 2022, 27 per cent of Canadian women and 41 per cent of Canadian men aged 65 to 74 were self-employed, and still working by choice rather than necessity.

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Cash flow modelling

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Retirement planning often reflects the life-cycle hypothesis, which was an economic concept developed by Franco Modigliani and Richard Brumberg in the 1950s. Its premise is that savers tend to smooth their consumption over their lifetime, saving during their working years, and dissaving, or spending their savings, during retirement. Spending is assumed to remain stable and constant. Its application to retirement planning tends to include an abrupt end to working and saving and a switch to drawing down savings thereafter.

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It is a simple solution to the complicated task of planning financially for retirement. And as a result, financial planners often assume steady spending throughout a client’s lifetime, with a full-stop retirement at age 60 or 65. Financial consumers and financial planners alike should challenge each other to look at different ways of accumulating and decumulating.

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Retirement is often more variable, including travel early in retirement, gifts to children, home downsizing, and inheritances. Or part-time work can help supplement spending for those whose savings cannot maintain their lifestyles.

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CPP and OAS

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You can start your Canada Pension Plan (CPP) retirement pension between ages 60 and 70. Healthy seniors who expect to live well into their 80s might benefit from deferring their CPP to age 70. They will receive fewer total months of payments during their lifetime, but the monthly payment amounts will be higher. If they live to their mid-80s and beyond, their financial outcome may be better.

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Employees aged 65 or older must continue to contribute to the CPP by default. If their CPP is maxed out based on their contribution history these contributions will not increase their pension. However, they could consider starting their CPP at 65. They may not need the income, but the subsequent contributions they make can then boost their CPP, with an adjustment the following year. This is called a post-retirement benefit (PRB).

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Alternatively, they can opt out of future CPP contributions once Canada Revenue Agency (CRA) approves Form CPT30. Employees must file this form and provide the CRA approval to their company to stop CPP contributions.