When Senior Clients Can't-Or Won't-Retire

It’s time to retire assumptions about retirement.

For starters, it’s occurring later in life as more Canadian seniors work beyond the traditional retirement age.

In 2015, 20% of Canadians aged 65 or older worked during the year, according to StatsCan data. That’s nearly double the percentage in 1995. Part-time or part-year work accounts for most of the increase. Still, almost one-third of working seniors (30%) worked full time and full year in 2015.

While some Canadians continue to work because they want to (13% of Canadian investors look forward to part-time work in retirement, finds the 2017 Schroders Global Investor Study), census data suggest more seniors are relying on employment income. In 2015 employment was the main income source for about 70% of seniors who worked full time all year. That’s up from about 62% in 2005 and about 57% in 1995.

Necessity or lifestyle choice?

Kevin Brewer, principal at Kevin Brewer Financial in Fredericton, N.B., says “by far” most senior clients who continue to work do so out of necessity, including some who retire too early and find themselves financially unprepared. “I have seen those retired, or semi-retired, take up consulting or freelancing as a means to supplement their fanciful retirement lifestyles,” he says.

Other seniors are forced from work as employers downsize, so consulting becomes an obvious choice, he says.

Another surprise for clients is when inheritances are smaller than anticipated or get spent on nursing homes and long-term care, says Brewer.

But there are also seniors who have jobs when it isn’t financially necessary. Jason Pereira, partner and senior financial consultant at Woodgate Financial in Toronto, says many of his affluent, professional clients continue to work—or retire and later return to work—despite ample portfolios.

A longer working career is a way to maintain vitality and cognitive function, he says (though he adds that other activities would be equally effective).

Working outside the home also keeps peace between spouses. “The number-one, fastest-growing cohort of divorcees is over 65,” he says.

Working it out with working clients

Pereira says he aims to give clients “the option of retirement, not the obligation.” Continuing to work, however, “can be punitive in terms of taxes,” he says.

When you combine clients’ pension plans with CPP, OAS and freelance or employment income, “many people are in the same tax bracket in retirement as they were while working,” says Brewer.

For professionals, Pereira suggests incorporation, “because they can draw some of the income they’re making now, then draw the rest of it later and even out income over time.”

And working seniors have RRSP contribution room if they’re under 71, he adds.

OAS clawback can be frustrating, though. While clawback depends on net income and can thus affect any senior, working seniors might view it through a particularly negative lens. That’s because it diminishes the marginal benefit from work, and thus demotivates some clients, says Pereira.

Still, “people obsess about clawback far too much,” he says. Affluent clients expend a lot of effort to avoid clawback compared to the retained benefit amount, he says, yet for less wealthy clients working out of necessity, “the net benefit of working will always be positive.”

Clients are eligible for OAS at 65, but the government suggests using the deferral (up to five years) when seniors work and can afford to wait. (Future monthly payments increase 0.6% for every month of deferral.)

For those who don’t wait, OAS clawback is 15% of every dollar above the net income threshold—$75,910 for 2018. OAS is eliminated entirely at net income of about $123,000.

Various strategies can keep taxable income below the threshold, such as using tax-sheltered investments, says Pereira. Affluent clients often contribute to TFSAs, with an end game of paying out to the kids tax-free, he says, and taxable assets can also be transferred to an insurance policy, which is a tax shelter.

A warning: “Dividend-paying stocks held in a taxable account are a big mistake,” he says, because taxable income includes grossed-up dividends.

A better investment option for taxable accounts is corporate-class mutual funds, which can convert income to deferred capital gains.

Brewer notes that those who qualify for the guaranteed income supplement (GIS, available to low-income earners who also draw OAS) must also keep an eye on income thresholds.

“Income takes away from GIS to the tune of 50 cents on the dollar,” he says. That means taking $200 monthly from an RRIF causes a monthly GIS clawback of $100.

Brewer says one strategy for low-income clients is to de-register RRSPs before turning 65 and place the funds in a TFSA. The strategy’s effectiveness depends on income sources, TFSA room and RRSP amounts. “You don’t want to cause yourself an excessive tax problem while trying to solve another one,” he says.

You can’t take it with you

If clients stick to minimum RRIF withdrawals to avoid OAS clawback, planning is required when registered funds aren’t depleted by the time they die.

When the client or the beneficiary spouse dies, “the entire registered portfolio is [taxed] as if the entire thing was earned as salary in the year of death,” says Brewer. (Clients could withdraw more than the minimum if it means reducing the number of total times they’ll hit the OAS clawback threshold, notes Pereira.)

Subsequently, life insurance can be purchased so the estate can cover the tax. “Paying an insurance premium may cost less than carving out a portion of the estate to send to CRA,” says Brewer.

Insurance could also be bought to match the RRSP amount and given to charity. That way, the RRSP income is offset 100% by the charitable receipt. “CRA gets $0,” says Brewer.

Considerations for working seniors

  • Benefit clawback: OAS clawback starts at $75,910 for 2018

  • RRIF management: Clients can access lower tax rates by meeting (but not exceeding) the OAS threshold

  • CPP: Working seniors younger than 65 who receive CPP must contribute to CPP. Working seniors 65 to 70 who receive CPP can choose whether to contribute to CPP. Working seniors aged 60 to 70 are eligible (depending on income) for the post-retirement benefit.