OAS change won’t disrupt retirement plans

Many Canadians aged 45 to 54, the first age group to be affected by the OAS age increase proposed by the government, are already planning on working past age 65, according to CIBC polls conducted by Harris/Decima in September 2011.

The findings suggest the proposed changes won’t cause most Canadians to rewrite their retirement strategies, but that they may need to revisit their savings and debt management, with some already expecting to carry debt into retirement.

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Consumer polling conducted in late 2011 provided a number of insights about Canadians in the 45-54 age group, including the fact that the average target retirement age for these Canadians is 63, with more than two-thirds planning to stay engaged in the workforce after they retire by taking on part time work (43%) or by doing occasional consulting (22%) to supplement income.

Looking ahead to their sources of income in retirement, 30% already plan to rely primarily on their own savings, while 25% believe government payments would be a key source of income. An additional 25% named private pensions as their primary source of income.

A quarter (26%) of this group expect to carry debt into retirement, with 17% of Canadians between 45 and 54 saying they would still have a mortgage payment to consider.

“Most Canadians aged 45 to 54 are not likely to require major alterations to their retirement plan based on the recently announced changes to OAS,” said Jamie Golombek, managing director of tax and estate planning, CIBC. “However, for those who expect to carry debt into retirement, it is another reason to revisit their savings and debt management plans in these critical years before retirement.”

He adds, “Good debt management is particularly important, as repaying debt in retirement creates a drag on your discretionary income.”

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With this in mind, changes to OAS payments need to be factored into retirement planning for those who were planning to retire at age 65 or earlier. With the potential for a reduced monthly income, Canadians will need to carefully consider how their finances will look in the early years of their retirement and whether debt repayment would have a greater impact on monthly retirement income.

“Taking an integrated view of your overall financial picture including savings and debt is the single most important step you can take today to help guide you to the retirement you want for you and your family tomorrow,” says Golombek.

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Talking points for clients affected by OAS changes:

• Avoid major investment changes and don’t shift your investment mix in an attempt to generate higher returns in your current portfolio. Your future income needs and your risk tolerance led to your current investment decisions, and those carefully considered plans should not be changed without a complete review of your overall investment portfolio.
• Eliminating debt before retirement remains essential to making retirement income go further; consider setting regular mortgage payments higher than the minimum required, which will reduce principal faster at today’s low interest rates.
• Ensure the mortgage allows for lump sum payments, so you can use your tax refund or other lump sum payments to further accelerate debt repayment.
• Review your income needs and consider your sources of income for ages 65 and 66.