Costly Mistakes that Retirees Make About Government Benefits

Costly Mistakes that Retirees Make About Government Benefits by Astra Financial

Retirement planning can be complex, but few aspects are as critical as understanding your government benefits. In this episode of Heart of Your Money, we’re tackling four costly mistakes that could be diminishing your retirement income.

From underestimating the true value of CPP and OAS to getting blindsided by the dreaded clawback, these pitfalls can significantly impact your financial security. The good news? They’re all avoidable with proper planning. Whether you’re approaching retirement or already there, knowing how to maximize these benefits while minimizing tax implications could mean thousands of extra dollars in your pocket.

Join me as we explore smart strategies for timing your benefits, leveraging spousal options, and protecting your OAS from unnecessary clawbacks.

Show Notes: Costly Mistakes that Retirees Make About Government Benefits

Welcome back to the Heart of Your Money podcast. I’m your host, Zena. And today we’re diving into something that could make a real difference in your retirement. And what I mean is keeping more of your hard-earned money in your pocket. We’re talking about four costly mistakes retirees make when it comes to government benefits.

That’s CPP and OAS is what I’m talking about. And these are some sneaky pitfalls that I want you guys to avoid. So grab your coffee or tea, sit back, listen, and let’s make sure you’re not leaving any money on the table.

Mistake number one, underestimating the real value of government benefits. Okay. This one’s a biggie.

It’s all about underestimating the value of CPP and OAS. Now, sure, they may not sound like much on paper, but these benefits are like your financial safety net. They don’t fluctuate with the markets, they’re guaranteed for life, and they get bumped up every year for inflation. Think of them as the solid foundation of your retirement income plan.

And cool tip, you can have taxes withheld from your CPP and OAS. Just like when you were getting paid and you had taxes taken off automatically. This makes life easier. I wanted to share that because I have had a few people surprised when I say, “Listen, we need to start taking some taxes off your CPP and OAS instead of out of your investments.”

Because why sell investments more than you have to? They’re going to earn more, they’re going to create more interest and dividends. You might as well have it come off your CPP and OAS. Easy way to do that is to just call Service Canada. Okay, so now I’m going to talk some numbers. And for some of you, this is where you can look out the window or refill your coffee cup.

But these are numbers that I think when people are getting very close to CPP and OAS, they actually perk up and listen and want to hear a few things. So the maximum CPP payment – I’m going to share that. It is $1,433 here in 2025 and that’s per month. So $1,433 a month is the maximum CPP. And old age security at age 65 – that’s $727 a month. So both of those are if you’re 65 and you’ve contributed the maximum amount to CPP, you’re going to get $1,433, and old age security at age 65 is $727 a month, and guess what? These payments don’t stop – they keep coming rain or shine, meaning no matter how the markets perform, you get them.

Mistake number two, rushing to collect benefits too early. This is the classic mistake of collecting both of those. Well, CPP first, I’m going to talk about getting that one early. So I get it, you’re excited to start retirement and the extra cash sounds tempting, but let’s slow down and do the math again. If you start CPP before age 65, your benefit gets reduced by 0.6 percent every month. Okay, let me put it per year, that’s about almost 7 percent less per year. So if you are starting at 60, you’re looking at a 36 percent reduction. Ouch. Now, some people have to start at that early because they have quite a bit of debt and they need some income and that’s a life circumstance, but for the majority of us, that reduction, that’s a big one.

Now on the flip side, if you wait past age 65, you get a bonus. So for every month you delay, your payment increases by 7%. Now wait until 70 and then you’ll get a 42% boost. Imagine going from a thousand a month to $1,400. That can make a difference. But hey, I know life isn’t just about math. I know, I know that.

So here’s when taking CPP early might make sense. I’ll share a couple. I said before, you need the money now, you’ve got debt. Maybe there’s health concerns, you know. Longevity for whatever personal health things that you’re going through and you know that you’re not going to live a longer life, you know, into your late 70s, then you’re going to want to take it earlier. And some people, the big excuse I hear when people come into my office, is – hopefully they haven’t taken it yet, but once in a blue moon, I get somebody that comes in. They’ve already started the tap of CPP and they tell me it was, “Hey, listen, I just want to enjoy life. I want to take it now while I’m spending the most and I’m active right now.” On the other hand, if you’re in good health and can afford to wait, delaying is a smart move.

Mistake number three, overlooking spousal strategies. Now let’s chat about something that’s often overlooked and that’s if you’re married, the options that you have to optimize your benefits. One cool feature is CPP pension sharing. It’s not the same as income splitting, so it is not when you’re doing your taxes, maybe you’re on TurboTax or with an accountant, and after age 65, and depending on what kind of pension you have, you can income split. It’s not that, it’s different. And it’s a way though, to lower your tax bill. You have to request it specifically from Service Canada.

And while it doesn’t change the total CPP amount you and your spouse receive, it can make a big difference in how much tax you pay. And don’t forget about survivor benefits. If one of you passes away, the surviving spouse can receive combined CPP benefits, but there’s a cap and it can’t exceed the maximum amount of CPP.

Mistake number four. This is the last one I’ll talk about – getting blindsided by the old age security clawback. All right. This one stings. I, first of all, I have two problems with the naming of Old Age Security. I really, really wish – and I know I don’t want the government to spend any more money to change this name – but I wish it wasn’t called Old Age Security because old age is no longer 65. In my biathlon training, I am routinely getting my butt kicked by people receiving Old Age Security. I would not look at them and call them old at all. So this one stings and it’s officially called the Old Age Security Recovery Tax. Now recovery tax sounds better than clawback, but it doesn’t matter because either way – clawback, recovery – it’s nasty.

It kicks in when your income goes above a certain level. Here’s how it works. In 2025, if your income exceeds $90,997, the clawback starts. For every dollar above that threshold, 15 cents is deducted from your OAS, and if your income hits $148,000 – so if your income is $148,451 to be specific – a year, your Old Age Security is completely gone. Now, if it’s after age 75, they’ve bumped it up and it’s actually $154,000 if you’re over age 75, so there’s a slight difference there, but that’s when your Old Age Security is completely gone.

If you make over $148K, don’t worry. There are ways to reduce or even avoid the clawback. Number one, visit your financial planner. That’s what we do. I love that stuff. I get all nerded out and do a million scenarios and what bucket from here. That’s the whole idea of a financial plan. It saves you thousands in taxes. And so if you’re concerned about paying your financial advisor – hopefully you’re only paying 1 percent transparent advisor fee every month and you see it so 1/12th every month – you’re gonna recoup it just in the planning year over year of what buckets to take out of. You’re gonna recoup it by having an estate plan left over so you’re not giving it all over to CRA.

So wouldn’t you rather pay your financial advisor 1%, who also makes you great return on your investments, maybe rather than not visit them because you’re feeling like, “Ooh, another 1% fee.” They earn it. We earn it because we save thousands in taxes. Okay, that’s a rant for another day. Sorry guys. I’m gonna stick back to this one.

So there’s ways to reduce and avoid the Old Age Security clawback. You can spread out your RRSP withdrawals over several years. So we’ve done that. We know that if income’s really high and if you wait until age 72 and you turn your RRSP to a RRIF and now all of a sudden you’re in this really high tax bracket, you won’t even get OAS.

There’s a way we can structure early on by doing pre-planning and that’s why starting before you retire makes sense, before you start turning on the tap. Another one is delaying your OAS until age 70. And just like CPP, you get a higher payout if you wait and defer it until age 70. And so here’s an example.

Someone has a company, a corporation, and they’re just retired. They’re, you know, 60, 65, and we want to drain out money from the company first. There’s enough there to pay them annual income. We’re actually going to defer taking OAS until age 70, until we can get all that money out of the company. But it’s all income planning. That’s just one very, very minor, general example but it works and in every plan I do, we run a scenario. When should we take it? From 65 and then running a scenario all the way until 70, which one means paying less tax, which one leaves the most in your pocket.

Another one is using your Tax-Free Savings Account wisely. Income from a TFSA doesn’t count toward the clawback threshold. So, in some scenarios, we actually supplement retirement income by turning on the tap in the TFSA. Whether it’s, I don’t know, maybe it’s $400 a month or $500 a month, or they’re actually using it as income because they’ve spent all this time. They’ve done great investments. We’ve got lots and lots in there, you know, but they’ve got thousands in their Tax-Free Savings Account and they’re now retired and we can actually turn on the tap to pay them a little bit each month and just that small little smidgen amount of income of reducing registered income and instead taking it from the TFSA, it brings them down a notch on the tax ladder and now they do not have a clawback from Old Age Security. So that’s one way. Those are a couple examples of reducing that clawback.

General takeaway is your financial planner can map that out for you. So go see them. Fun fact, you can collect CPP and OAS even if you’re living outside of Canada. In fact, you can go to the website and find out they’ll actually deposit it to certain countries’ currency. So, I thought that was interesting. If you’re dreaming of retiring abroad, that’s one less thing to worry about. You’ll still get your benefits.

So there you have it, four costly mistakes retirees make about the government benefits and how you can avoid them. By making smart decisions about when to collect CPP and OAS, you can integrate your spousal benefits and plan for the OAS clawback. You can make the most of your income.

If you found this episode helpful, please share it with someone who might benefit from it. And don’t forget to subscribe so you don’t miss any future episodes. Thanks for tuning in to the Heart of Your Money. Until next time, I’m Zena helping you keep more of what’s yours in retirement. Stay well, stay kind, and I’ll see you in the next episode.

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