Working in retirement

Etherington decided he needed to keep working in order to finance his retirement. He joined up with a friend to perform warehouse safety inspections. On another front, Etherington began working with a group to develop tools for underground gold and silver mining – his previous profession. He also works part-time for CARP (formerly the Canadian Association of Retired Persons).

“Now, I am making money,” Etherington says, “Not a lot, but enough to survive.”

Etherington took his Canada Pension Plan (CPP) benefits early and understands that his old-age security (OAS) benefits and any other income-based subsidies might be clawed back if he reaches a certain income threshold – but he doubts he will reach that level.

Today, many people work past their set retirement age, whether it’s a lifestyle choice or a financial necessity.

Jim Yih, a financial education expert and founder of www.retirehappy.ca in Edmonton, believes many people who work past retirement age worry unnecessarily about a potential clawback of their OAS. (A “clawback” is a reduction in benefits triggered when income reaches a certain threshold.) For 2014, the clawback (a.k.a. “tax recovery”) applies to pensioners whose net income exceeds $71,592. For each $1 of income above this limit, the amount of basic OAS pension is reduced by 15¢.

Currently, the maximum OAS benefit is $563.74 a month – less than $7,000 annually.

But, Yih says, although many clients worry about the clawback, the benefits [of earning additional income] usually outweigh the negatives. Says Yih: “I always pose the question: ‘If you are working and making $1,000 a month, would you give up that $1,000 a month just so you could retain the [total] $560 from OAS?'”

Many clients confuse clawbacks of OAS with paying higher income taxes, Yih says. But with the marginal tax-rate system, people are never penalized for making more money. Yes, they might have to pay more taxes; but, in the end, people should always be able to increase their take-home income by earning more.

The 43% marginal tax rate in Ontario doesn’t mean that all of your client’s money will be taxed; only the amount above the threshold will be.

“So, even if you are in the highest tax bracket,” Yih says, “you are still putting 57¢ of every dollar [earned] in your pocket. You will never go backwards by working more.”

Yih gives an example of an employer who offers a worker a $10,000 raise or bonus. Most people would not turn down such a windfall on the basis that it would cause them to pay more taxes. That’s because, in the end, the employee does get to keep a good portion of the bonus.

“So, why would that be different in retirement?” Yih asks. “The more income you make, the more you put in your pocket. I don’t care where it comes from – whether it’s a company pension plan, CPP or working; whether it’s employment income or rental income. More income means more money in your pocket.”

OAS and the guaranteed income supplement for lower-income Canadians can be affected by working longer. CPP is not an income-tested subsidy, so it should not change no matter how much longer a client works.

Clients who retire from companies with a pension plan and go back to work, Yih says, will not suffer a reduced pension, either.

Not working for fear of OAS clawbacks and higher taxes, says Yih, “is a psychology argument, not a rational argument.”

The recent federal government decision to increase the age of eligibility for OAS to 67 from the current 65 starting in April 2023 could delay any concerns about OAS clawbacks for some people. Clients born before April 1, 1958, will not be affected by that change.

Meanwhile, Etherington suggests, younger clients who want to avoid working in retirement should start saving early: “Prepare far, far ahead.”

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