The Fear Of Missing Out (FOMO) is alive and well in Canada. It’s why we check our phones for emails and texts every minute, sign up for store sale notifications, and pile into speculative investments, driving them to baffling heights. And if there’s one thing we know, it’s that decisions made out of fear are rarely good decisions.
But perhaps the most widespread and surprising example of FOMO is the age at which Canadians choose to start receiving retirement payments from the Canada Pension Plan (CPP).
A Bit of Background
We can choose to start receiving CPP as early as age 60 or as late as age 70. While the “normal” retirement age is 65, there are significant penalties to taking CPP earlier and even more enticing benefits to waiting to take it later.
For each month that we choose to take CPP early, we give up 0.6% of the pension value. This translates to a penalty of 7.2% for each year before age 65 we take it, or a 36% reduction if we opt to take it at age 60.
Conversely, for each month after age 65 that we choose to postpone receiving payments, we get 0.7% in increased pension payments. This works out to 8.4% per year, or a healthy 42% increase if we can hold out until age 70.
So What Does That Mean in Reality?
If, instead of taking CPP at age 60, you wait until age 70, you’ll get 2.2 times as much! Moreover, since CPP benefits are indexed to wage inflation, the actual difference is closer to 2.5 times. Even holding off for just 1 year by starting at age 61 instead of 60 gives you more than 11% more income – for life! Pretty sweet, eh?
But here’s where that pesky FOMO comes in: according to a comprehensive report by Bonnie-Jeanne MacDonald at the National Institute of Ageing at Ryerson University, fewer than 1% of Canadians choose to delay CPP benefits to age 70 to maximize their benefit. Even more surprising, more than 95% take CPP at age 65 or earlier!
And according to the report, that decision could cost the average Canadian more than $100,000 in secure lifetime income, a concept it refers to as “Lifetime Loss”. Depending on an individual’s CPP entitlement and longevity, their Lifetime Loss could be almost $300,000! OUCH!
In discussions with my clients, the question of when to start taking CPP benefits ALWAYS comes up, as it should. While there are many factors that go into the decision, the fear of dying as a young retiree and leaving oodles of CPP money on the table is probably the main argument people make for cashing in early.
It’s a funny thing. On one hand, retirees worry about living too long and running out of money or having their savings devalued by inflation. On the other, when it comes to CPP, retirees worry about dying early and leaving unclaimed CPP money on the table.
Of course, both of these things (dying early or having a long life) can’t happen to one person, and you can’t optimize for both scenarios. You have to decide which you want to prepare for. I’d argue you should focus on the more likely scenario, which is a long – and hopefully happy – retirement!
Arguments in Favour of Waiting
- Collectively, we’re living longer.
On average, a male who makes it to age 65 can expect to live almost 20 years, a female over 22 years. With good health and good luck, you could be looking at 30 years or more in retirement. While we’ve all heard tragic stories of people who pass away shortly after retirement, in reality, 93% of 60-year-olds will live past age 70, with more than half living past age 86. Unless you have a known serious health condition, the odds are that 60-year-old you is looking at two decades or more of retirement for which to plan! - Inflation is a thing.
Prices go up… and up… and up. Over the course of a multi-decade retirement, the purchasing power of your savings can drop significantly. CPP payments are indexed to inflation, meaning that as prices go up (broadly speaking), your payments go up too. It’s hard to find a guaranteed income stream that will match that! If you start with larger CPP payments by holding off until age 70, those larger payments benefit from inflation adjustments. - You’re getting an AMAZING deal with the CPP vs. retail annuities.
Traditional defined-benefit employer pensions are becoming rarer than handshakes in a COVID hot zone. An annuity is a way of creating your own “pension” from your savings, but attempting to match the inflation-adjusted increased payments you get by delaying your CPP by going to an insurance company will cost you a LOT more. According to the report, 71% more on average for men, and 94% more for women. - Pay less in tax when the end does come.
Most Canadians try to make their RRSPs/RRIFs last right through retirement and plan their retirement savings drawdown accordingly. This is fine if you know exactly when you’re going to pass on. You can plan things precisely and, as the saying goes, bounce the cheque to the undertaker. (Seriously though, don’t do this. They’re hardworking folks.)But we don’t know exactly how long we’ll live, right? So chances are you’ll either run out of savings (if you live “too long”), or leave a good chunk of money for the government to tax (if you pass on earlier than planned). Upon the death of the second spouse, any remaining RRIF balance is taken as income and taxed accordingly, which could result in a hefty tax bill on larger accounts.
Talk about leaving money on the table, or rather, to the Canada Revenue Agency (CRA)!
If instead, you spend more of your retirement savings earlier in retirement to postpone the start of your CPP retirement pension, there will be less remaining to tax when you pass on, and you’ll also guarantee yourself a higher inflation-adjusted stream of income that lasts, well, as long as you do.
A Few Reasons to Take CPP Early
While the case for delaying the start of a CPP retirement pension is strong, there are a few situations where it might make sense to “cash in” early. These include a lack of alternate income sources to “bridge” you to the start of a delayed CPP, health issues that severely impact longevity, potential clawback of income-tested benefits like GIS and OAS, and those whose entitlements may be affected by continuing to work or receiving a survivor’s benefit. If you’re nearing retirement, work with a qualified financial planner to develop a comprehensive retirement plan that will guide you through such considerations.
Read about how we’ve helped people just like you figure out their retirement planning options, feel empowered and ready for the future.
For the rest, don’t let FOMO keep you from the benefits of a fantastic but greatly underutilized option when it comes to your CPP retirement pension. I may never make it to the ranks of the wealthiest 1%, but I fully intended to join the enlightened 1% when it comes to taking my CPP at age 70.
NOTE: The stats and figures used in this article originated from a report published by the FP Canada Research Foundation written by Bonnie-Jeanne MacDonald, PhD, FCIA, FSA. You can access the report here: “Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits“
NOTE: The author is not able to address questions regarding an individual’s specific financial situation. If you have a technical question regarding your CPP, please contact Service Canada. If you would like to discuss your retirement planning needs, we encourage you to book a free, initial consultation with one of our Money Coaches.
