The upside to waiting until age 70 to take CPP benefits


Q. I am retiring next year at age 65 and I don’t know if I should take my CPP immediately, or wait. My friends and other people I know from work took their CPP when they retired and they are telling me I should take it when I retire. Are they right?  When is the best time to draw CPP?
–Jit

A. Hey Jit, ask one of your friends who waited until age 70 to take Canada Pension Plan benefits, and see what they say.  I’m just having fun—I’d be surprised if you knew anyone who delayed their CPP to age 70.

But, according to a new report by the Canadian Institute of Actuaries, most Canadians should start their CPP at age 70.

These are the points from the report that really jumped out at me, and I’ve provided my thoughts below.

  • The only two factors to consider when making your CPP start decision are your life expectancy and expected investment returns. Taxes don’t come into play.   
  • Use your RRSPs to bridge the income gap (CPP shortfall) between 65 and 70 using this formula: 7.35 x CPP at age 65 = RRSP bridge amount.  
  • Thinking your CPP will increase by 8.4% per year, or 42% over 5 years, is wrong. It’s closer to a 50% increase.   
  • Financial planners do a poor job of getting their clients to understand the real risks of inflation, investment returns, and mortality and outliving their money.

Only two factors matter: life expectancy and rates of return

Old Age Security (OAS), CPP, and RRSP/RIFFs are all taxed the same way, and also affect government benefits, supplements and credits the same way. In a recent article I compared different start dates of each; you see there is almost no difference.    

People often tell me they want to take CPP early in case they die early, to ensure they get some of their money back. That’s betting against the odds. If you’re a healthy 65-year-old, you’re probably going to live longer than the average age presented in the table below.  

Longevity risk Probability of survival to age…
75 80 85 90 95
Female 90% 82% 69% 50% 26%
Male 86% 75% 59% 38% 17%

Most 65-year-olds are going to live beyond age 85 and there are still medical advances happening that could extend life expectancy even further.

This next table shows you the probability of doing better by delaying your CPP versus starting at age 65 and earning 4% and 6% on your investments after inflation.   

Net investment return Age
75 80 85 90 95
4% 0% 25% 97% 100% 100%
6% 2% 28% 58% 75% 85%

Use your RRSPs to bridge the CPP gap years

I really like the concept of “bridging” in the Actuaries’ report. 

Their formula is:

Your projected CPP at age 65 x 7.35 = RRSP bridge amount 

Following this formula, a person expecting $13,500 of CPP at age 65 would need an RRSP bridge of $13,500 x 7.35 = a $99,960 RRSP account.  

The best part of this bridging concept is it changes the mindset for younger investors. The strategy is to plan to draw CPP at 70 and separate your RRSP investments into two imaginary buckets: one to act as a bridge benefit and the other to support your retirement lifestyle.  

Of course, when you get to age 65, you have the option of changing your mind and there is no cost, no “oops”—it’s brilliant! (In contrast, with some other strategies, once you start down that path, there’s a cost if you change your mind.)

Your CPP benefit will increase by more than you think

After age 65, CPP benefits increase 0.7%/month, 8% a year, or 42% over 5 years.  Simple, but have you thought about what your CPP is based on?  

CPP is based on maximum pensionable earnings (MPE), which have historically increased faster than the rate of inflation.  

There are two pieces to the puzzle: CPP monthly increases and the spread between the rate of inflation and the MPE. When both are taken into consideration, the report suggests the CPP increase from age 65 to 70 will be closer to 50%, not 42%.  

Understanding risk

To help you make good financial decisions today, models and spreadsheets are built on today’s assumptions, projected into the future. The challenging part is things are constantly changing, so models and spreadsheets can hide risks. 

Think back over the last 25 or 30 years. What has changed? Inflation, interest rates, medical advances, things you enjoy?

Do you know that with inflation at 2%, it takes about 36 years for $1.00 to be reduced in value to 50 cents?  What do you think the chances are of inflation increasing during your retirement?

What do you expect to earn on your investments?  As you get older, what might cause that rate of return to reduce?  

What will happen if you live 10 years longer than you expect?  What is your plan if you won’t have enough money?

One role of a financial planner is to help get you positioned so you can maintain your lifestyle over your lifetime, no matter what happens. Delaying CPP helps take care of that second part, no matter what happens.

Now, I don’t know if in your situation you should take CPP at 70, and the study does list some exceptions, particularly if your GIS or OAS is going to be affected. But for most people, if you have an investment account large enough to bridge you to age 70, then delaying makes sense if you want to build more guarantees into the later stages of your life.

Finally, as always, I recommend you have your situation modelled before making your decision. Hopefully, your advisor will try to give you a little scare by changing assumptions and exploring different possible outcomes.

Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca.

This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning and insurance services through Atlantis Financial Inc.

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