Skip to main content

Senior sitting in her garden

jacoblund/Getty Images/iStockphoto

I get it. Canadians really do not like the idea of waiting until 70 to start collecting on their Canada Pension Plan.

In my last article, I showed that a couple, whom I called Carl and Hanna, were better off starting their CPP at 70 rather than 65 (both are 65 and on the verge of retirement). I showed they were better off even if Carl died young and Hanna lived a long time. It isn't as if they deprived themselves in their 60s, though. They simply drew a bigger income from their registered retirement income fund (RRIF) until they turned 70 and CPP started.

My example was met with healthy skepticism, if not downright disbelief. In this article, I will address the main objections that most Canadians seem to share. With all respect, let me state that the majority of objections are not valid. If I can sway a few readers, I will consider it a success.

Story continues below advertisement

The first objection is just a question of fact. Some readers thought the increase in CPP pension at age 70 was 42 per cent (some even said 36 per cent) and not 50 per cent as I was claiming. In fact, the CPP pension increases by 8.4 per cent a year between 65 and 70 which adds up to 42 per cent, but that is not all. It also increases to reflect changes in the CPP earnings ceiling between 65 and 70 and that ceiling rises faster than inflation in most years. As a result, the pension at 70 is going to be very close to 50 per cent more than at 65.

Read more: 'How Long Will I Live?' and other helpful online retirement calculators

The second objection is that the example was "engineered" to produce a certain result. There were three ways in which this engineering was deemed to be happening:

1. I had Carl dying at 68 and Hanna at 95. The point was to show what happens on early death but fair enough. Let's change the model to have Carl dying at 88 instead and Hanna will still die at 95.

2. I assumed that Carl would get 95 per cent of the maximum CPP pension while Hanna was entitled to 65 per cent. Few people get the maximum CPP, especially if they are middle-income earners (as in this case) with earnings around the CPP earnings ceiling. For the chart below, I changed my example so that Carl and Hanna are both entitled to 80 per cent of the maximum.

3. I used a worst-case investment scenario. The point of doing so was to stress-test the decumulation strategy under adverse conditions but let us see what happens if we assume a middle-of-the-road investment return instead (about 5 per cent). We will also reduce the RRIF assets to $300,000 since $400,000 is more than they need even if their strategy is suboptimal.

With the three changes mentioned above, the chart attached at the bottom shows that Carl and Hanna still have enough income to meet their income target each and every year until Hanna dies at 95. The chart assumes they wait until 70 to collect their CPP and that they draw more from their RRIF until then.

Story continues below advertisement

So what would have happened with exactly the same parameters but with Carl and Hanna receiving their CPP at age 65? Their RRIF assets would have run out by age 84 and their total annual income after that would have been about $10,000 short of their target for the rest of their lives.

I've heard another objection that is a little baffling. Some people said they want to enjoy their money in their 60s so that is why they want to start CPP early. I'm all for enjoying your money while you're still young. It's just that there is no reason that the income in your 60s has to come from CPP. It can come from your savings instead and your reward is that you'll receive much more CPP pension later in life. Obviously you need enough savings to last until CPP starts at 70.

At the bottom of it, I believe deferring CPP is so unpopular because it forces people to withdraw more money from their savings early on to make up for the shortfall in income. The balance in their RRIF drops a lot faster as a result.

I recognize that this phenomenon is hard for us to accept since so much of our self-worth and our sense of financial security are tied to the amount of wealth that we have accumulated. Even though it goes against the grain, you just need to have faith that this deferral strategy will pay off in the long run.

Frederick Vettese is the Chief Actuary of Morneau Shepell and author of The Essential Retirement Guide: A Contrarian's Perspective.

Report an error
Comments

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff. Non-subscribers can read and sort comments but will not be able to engage with them in any way. Click here to subscribe.

If you would like to write a letter to the editor, please forward it to letters@globeandmail.com. Readers can also interact with The Globe on Facebook and Twitter .

Welcome to The Globe and Mail’s comment community. This is a space where subscribers can engage with each other and Globe staff.

We aim to create a safe and valuable space for discussion and debate. That means:

  • All comments will be reviewed by one or more moderators before being posted to the site. This should only take a few moments.
  • Treat others as you wish to be treated
  • Criticize ideas, not people
  • Stay on topic
  • Avoid the use of toxic and offensive language
  • Flag bad behaviour

Comments that violate our community guidelines will be removed. Commenters who repeatedly violate community guidelines may be suspended, causing them to temporarily lose their ability to engage with comments.

Read our community guidelines here

Discussion loading ...

Due to technical reasons, we have temporarily removed commenting from our articles. We hope to have this fixed soon. Thank you for your patience. If you are looking to give feedback on our new site, please send it along to feedback@globeandmail.com. If you want to write a letter to the editor, please forward to letters@globeandmail.com.
Cannabis pro newsletter