It doesn’t hurt to wait

Canadians who take CPP at 60 lose $100,000 in retirement income, study finds

Good things come to those who wait, they say. And that may be particularly true when it comes to retirement.

The average Canadian who takes Canada Pension Plan benefits at age 60 rather than 70 can expect to lose more than $100,000 of income over the course of their retirement, according to the Lifetime Loss calculation in research by Bonnie-jeanne Macdonald for Ryerson’s National Institute on Ageing and the FP Canada Research Foundation.

Even delaying the benefits by one year from 60 to 61 helps. “Based on the official age-adjustment factors alone, a one-year delay is equivalent to investing a single year’s CPP/QPP benefit at age 60 and getting a lifetime pension income of 11.25 per cent of that initial investment, indexed by inflation year after year,” the study says.

Macdonald says the value of delaying and the penalty for early claiming are greater than Canadians understand.

Aside from the adjustments, the incentives for delaying benefits are often higher because of the role national wage growth plays in determining CPP/QPP benefit levels. Between 2012 and 2019, the penalty for taking benefits at age 60 versus 65 grew from 36 per cent to 38.8 per cent and the incentive to wait until 70 increased from 42 per cent to 45.4 per cent. According to CPP’S chief actuary’s assumption for the future, national wage growth is expected to increase these incentives even further. Waiting to claim benefits is even more attractive now because of low interest rates, longer life expectancy and adjustments to CPP/QPP delay rules in 2012, says the study. The enhanced CPP being phased in between 2019 and 2023 will make this benefit an even larger source of income and make the decision of when to take it even more important.

Yet fewer than one per cent of Canadians are waiting until 70, with 95 per cent taking benefits at what’s considered the “normal” retirement age, 65, or earlier. Over the past decade the most popular uptake age was 60, the earliest possible.

“In doing so, they are unknowingly giving up substantial lifetime income — as well as protection against financial market risks, the possibility of high inflation, living longer than anticipated and the anxiety of potentially running out of money in retirement,” said Macdonald.

We can do it. More than half of Canadians could have delayed taking CPP by at least a year, and more than a quarter could have waited the 10 years to get to 70 by using RRSP/ RRIF savings to bridge the gap, the research finds.

This can be done by working longer or using savings to bridge the gap. “Even earning a four per cent rate of return (after fees), nearly four-out-offive Canadians with RRSPS/ RRIFS would get more income from using a portion of their savings in early retirement as a bridge to a higher delayed CPP/QPP benefit, rather than stretching out their RRSP/ RRIF withdrawals over the span of their full retirement,” the study says.

Why aren’t we doing it? Ignorance is part of it, which Macdonald’s study aims to address. A recent government of Canada poll found that two thirds of Canadians nearing or in retirement did not know that delaying CPP would increase payments.

But the study also says current financial planning practices are encouraging Canadians to take benefits early, ranging from the misleading concept of a “breakeven age” to potential conflicts of interest in the desire to preserve wealth management fees.