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Why women (especially) should delay taking CPP

Senior couple mountain biking on a forest trail, low angle

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Women have good reason to worry about retirement finances – they tend to live longer than men, have lower pensions and are more likely to become widowed and need long-term care. That means that for women, in particular, delaying the start of taking their Canada Pension Plan (CPP) retirement benefits from 65 until 70 makes a lot of financial sense.

The mathematical case for delaying CPP is clear: Starting CPP benefits at the age of 70 instead of 65 will increase a person's CPP pension by 42 per cent. For example, if a 65-year-old woman named Gaby is entitled to a CPP pension of $10,000 a year, she would get a pension equivalent to $14,200 a year (or possibly even higher, depending on wage inflation) if she delays taking the benefit until the age of 70.

If Gaby has sufficient registered retirement savings plan (RRSP) savings to bridge the five-year gap ($14,200 for five years), from an unbiased academic perspective, this is undoubtedly the best strategy. Not only will it give her the most bang for her buck, but it will also give her the greatest financial security in retirement.

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Despite the evidence above, few people actually do it. Why is the idea so unpopular?

One big reason is that when deciding whether to delay CPP, people mentally gamble on how long they think they will live. So if Gaby thinks she'll live until 75, starting CPP benefits at 65 seems to be the better bet: Ten payments of $10,000 ($100,000) is more than five payments of $14,200 ($71,000).

The problem with this gambling mentality is that people often underestimate their age of death. Most Canadians will live well beyond 75, especially women. Canada's Chief Actuary finds today's 65-year-old Gaby can expect to live at least another 22 years, to 87 – three years longer than if she were male.

So, even from a mental gambling perspective, the better "bet" for a woman expected to live longer, like Gaby, is to delay CPP to 70, since 22 payments of $10,000 ($220,000) is less than 17 payments of $14,200 ($241,400).

The expected return on deferring CPP benefits by five years is approximately 6 per cent (equivalent to an 8-per-cent gross return with typical investment fees), an attractive return in today's tough environment.

Mental gambling also ignores financial risk. There are three major reasons why retirement financial planning does not work out the way that we hope: poor investment returns, high inflation and living longer than we think we will (and running out of money).

Delaying CPP benefits and using RRSP savings to bridge the gap from the age of 65 to 70 is one of the best ways to protect against these risks. Here's why:

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  • 1. Investment return risk is minimized, since Gaby would (prudently) invest the portion of her RRSP savings to be used in the next five years in less risky assets.
  • 2. Inflation can erode income by more than half after 25 years of retirement (2 per cent a year, compounded over 25 years). But since the CPP is indexed to inflation, this risk is eliminated.
  • 3. The CPP is guaranteed by the government to pay out until death, wiping out the financial risk of living longer than we think. There’s no better guarantee available on the market.

Better return, lower risk

In a nutshell, delaying CPP improves expected returns and reduces risk. It also provides peace of mind. Women tend to be more risk averse, preferring to invest in less-risky assets and have more guaranteed income – and this strategy provides both.

A boost in secure income can become critical for women, who have a much greater likelihood of widowhood poverty and needing nursing home care. Many will live to advanced ages, when developing a chronic, debilitating health condition is a strong possibility. It's not a pleasant topic, but we all need to consider the possibility of being alone – and dependent – in retirement.

Finally, the stress of managing savings can become more burdensome with age. Having accessible savings can expose seniors to fraud – and well-meaning but insensitive relatives looking for a "loan."

While most women will benefit from delaying taking CPP benefits, there is an important exception: women who expect to get the Guaranteed Income Supplement (GIS). CPP benefits reduce GIS benefits, and research by the C.D. Howe Institute suggests GIS recipients may want to take CPP as soon as they turn 60.

In addition, low-income seniors are much more likely to die younger than higher-income seniors, so the better "bet" may be to start CPP benefits sooner.

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Of course, there are other reasons why delaying CPP payments and using savings to cover the gap might not be the right strategy. Maybe Gaby is planning to leave a legacy to her family, believes her retirement will be short (because of illness) and has her savings in vehicles other than RRSPs. It's not a simple calculation – even small changes in her personal circumstances can have a big impact on this decision.

As an actuary and researcher, I am wary of one-size-fits-all financial planning strategies. But delaying CPP from the age of 65 to 70 is generally a smart idea for retirees – especially women – who have enough RRSP savings intended for retirement income.

My advice to women? Enjoy more of your RRSP savings as a young and healthy senior, and let the government take care of you in your old age.

Bonnie-Jeanne MacDonald, PhD FSA, is an academic researcher at Dalhousie University in Halifax, and resident scholar at Eckler Ltd.

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