‘You don’t know what the future holds,’ says Dianne Wright, who plans to retire next year from St. Lawrence College in Kingston where she works as an academic services assistant.Lars Hagberg/The Globe and Mail
Canadians have a lot to consider when it comes to applying for the Canadian Pension Plan.
While the standard age to start is one month after a person turns 65, according to the Government of Canada website, CPP can be claimed as early as age 60 or as late as 70.
But with increased incentives for delaying CPP and bigger penalties for collecting early, more people are being tempted to delay longer. Basically, the longer you wait, the bigger the payoff. Plus, all the benefits last for as long as you live and are tied to inflation.
What you'll ultimately collect depends not only on how much and how long you've contributed, but on your longevity. There's the gamble. According to Statistics Canada, the average life expectancy in Canada is 81.1 years. So the quality of your health and family genealogy are key to making this decision.
Dianne Wright, an academic services assistant for the school of community services, St. Lawrence College in Kingston, has good genes in her family history. Her mother lived until she was 88 and her maternal grandmother lived to 91.
At 64, Ms. Wright is still working but plans to retire in March of 2017 and start collecting CPP. She considered applying earlier but decided to delay CPP until she was 65 to get the higher amount. But once she's no longer working, she says she will need the money.
"Maybe I'd collect more if I deferred CPP longer but then I'd have to use my savings to live and I don't want to do that," Ms. Wright says. "I don't want to lower my standard of living."
She and her husband, who are both healthy, plan to visit Vietnam to take classes in tai chi and cooking because they share those interests, as well as take future trips to Mexico and South America.
"You don't know what the future holds," Ms. Wright says. "I want to be able to travel while my husband and I are between 65 and 70 and have more energy. When we're in our 70s, our bodies will start telling us that we're getting older."
Ross McShane, director of financial planning services at McLarty & Co. Wealth Management in Ottawa, says the vast majority of his clients are taking CPP at 65, which is different from how it was 30 years ago. He says the change began in 2012 when the rules around CPP brought in a more stringent penalty for taking it early and an enhanced benefit for delaying.
Now if you wait until 70, you're going to get 142 per cent of the retirement benefit, but if you take it before 65, there's a reduction that can be as high as 36 per cent if you take it at 60.
"It used to be that you'd take CPP at age 60 as soon as you could get your hands on it," Mr. McShane says. "In those days, the penalty for taking it early wasn't as significant as it is now. The mindset was, 'Let's get it while we can.' Life expectancy wasn't quite what it is today."
Unless there is a cash-flow problem, Mr. McShane typically suggests that his clients hold off until 65. Longevity is part of the equation and cash flow is another.
"If you have other sources of income and cash flow at 60, there's no point in taking the reduction," Mr. McShane says. "If they have other sources of income and cash flow at 65, it comes down to a 'how long am I going to live?' decision. Financial planning would be very easy if we knew how long we were going to live."
Mr. McShane says that those who continue working past 65 may want to delay their CPP as well as those who feel the odds are in their favour that they'll live into their late 80s or early 90s. As long as they have adequate alternate sources of cash flow, they can do just fine without it. But he stresses that any decision should be made in the context of an overall financial plan, not in a silo. He personally wouldn't take CPP until he's 65.
"Even if I'm still practising financial planning when I'm 65, I'll probably take the CPP anyway because I'm going to be a lot more active and enjoying retirement more in my early retirement years than I think I will in my late retirement years," says Mr. McShane, echoing Ms. Wright's sentiments. "It would be nice to have that extra cash flow to do some trips while I can as opposed to receiving more later on down the road. That enters the minds of different folks."
Doug Dahmer, chief executive officer of Burlington, Ont.-based Emeritus Financial, believes taking CPP as soon as you retire is seldom, but not always, the right answer. In many cases, he says the best decision would be to defer it. He says a lot of people are still leaving money on the table because they're relying on simplistic conventional wisdom and may not be familiar with the new rules that increase the premium for waiting until after age 65 to about 8.4 per cent a year.
"In most cases, people are using outdated thinking that a bird in the hand is better than two in the bush," Mr. Dahmer says. "People often can't see beyond the idea that they may be missing money if they die early. My response is that chances are, they're not going to die early – the average lifespan is roughly a decade more than back in 1965 when CPP was first introduced – and the amount of money they're going to lose is significant."
Utilizing an online tool that his company developed to help people make a more informed decision about CPP, the Emeritus CPP Optimization Process, Mr. Dahmer analyzed the data of the first 2,000 users. He found that the average individual was leaving $90,000 on the table and the average couple was leaving $220,000 on the table, when compared with the optimal answers.
"There's a psychological side – I can take people through the numbers and demonstrate to them that they're $250,000 better off by waiting to start later, and they will still fight that saying, 'Look, I've got three phases to go through in my retirement: the go-go years, the slow-go years and the no-go years. And I'd prefer more money on the front end of that than the last end.'"
He warns that once you make the decision to take CPP, you can't change your mind and defer it. However, if you defer, you can change your mind later if you get news to suggest that longevity is not on your side. For example, it might be better to take it at 64 even though you planned to wait until 70.
"You need to look at three things," Mr. Dahmer advises. "Do you have any health concerns right now that you're aware of? How well are you taking care of yourself? What does your genealogy look like? We've got medical advances that are going to keep us going longer and a whole bunch more coming, so I'd bet on longer life as opposed to shorter."
Ross McShane
Director of financial planning services
McLarty & Co. Wealth Management, Ottawa
A lot of people do. Keep in mind that the CPP is not going to be clawed back, but the OAS [likely] is. With both of those sources of income, you have the option of delaying it past 65 to age 70.
The reasons for deferring OAS are different than the reasons for deferring CPP.
CPP is more of a 'How long are you going to live?' question and 'How's your health?'
OAS is more of a 'What's your income and is it going to be clawed back if you take it at 65?'
I'd rather an individual take CPP at 65 and defer OAS a couple of years until they stop working. Then they'd get the enhanced OAS benefit which makes more sense.
If you're in a top marginal bracket at age 65 or 66, and you're going to lose half of your CPP, maybe there's reason to defer it as long as your marginal bracket is going to come down at the time CPP is taken into receipt. Look at the big picture to get a feel for what the tax bracket is today versus what the tax bracket will look like down the line.
You're better off cashing in an RRSP and deferring CPP
Doug Dahmer
CEO, Emeritus FinancialBurlington, Ont.
The question I ask people is, "What's the average rate of return you've received in your RRSPs over the past 10 years?" I seldom hear a number above 6 per cent.
So I ask them, "If I could offer them a GIC that would guarantee them 7.2 per cent for the first five years and 8.4 per cent for the next five years, how much money would you put into it?" The general response is, all of my money.
So then I ask, "Why don't you look at what you would have got if you started your CPP when you were originally thinking of doing it, and take that out of your RRSP, and enjoy it, knowing that your CPP is going to be significantly higher when you start to draw on it, and it will last as long as you do."