Few retirees wait until 70 to collect their Canada Pension Plan cheques, but maybe more should

7th December, 2020

Few retirees wait until 70 to collect their Canada Pension Plan cheques
Many retirees have a difficult time deciding when to begin taking their Canada Pension Plan (CPP) payments.

According to the National Institute on Aging, 95 per cent of Canadians take CPP at the age of 65 or earlier, with only one per cent deferring until the maximum age of 70.

I believe the percentage in the latter group should be much higher.

CPP incentivizes retirees who delay their payments past age 65 by 0.7 per cent each month or 8.4 per cent a year. This translates to a 42 per cent increase in CPP payments at the age of 70 compared to age 65.

In dollar terms, pensioners currently eligible for a maximum CPP who begin payments at 65 would receive $1,176 per month, whereas 70 year olds would receive $1,670 — a difference of $494 per month.

The reasons most Canadians begin their CPP at 65 vary.

For some, a traditional retirement begins at 65 so it seems logical to collect their pension at that age. Others take their CPP early because they believe “a bird in the hand is worth two in the bush” — they would rather have access to their money now even if financially it doesn’t make sense.

Others worry about the solvency of the Canada Pension Plan. Globally, there are plenty of underfunded pension plans, some of which are on the verge of collapse, so it’s not surprising that many pensioners are choosing to access their money early — while it is still there.

Luckily the CPP is properly funded, well run, and is stress-tested on a regular basis, so it should be around for decades. It also provides a lifetime guaranteed indexed monthly income, something that is increasingly hard to find, particularly in the private sector where jobs with defined benefit pension plans are almost non-existent.

There is also those who fear dying early, before the age of 70, and therefore will not benefit from CPP. These people would rather collect their pensions as soon a possible just in case they get hit by a bus.

Statistically, the fear of dying early is unwarranted as, on average, life expectancy for both sexes is on the rise and well above age 70. The real risk for many retirees is not dying prematurely, it’s running out of money.

When comparing the benefits of taking CPP payments at age 70 versus 65, the break-even age is 81. The longer you live past the age of 81, the stronger the case for deferring CPP to age 70.

That said, not everyone can afford to delay their CPP payments due to lack of other income streams, such as a work pension or sufficient retirement savings that are needed to fund their lifestyle until they reach 70. Also, it often makes sense for people with health conditions or those where longevity doesn’t run in their family to take their CPP early.

Many retirees do little or no retirement planning, which is problematic. If a retiree overspends in their 60s there is a good chance they will run out of money in their 80s.

A 60 year old who needs extra income still has options available because they can work longer, get a part time job or invest differently as their investment time horizon is still relatively long.

However, if they run low on funds in their 80s because they overspent in their 60s, options are much more limited. Not many businesses are willing to hire at that age and their investment time horizon is much shorter, limiting potential returns.

The best practice is to do some financial planning well before you retire which will help determine the best age to begin CPP and Old Age Security payments. Maximize tax efficiencies and determine a retirement income budget so that you don’t outlive your retirement savings.

Originally published in CBC’s Opinion section.

Thanks for reading Mark Ting @MarkTingCFP
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