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  • Writer's pictureRichard Fonagy

Why You Should Wait Until You Are 70 To Collect CPP Benefits:

Waiting until age 70 can make retirement sweeter; here’s a strategy so effective you’ll wonder why you have never heard of it before

Oct 16, 2016 • Last Updated 3 years ago • 5 minute read

Nobody wants to outlive their savings, but nor do they want to live below their means.

Baby boomers are starting to retire in large numbers and unless they work in the public sector, most of them will be relying on RRSPs or a defined-contribution pension plan for a good portion of their retirement income. The challenge they will face is turning their life savings into retirement income in the most effective manner — what actuaries like to call “decumulation.”

Nobody wants to outlive their savings, but nor do they want to live below their means. Navigating between these two extremes can be a challenge. Unless you buy an annuity, you might think that all you can do is keep your fingers crossed and hope for the best. In fact, a little knowledge about retirement spending patterns and government pensions can help retirees get more retirement income when they need it.

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To see how this is possible, consider a simple example involving Mario, a pending retiree who just turned 65 and owns a mortgage-free home. Mario is single and has no children; his average salary in his last five years of work was $75,000; he has $350,000 in his RRSP and can expect about $13,100 and $6,800 in CPP and OAS benefits, respectively, each year.

Mario wants to turn his $350,000 RRSP account balance into an income stream. In Scenario 1, we will consider what Mario can expect if he follows a conventional drawdown strategy:

  • Mario transfers his RRSP account balance into a Registered Retirement Income Fund (RRIF)

  • He draws income from the RRIF immediately, based on the minimum withdrawal rates permitted under the Income Tax Act

  • He also receives his CPP and OAS pensions starting at 65

In addition, let’s assume Mario dies peacefully at age 95 without ever needing long-term care. If we assume an annual investment return of four per cent (net of fees), the resulting income stream for Mario is shown in Scenario 1.

At first blush, the result looks impressive. Mario is receiving income from three sources and it is rising steadily over time. It is only at age 95 that his income drops but, even then, the drop is slight and that is the year that Mario is assumed to pass away.

The trouble is, Mario’s income falls well short of his target income (the thick black line in the chart), which I define as the amount he needs to maintain his pre-retirement standard of living. For Mario, it equals 57 per cent of final average earnings at the point of retirement, and it then rises with inflation until age 72 after which it rises more slowly. (This spending pattern is a big subject in itself and is based on a number of academic studies of real life situations.)

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The 57 per cent figure was not picked out of the air. It depends on income level, marital status, mortgage payments and child-raising expenses, which can vary between 40 per cent and 70 per cent for most middle-income households.

Getting back to Mario: he is nearly $9,000 short of his 57 per cent target at age 65. That is a lot. It can spell the difference between merely existing and really enjoying life. It is easy to conclude that Mario did not save enough, but we will see this is not so.

With a shrewder allocation of the financial resources at his disposal, the $9,000 shortfall in annual income can be made to disappear. At the same time, his investment risk and longevity risk can be reduced.

The key is to defer the start of CPP and OAS pensions until age 70. Less than one per cent of all workers do this and even then, the late start may be more accidental than intentional. While low-income workers may have no choice but to start their CPP and OAS immediately, middle-income workers like Mario are missing out on a great opportunity to improve their retirement security if they start CPP and OAS too early.

By starting CPP pension at age 70, the initial amount payable is at least 42 per cent greater than if CPP starts at age 65. In fact, it is more likely to be about 49 per cent greater for certain technical reasons. OAS benefits can also be boosted by deferring the starting age to 70 though the increase is “only” 36 per cent.

In Scenario 2, let us assume that Mario does the following:

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  • Draws enough income from his RRIF at 65 to meet his 57 per cent retirement income target

  • Draws enough income in subsequent years to match the desired spending pattern

  • Starts his CPP and OAS pensions at age 70 rather than age 65.

The result is shown in Scenario 2. Mario’s financial situation has improved dramatically. He can spend a lot more now and because CPP and OAS pensions are so much larger, his RRIF can now generate enough income to meet or exceed all of his needs for life, even if he dies after his 100th birthday.

Of course, there are some caveats. First, we assumed an annual return of four per cent, but the problem of managing investment risk will always be there. In Mario’s case, we shrank that risk down somewhat by drawing down the RRIF assets more quickly, but we did not eliminate it entirely.

Second, we assumed that Mario will not end up needing long-term care, which could be expensive, but if he did, he still has the equity in his home to help fund it. Moreover, his elevated CPP and OAS pensions will pay for a good portion of his long-term care needs and could even pay for all of it depending on which long-term care option he chooses.

If this strategy is so effective, you might wonder why you never heard of it before. That may have something to do with the way most financial advisers get paid. Unless they work on a fee-only basis (which is rare) they are paid a percentage of assets, but the strategy described here draws down those assets more quickly.

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