Research suggests many should take CPP, QPP later – and use RRSPs to bridge the gap
February 25, 2021
Are Canadians doing things backwards when it comes to rolling out their retirement plans?
New research from Dr. Bonnie-Jeanne MacDonald of the National Institute on Ageing at Ryerson University suggests that in some cases, we are putting the cart before the horse when it comes to our Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits.
Save with SPP spoke by telephone with Dr. MacDonald to find out more about her research.
In her paper, titled Get the Most from the Canada and Quebec Pension Plans by Delaying Benefits, Dr. MacDonald notes that “95 per cent of Canadians have consistently taken CPP at normal retirement age (65) or earlier,” and that a mere one per cent “choose to delay for as long as possible, to age 70.”
This, she writes in the paper, can be a costly decision. “An average Canadian receiving the median CPP income who chooses to take benefits at age 60 rather than at age 70 is forfeiting over $100,000 (in current dollars) of secure lifetime income.”
She tells Save with SPP that tapping into your (registered retirement savings plan) RRSP and other savings first, as a bridge to a higher CPP or QPP later, can make a lot of sense. “Rather than holding on to the RRSP, why not use the RRSPs sooner and CPP later,” she explains.
Even waiting one year – taking CPP or QPP at 61 instead of 60 – means you will get nearly 12 per cent more pension for life, she says. The longer they wait to start CPP, the more they get – about 8.2 per cent more for each year after age 65, Dr. MacDonald explains.
If you go the other route, and take your government pension at 60, “you don’t know what your savings will look like at 70,” she notes. As well, those savings may be harder to manage when you are older, especially if you are “drawing down” money from a registered retirement income fund (RRIF).
Many people, she notes, worry that taking government benefits at 70 is too late, and that they will potentially die before getting any benefits. Most people who are in good health will live long beyond age 70, she says; the data shows that only a small percentage of Canadians don’t make it past their 60s.
Dr. MacDonald notes as well that the retirement industry tends to help people save, but doesn’t help them on the tricky “decumulation,” or drawdown phase. It would be akin to having an adviser set you up with skis, boots, poles and bindings, and deliver you the top of the ski hill – where you would be on your own to figure out how to get to the bottom, she says.
While “Freedom 55” was a popular concept in decades past, the data shows that the retirement age is creeping back up to age 65 and beyond, she says.
“Finances… are part of the reason why people are retiring later,” she explains. Pension plans are less common these days, and not all of them still offer an early retirement window. Few offer incentives to late retirement, she adds.
Her paper concludes that Canadians – and the financial industry that advises many of them – need to rethink the conventional idea of taking CPP or QPP as soon as possible in retirement, and then hanging onto RRSPs until it is time to RRIF them up the road.
“Despite wanting and needing greater income security, Canadians are clearly choosing not to delay CPP/QPP benefits, thereby forfeiting the safest, most inexpensive approach to get more secure retirement income,” she writes. By showing, through the Lifetime Loss calculation, that Canadians can lose out on $100,000 of secure retirement income, the hope is that the industry and policymakers will begin to rethink how they present retirement strategies to Canadians, the paper concludes.
We thank Dr. Bonnie-Jeanne MacDonald for taking the time to speak with Save with SPP.
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Written by Martin Biefer
Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.