As part of financial education in the workplace, there tends to be a greater emphasis on the accumulation phase of saving and less so on how to approach decumulation. With the Baby Boomer wave shoring up thousands of new retirees on a daily basis, strategies to convert savings into income that lasts a lifetime are more important now than ever before.
There are financial education opportunities that are far less understood and warrant some time in the communication spotlight. A topic that rarely get promoted is when to start Canada Pension Plan (CPP payments).
Bringing our Canadian retirement system into context means considering three distinct pillars:
1) Federal government programs (CPP, Old Age Security and Guaranteed Income Supplement)
2) Personal savings - Registered Retirement Savings Plans (RRSPs), Tax Free Savings Account (TFSAs) and other non-registered account, personal equity, home and vacation properties and equity in business, inheritances, etc.
3) Workplace pension programs.
CPP quick facts.
CPP is part of the federal government program. It proves a basic retirement income up to a maximum of 25 per cent of the Year's Maximum Pensionable Earnings (YMPE).
In order to receive the full retirement benefits, the normal retirement age for CPP is considered age 65. Canadians who've contributed to CPP and are entitled to receive a payment can start collecting as early as age 60, but they must start receiving CPP no later than age 70.
Anyone who starts receiving CPP before age 65 is penalized with a reduction in monthly payout. For each year a person defers receipt of CPP payments, they receive 8.4 per cent more annually to a maximum of a 42 percent increase in their CPP payment at age 70.
Is a bird in the hand better?
While there appears to be financial advantages to deferring CPP payments, many Canadians are reluctant to do so. This is due to what is called the bird in the hand attitude. People believe it is better to have the money now. They also worry that if they defer CPP payments, there won't be any federal money left for them if they wait too long.
Questions worth asking.
When to start CPP payments really depends on individual preference, comfort level, health status and wealth accumulation. For those not sure when to start, here are some questions to narrow down the right time:
1) Are you planning to work past age 60 and if so, for how long?
2) a. Is there a phase of your retirement when you believe you'll most enjoy having more money available? Chances are that people are their healthiest soon after retirement and as they continue to age, the chance of health deterioration increases.
There are three phases to retirement called:
1) The go-go years - when you're most active. Will you need extra cash that early CPP payments will provide?
2) The slow-go years
3) The no-go years - are you worried your funds will run out and deferring your CPP payments will help bridge you during this period of your life?
2) b. Consider your life expectancy while factoring in your personal health situation and family history.
3) What will taking CPP early cost you? There are some easy and free online early CPP calculators available including: the Government of Canada, and Tridelta. Doing some easy math to analyze the financial impact of taking CPP early helps with monthly income projections in retirement.
A lot to consider.
When to start CPP payments really depends on the person asking the question. Helping them walk through the process by providing important questions that facilitate insightful responses may make it easier for them to decide where to go from here. We're fortunate to have the freedom to choose when to start CPP, but for those worried about ensuring their savings last a lifetime, selecting the right time is key.
Questions about when to start CPP payments will continue to increase and we want to ensure you're well equipped to address those questions as part of your workplace pension program communication strategy. We invite you to contact us. We're here to help so that you can focus on what you do best.
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.