24 Nov Pattie Lovett-Reid: Worried about outliving your money? Time to rethink CPP
If you are not worried about funding your retirement, this blog isn’t for you.
However, if you are worried about outliving your money, let’s talk about the most misunderstood government program: CPP/QPP.
Currently, government sources provide approximately $20,000 per year. Government programs were never intended to fund your retirement but supplement it. If you run out of money at age 60 there is an option to go back to work. However, for a 90 year old, fixed costs can be high, often with declining health, making going back to work an unlikely option.
The reality is you could live too darn long.
Add to this, COVID-19 has changed the way we want to live. According to the National Institute on Ageing, the desire of those 65+ to age independently, in their own home with dignity now stands at 100%. Life has changed and so have retirement expectations. With public funding being stretched, income dwindling, longer lives, and the price of retirement going up, retirement financial security is at risk.
The obvious suggestion is to save more. However, that doesn’t solve the problem for most because it lacks an important requirement: creating an annuity.
This is where the CPP/QPP comes into play. For most Canadians, the cheapest and safest way to secure income over their retirement is to delay CPP/QPP benefits past age 60.
I was recently hosting the FPCanada Symposium and had the privilege of listening to Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research, National Institute on Ageing. She fundamentally believes most Canadians who can afford to defer their CPP/QPP benefits should do so. By delaying your benefits you are essentially purchasing an inexpensive, inflation-indexed and very secure defined benefit pension.
In other words, you are securing income for life. Now to be fair this might turn your thoughts on retirement funding upside down. You may have to draw down on your RRSP savings or TFSA in order to delay CPP due to current living expenses and for some that can feel uncomfortable. Drawing down on your nest egg can be an emotionally hard thing to do, as many worked years to build it up and want it to last as long as possible.
However, keep in mind RRSPs and TFSAs aren’t annuities for life. When the money is gone, it is gone.
Often rewards of the future are less important then the reality of today. Which is why 95% take CPP early and only 1% delay until age 70. And while it is counterintuitive, waiting until age 70 rewards the future and is actually less risky than taking it early.
You are typically eligible for CPP at age 65, with penalty as early as age 60 and by not claiming until 70, you could get 150% of the income you would receive at age 65. An annuity or payment for life. Payment for life could be longer then you thought. If you are a 60 year old male you have an average life expectancy of another 26 years and for women another 29 years. There is huge value in delaying.
Let’s dispel a myth, that CPP/QPP isn’t sustainable, and there is a risk the plans could run out of money as the boomers retire. That simply isn’t true. CPP/QPP is well funded for at least the next 75 years and is considered to be one of the most sustainable pensions around the world.
So the odds are we will live past age 70 and the government programs are well funded.
This is a golden opportunity to create your own pension for life.
According to Dr. MacDonald, the strength of the CPP/QPP have made delaying benefits, the safest, most inexpensive approach to get more secure, worry-free retirement income that lasts for your life and keeps up with inflation.