The question of when should I take these government benefits is on the mind of a lot of people closing in on their retirement. When this question comes up, the potential retiree may be thinking in terms of ‘when should I take the benefit to maximize my money?” I believe the more important first question should be ‘How can I better secure my retirement?” There are a number of dangers that can hamper or even ruin our retirement, and deciding when to take our benefits can help reduce them.
Old Age Security and the Canada Pension plan have different incentives for delaying them and should be treated differently. Old Age Security offers a 7.2% increase in your payments for every year that you delay and a 36% total increase for your monthly payments. Canada pension plan offers 8.4% and 42% respectively. This makes a large difference in eventual returns and it is always recommended to delay CPP and not OAS if you were to choose one. In addition to the increased rate of return of the CPP over the OAS, is the survivor benefit CPP offers to married and common law people should one of them pass away. We will talk about CPP primarily moving forward in this post, but the same principles can apply for OAS, just with the math being a little less favorable. Overall delaying the benefits reduces future risk. Alternatively taking the benefits immediately at 65 (or with CPP as early as 60) can help take the pressure off now when negative events look to derail your retirement.
Negative events softened by taking immediately
1. Immediate cash flow. A lot of retirees have the Canada Pension Plan and Old Age Security as the central pillars of their retirement and taking it later may affect their lifestyle for those 5 years that they delay.
2. Poor health. The early payment can help with the strain that poor health can have on finances. If the unfortunate event of an early death is on the table, the benefits of delaying your government payments OAS can be wiped out completely, CPP could be reduced (if you have a spouse) or wiped out as well if you don’t. You could end up with less money for those that you love who are left behind.
3. A market crash that times perfectly with your retirement. The dreaded crash upon retirement can affect the money that you have available long term as you start making withdrawals right when the value of your investments is at their lowest. This can prove especially true if you are carrying a higher amount of equity heading into retirement. Not delaying your benefits, or even taking early payments can help reduce the amount of capital that you have to withdraw from while the investment is at its lowest value.
Risks avoided by delaying
1. Longevity risk. The possibility of outliving your retirement investments is a fear that many retirees have and with life expectancy continuing to rise, you may live longer than expected. Delaying your CPP gives you a much larger payment over the latter years of your life.
2. Inflation risk can cause longevity risk to be an even bigger deal, if the cost of living rises more in your retirement years, your later years will put increased pressure on your investments for increased income, and having a substantially higher CPP payment can help mitigate this.
Other Financial Considerations
1. Delaying your government benefits can reduce GIS if you qualify for it. Be sure to do the math to see if you will reduce your GIS payments for every extra dollar over the threshold you are.
Now let’s take a very limited look at the numbers. Age 85 is the age at which delaying your CPP until age 70 will become the financial winner in overall money paid out using generic variables. The variable used is a 60/40 risk allocation being drawn down from an RRSP as the alternative to the money that you would be receiving from your benefit (this covers the opportunity cost in the equation). The current life expectancy of a Canadian once they reach age 65 is 84. This means that it is comes down to a coin flip for if you will end up receiving more or less from you benefit if you delay it. However, the potential future benefits can outpace the short-term drawbacks financially as the additional payment created by delaying get’s more and more favorable over longer periods of time past that age 85 threshold. If you don’t have specific reasons to take your benefits early, try delaying them and building greater security through increased government benefit payments for the duration of your retirement.