Special to the Financial Independence Hub
Canadians from across the country are starting to look at their Canada Pension Plan with the respect it deserves.
The reaction to our CPP Optimizer research report has been overwhelming. In a nutshell, the CPP benefit for a couple can be in excess of $700,000 over their lifetime and the study demonstrates that the difference between starting your benefit at the least beneficial date and starting at the best date is more than $300,000.
Taking benefits too early can be costly
Unfortunately, not everyone knows these statistics. From comments in social media, I can see that many people are trapped in the old school, conventional wisdom that you should take your benefit as soon as you retire. “A bird in the hand …” is a common thread of discussion. For some people, this choice will be a mistake of enormous proportions.
Their concern is that they might die early and miss out. This a possibility, but with $300,000 at risk, a wise person will assess the probability of this occurring. For those people with adequate financial assets and an expectation of living for awhile, I can understand their desire to have incremental income coming in during their Go-Go Years (why would I defer my CPP to my Slow-Go Years?)
Let me encourage you to consider the following question: If you could find a 5-year GIC with a Canadian Government AA rating and 8.4% interest rate that is also indexed for inflation, how much money would you move into this investment? For an extremely low risk investment with a great return, I bet the answer is: everything.
Draw down RRSP first
It pays to consider your CPP much like your RRSP. They are both ‘investment’ vehicles designed to give you an income stream in retirement. The guaranteed and compounding 8.4% return on deferring CPP is much higher than the forecast 4.71% long-term return on a 50:50 bond/equity portfolio forecast by the C.D. Howe institute. It makes sense to draw down the lower-return investment and let the higher-return investment build a bigger and guaranteed recurring income stream. In other words, replace the income stream you would have received by taking CPP early with incremental drawdowns from your RRSP
View CPP as a secure investment opportunity
Later in life, when you start your CPP, based upon your specific optimal start dates, you can back off on your RRSP drawdowns, knowing you have a guaranteed, much higher income from CPP for the balance of your life.
So, if you have adequate investments to afford to draw more in your early years, and less in your later years, look at the timing of your CPP as a secure investment opportunity. A Retirement Income Specialist can help you figure out the exact formula to maximize your sustainable retirement income.
To determine the best time for you to start drawing your CPP benefits please visit cppoptimizer.com. You may be amazed at the dollar value of the right decision and understand how you can have both a bird in hand and two in the bush.
Doug Dahmer, CFP, is founder and CEO of Emeritus Retirement Income Specialists. With offices in Toronto and Burlington, Emeritus’ C3 process is one of the industry’s most comprehensive retirement planning processes.