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As I prepared to write this month’s blog post, I came across an interesting U.S. study exploring how the structure of a company’s self-directed retirement plan might impact its participants’ investment selections. When investment choices were listed alphabetically, the study found employees were apparently favouring the first few funds on the list.
Arbitrary? You bet. But before we laugh too hard, I’ve noticed similar behaviours closer to home, especially when it comes to making best use of the Canada Pension Plan (CPP).
Assuming you’ve contributed to the CPP during your career, when should you start drawing your benefits?
If you guessed age 65, that’s understandable. Unless you decide to receive a reduced benefit at a younger age (as early as 60), it’s when Service Canada automatically mails you your CPP application form, as if it’s a given you should fill it out right away. 65 is also the age many younger folks talk about when they dream of the day they’ll stop working. It’s a number that’s become almost synonymous with “retirement.”
That said, it’s an entirely arbitrary number when it comes to your own best financial plans. I can cite any number of reasons 65 might or might not be the right number for you.
There’s the prospect of receiving more benefit by waiting until age 70 to get started: currently 42% more than if you start taking it at age 65. On the flip side, it may make more sense to start drawing a smaller benefit sooner if you are single and in poor health.
As Financial Post columnist Jason Heath suggests, it’s worth treating your CPP like an RRSP for planning purposes. To put this in perspective, Heath calculated that a lifetime CPP benefit starting at age 65 and assuming an age 90 life expectancy would be the same as having a $277,000 RRSP, earning 4% per year. As Heath explains, “Whether you withdraw from other sources, or start your CPP, you are reducing the future income that you can earn from that source.”
So, when is it best to take these significant benefits compared to others that may be available to you? Instead of simply signing up at age 65 as a given, why not give it some thought (or hire a planner to help you)? Continue Reading…
You can purchase an income stream for life. And of course, the longer you wait to purchase that annuity the greater your payments. You might stagger your annuity purchase(s) over many years and periods of your retirement. That’s typically the advice found in Pensionize Your Nest Egg and offered from advisors who Pensionize a portion of their clients’ nest eggs.
For a 65-year-old Canadian male there’s a 25% chance that they’ll live to age 94. Yikes. What side of the annuity grass will you be on? This table demonstrates why a certain level of guaranteed income might be a good idea. You might at least cover your basic living needs for life and projected oldage home payments with guaranteed income.
