Canada’s retirement system is built on three pillars: Personal savings, employer pensions and the pensions we get from the government.
If you’ve been lucky, careful and saved enough, these three sources of income are supposed to see you through a comfortable retirement.
But everyone’s situation is different. We know, for example, that many people don’t save enough for retirement. And many don’t have a company pension.
So, government pensions like the Canada Pension Plan, the Quebec Pension Plan and Old Age Security are very important to a lot of people. And that’s why a debate over the age you should start taking your government pensions is attracting a lot of attention.
Some experts say you should probably wait until you’re 70 years old to take your government pensions. Does that make sense? Let’s look at the pros and cons.
The pros and cons
If you turned 65 today, and we’re entitled to the maximum payout from the CPP or QPP, you would be in line for a monthly pension of $1,114.
You can get your pension as early as 60, but for every year before you turn 65, your pension will be reduced by 7.2%. So, if you take it at 60, the reduction is 36%. At current rates, you would receive a maximum of just $713 dollars.
On the other hand, you receive 8.4% more for every year you wait from 65. So when you turn 70, you would be in line for a pension that is 42% greater than the one you would have got at 65. Your maximum would be $1,582 a month, if we ignore inflation for the five years you waited.
OAS benefits can also be boosted by deferring the starting age to 70 though the increase is “only” 36 per cent.
Despite these incentives, people just can’t wait to get their hands on their pensions. Only 6 per cent of all CPP recipients postpone the start of their payments past the age of 65, and a huge number start at 60.
Well, many people can’t afford to wait. They haven’t saved enough for retirement and they need the money.
What if government pensions disappear?
Others hate the idea of drawing down the money they’ve saved for retirement while they wait to collect their government pensions. Many also ask what if I die early? Or what if government pensions aren’t there when I go to collect mine?
I believe concerns about the long-term viability of our government pensions are valid.
At PWL, we expect investment returns to diminish in the years to come. In fact, we expect them to average just 5% a year versus a historical average of 8.4%. (To learn more about diminishing returns, check out my video Seven Steps to Maximize Your Wealth.)
At the same time, Canada’s population is aging and living longer.
These factors will put more pressure on government pensions. A lot of people add it all up and say: Show me the money!
On the other side of the debate are those who advocate waiting until 70. They point to assurances from the people who monitor the health of the CPP and QPP who insist these plans are sustainable for the long-term.
The advocates also argue that if even you live a modestly long life—and chances are you will—you are going to collect a lot more money by waiting.
Risk transferred to the government
And it’s guaranteed by the government, unlike the money you will draw down from your savings while you wait to turn 70. So, you’ve reduced your risk of running out of money before you die because of investment losses.
The timing of when you decide to take your government pensions should depend on a lot of factors. How much money you’ve saved. How healthy you are. And what you believe about the viability of government pensions in the years to come.
Once you take your pensions, there’s no going back. So, you should talk it over with your financial advisor. And whatever you decide should be in the context of a comprehensive financial plan.