Defined benefit pensions like the CPP or those found in some workplaces provide great comfort to retirees.Sean Kilpatrick/The Canadian Press
The case for delaying Canada Pension Plan retirement benefits as late as age 70 does not resonate with many people, and it’s obvious why.
Arguments for taking CPP at the standard age of 65 or as early as 60 are much more satisfying on an emotional basis. It all comes down to a preference for immediate versus delayed gratification, even if every month of delay from 65 to 70 gets you more CPP.
By all means start CPP early or at 65 if you need the income, or you have a limited life expectancy because of health-related issues. Be skeptical of other rationalizations for starting CPP on time or early, including one that is debunked in a new actuarial research paper as the “Take it early and invest it yourself – you’ll do better!” narrative.
Since we’re talking about investing CPP benefits, let’s look at the result you get by delaying CPP as an investor might. Each month you delay from age 65 to 70 gets you an increase of 0.7 per cent, which works out to 8.4 per cent annually to a maximum of 42 per cent.
You’ll need to invest a lot of your CPP benefits in stocks to equal these returns. “What are the risks you’re taking on by putting the money in the stock market versus having it in what’s considered probably the safest investment you could have as a retiree?,” asks Bonnie-Jeanne MacDonald, co-author of the paper and director of financial security research at the National Institute on Ageing at Toronto Metropolitan University.
Let’s review those risks:
- Stocks could lose money: Five-year periods where major stock indexes lose money are rare, but possible.
- You could underperform: Pick non-optimal stocks or funds and you might end up with returns that are just okay or worse.
- Self-sabotage, Part One: You panic after a sharp stock market correction and sell at the bottom, then buy back into the market after most of the recovery has happened; or you jump on a trend right at the peak.
- Self-sabotage, Part Two: You end up spending some of your CPP benefits rather than investing the full amount each month.
- Fees will undermine your returns: These fees include commissions for buying and selling securities and the fees charged to owners of products such as exchange-traded funds and mutual funds.
Ms. MacDonald, a veteran actuary, does not like the odds of achieving a better outcome by starting CPP early or at 65 and investing the money.
“More than likely, you’re going to get a lower return and you’re also going to be taking on more risks,” she said. Delaying CPP could very likely give you better returns with less risk.
Defined benefit pensions like the CPP or those found in some workplaces provide great comfort to retirees. Ms. MacDonald quoted research showing people spend more confidently in retirement if they have one of these pensions, and enjoy that spending more.
What defined benefit pensions cannot do is serve up a chunk of money to, for example, help your adult children with a home down payment. You’ll need savings of your own for that – money you might deplete to some extent if you delay CPP for the five years from 65 to 70.
But Ms. MacDonald said you may be able to accept more risk in your own investing once you start the increased flow of secure income you get from delaying CPP. Aiming for more growth in your investments could help offset withdrawals made between 65 and 70.
At the same time, delaying CPP at least partly addresses concerns people have about managing their finances as they age and lose their cognitive abilities. Delaying gives you more automatic, worry-free money each month to cover living expenses.
Ms. MacDonald said the thinking that drives people to take CPP early or at 65 instead of delaying is tied to a bias people have for assets they personally own in a bank or investment account compared to pensions.
“There’s actually a name for that – it’s called the endowment effect,” she said. “People put more value on money in their bank account, even when the pension actually has a lot more value.”
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