Here’s one way Canadians with RRSP savings can get the most from their CPP benefits

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Bonnie-Jeanne MacDonald, PhD FSA FCIA, is Director of Financial Security Research at the National Institute on Aging (NIA) at Ryerson University, Fellow of the Society of Actuaries, Fellow of the Canadian Institute of Actuaries and Resident Researcher at Eckler Ltd. .

Canadians with RRSP savings that they intend to spend in retirement are missing out on a great financial strategy: using some of those savings as an income bridge to delay their Canada Pension Plan benefits (RPC).

As I wrote last week, this is the safest and cheapest boarding house money can buy.

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But disentangling all the considerations is confusing, as there are endless combinations of relevant factors that go into the decision and its outcome – including personal considerations and circumstances, the dynamics of the financial world in retirement, and the implications of the systems. Canadian tax and social transfers. – like Old Age Security (OAS), which includes the Guaranteed Income Supplement (GIS).

Simply complex

The CPP and its Quebec equivalent, the Quebec Pension Plan (QPP), are iconic Canadian social programs. People like these programs because they are simple: automatically pay premiums while you work, with your employer; then, at retirement, receive the accrued benefits until your death. And, contrary to popular belief, this program is actuarially viable for at least the next 75 years. In other words, your CPP pension is a safe bet.

However, beneath this outward simplicity lies a complicated financial system. This complexity includes generous financial incentives to delay the start of CPP – or QPP – payments.

My new research with the Canadian Institute of Actuaries and the Society of Actuaries, with Marvin Avery and Richard Morrison, demonstrates the clear benefits of this particularly profitable financial opportunity.

From apples to apples

Using the example of a 65-year-old retired Canadian, the goal of the research was to make a direct comparison of two otherwise identical financial strategies, where the only difference is the age at which CPP payments begin (see graphic).

Two options aim to generate the same income

every year, and start with the same level of savings

and retirement income resources. The only difference

is the age at which CPP payments start… and

the risks involved.

Option 1: Delay payments from age 65 to 70 by using a

portion of RRSP / RRIF savings to provide bridging income

during this five-year period.

SV, employment

pension, other pension

income and

savings withdrawals *

Withdrawal of

RRSP bridging

funds

RRSP bridging

fund balance

Option 2: Claim CPP Payments at Age 65 and Invest

RRSP / RRIF funds (which could otherwise be used as

bridge) in a portfolio subject to market risks, which makes

withdrawals that generate the same net income as option 1

(until death or the end of the bridging funds).

SV, employment

pension, other pension

income and

savings withdrawals *

Withdrawal of

RRSP bridging

funds

RRSP bridging

fund balance

* Less taxes and OAS / GIS refunds

JOHN SOPINSKI / THE GLOBE AND THE MAIL

SOURCE: Bonnie-Jeanne MacDonald

Two options aim to generate the same income each year, and

start with the same level of savings and retirement income

Resources. The only difference is the age at which the CPP payments

start… and the risks involved.

Option 1: Delay payments from age 65 to 70 by using a

portion of RRSP / RRIF savings to provide bridging income

during this five-year period.

SV, employment

pension, other pension

income and

savings withdrawals *

Withdrawal of

RRSP bridging

funds

RRSP bridging

fund balance

Option 2: Claim CPP Payments at Age 65 and Invest

RRSP / RRIF funds (which could otherwise be used as

bridge) in a portfolio subject to market risks, which makes

withdrawals that generate the same net income as option 1

(until death or the end of the bridging funds).

SV, employment

pension, other pension

income and

savings withdrawals *

Withdrawal of

RRSP bridging

funds

RRSP bridging

fund balance

* Less taxes and OAS / GIS refunds

JOHN SOPINSKI / THE GLOBE AND THE MAIL

SOURCE: Bonnie-Jeanne MacDonald

Two options aim to generate the same income each year, and start with the same level

savings and retirement income. The only difference is the age at which the CPP

the payments begin… and the risks incurred.

Option 1: Delay payments from age 65 to 70 by using part of RRSP / RRIF savings

provide bridging income during that five-year period.

SV, job pen

sion, other retreat

income and savings

withdrawals *

RRSP withdrawal

bridge funds

RRSP bridging

fund balance

Option 2: Claim the CPP payments at age 65 and invest the funds in an RRSP / RRIF (which could

be used as a bridge) in a portfolio subject to market risks, making annual withdrawals

which generate the same net income as option 1 (until death or the end of the bridge funds).

SV, job pen

sion, other retreat

income and savings

withdrawals *

RRSP withdrawal

bridge funds

RRSP bridging

fund balance

* Less taxes and OAS / GIS refunds

JOHN SOPINSKI / THE GLOBE AND MAIL, SOURCE: Bonnie-Jeanne MacDonald

In our study, we quickly realized that the ramifications for personal income tax and OAS / GIS eligibility are the same in both options. (Please note that the CPP death and survivor benefits are not affected by the age of CPP membership, and the same is true for benefits from the employer’s pension plan).

So what is the difference between these two options? The simple answer is the risks involved.

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The odds are not in your favor

Using full dynamic microsimulation computational modeling, we looked at many (millions) of alternative futures to see how both options played out. In each scenario, income flowed appropriately through the Canadian tax and transfer system, financial market returns changed realistically, and the age of death followed the same patterns experienced by the Canadian population.

The results showed that most Canadians with RRSP savings are much better able to cut some of their savings in early retirement and use them as a bridge to a higher CPP deferred benefit, rather than extend all of their savings during retirement.

For example, if a person takes their CPP benefits at age 65 and invests their RRSP funds in a portfolio that earns an average of 4% after fees, the vast majority would run out of these potential “bridging funds” before they die. (70% of the time for men and 80% of the time for women).

Overall, there is not a sufficient reward to shoulder the risk and associated fear of receiving CPP benefits sooner and leaving more money behind to face long-term financial market challenges.

At what age should you start taking CPP? Try our Globe Calculator

Of course, there are a few exceptions, which I will expand on in my next book with my colleague, Alyssa Hodder, from the International Foundation of Employee Benefit Plans. For Canadians who have good reason to believe that their retirement will be short (eg. Due to reduced life expectancy) or who simply cannot afford to delay CPP payments, this option will not be viable. Or, if a person’s RRSP funds are all for bequests, using some of them to delay your CPP benefits (and secure more secure pension income) isn’t on the menu.

But for the rest, while it may seem counterintuitive, taking CPP early is the riskiest option.

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Delaying CPP benefits can set you on the path to a more secure financial future – and your older future will thank you for your foresight.

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