CPP at Age 60 Anchors Canadians’ Thinking
The option to take CPP starting at age 60 is not serving most Canadians well. Most people who have no defined-benefit pension do not have enough savings to retire comfortably when they turn 60. But since people know that CPP can start at 60, this creates an anchor in their minds for when they want to retire.
The maximum CPP benefit for those starting at age 60 is about $8000 per year. Most Canadians will get quite a bit less than this. For a single person hoping for a modest $36,000 per year income in retirement, CPP isn’t adding much. This leaves at least a $28,000 per year shortfall until age 65, and once OAS kicks in, about a $21,000 per year shortfall thereafter. Covering this shortfall requires savings in the range of half a million dollars or more. I think I just heard some readers say “HA!” at the thought of having half a million dollars saved.
The problem is that the lure of not having to work any more is powerful. But for the typical Canadian, discussing CPP at age 60 just brings false hope. Combine this false hope with some fuzzy thinking about the numbers and many Canadians take the retirement plunge at age 60 even though they are ill-prepared financially.
I tend to favour giving people the choice to make their own decisions. But I can’t help but think that typical Canadians would have more realistic retirement expectations if they couldn’t start their CPP benefits until age 65 or later.
The maximum CPP benefit for those starting at age 60 is about $8000 per year. Most Canadians will get quite a bit less than this. For a single person hoping for a modest $36,000 per year income in retirement, CPP isn’t adding much. This leaves at least a $28,000 per year shortfall until age 65, and once OAS kicks in, about a $21,000 per year shortfall thereafter. Covering this shortfall requires savings in the range of half a million dollars or more. I think I just heard some readers say “HA!” at the thought of having half a million dollars saved.
The problem is that the lure of not having to work any more is powerful. But for the typical Canadian, discussing CPP at age 60 just brings false hope. Combine this false hope with some fuzzy thinking about the numbers and many Canadians take the retirement plunge at age 60 even though they are ill-prepared financially.
I tend to favour giving people the choice to make their own decisions. But I can’t help but think that typical Canadians would have more realistic retirement expectations if they couldn’t start their CPP benefits until age 65 or later.
Half a million dollars saved and more is needed for retirement for my cohort, even with CPP delayed until 65, is my math. Fully agree with this post, I think folks taking CPP at age 60 without doing the math might find their retirement income much less than they bargained for.
ReplyDeleteWhile it's true that CPP forms only a small portion of most people's retirement income (or at least it should) there are several sound reasons for taking it at 60.
ReplyDeleteIf you, and your spouse if you're married, are in poor health and don't expect to reach the average age for life expectancy, you’re probably better off taking it early.
As well, even if both partners have contributed the maximum all their lives, the sum of the deceased person’s pension and the survivor's pension can’t be more than the maximum allowed.
Practically speaking, this means that many dual-income couples with decent work experience won’t ever see much in the way of survivor benefits. In many cases, much of their CPP pensions will essentially die with them.
This is even truer for single people.
Unlike most DB pension plans, where if you’re single when you start receiving your pension your estate is generally entitled to at least 10 years of payments, the CPP offers no such relief.
With no partner or children, your CPP pension ceases upon your death. Everything else you contributed over the years will go towards other people's pensions.
Again, unless you expect to be very long lived, this is an argument for collecting early to ensure you get as much out of the plan as possible.
@Anonymous: Whether or not to take CPP at 60 is a different question from whether to retire at 60. I suspect most people of average health would be better off delaying taking CPP to give them greater certainty that they'll have a livable income into old age. However, all this is a different debate from the one I began with this article. A great many Canadians aren't trying to maximize CPP benefits. They just don't want to work any more and the possibility of starting CPP at age 60 entices them to consider retiring without really looking at the numbers realistically.
DeleteI'm just wondering where you found info about many Canadians taking CPP at 60 who were financially ill prepared? Was there a study recently? I'm curious because of my interest in forced early retirement.
ReplyDeleteI only know a couple of people who took CPP early. In one case, she was too ill to work. In the other, he was laid off at 57 and couldn't find anything above minimum wage (which he took) afterwards. Both were ill prepared financially but neither had expected or planned to stop working early.
I think many people have early retirement forced on them. But I have no data to prove that, only lots of anecdotal evidence. Enough anecdotes that we've been preparing like mad in case it happens to us. It very nearly happened to my relative last year when his company arbitrarily decided to close their Cdn operation, even though it had signed contracts running out for another 18 months, just because they wanted to consolidate all of their holdings in Europe. Fortunately, we've now reached the point where we could manage if we were downgraded to minimum wage jobs, which is a huge relief when one works in a cyclical layoff-prone industry.
@Bet Crooks: My comments are based in part on questions from readers, friends, and acquaintances who have not retired yet but are hoping to retire at 60 even though the numbers make no sense. The other part is the simple fact that it's not possible for everyone to stop working so young and still live comfortably because there just wouldn't be enough people left to provide all the goods and services retirees want.
DeleteYou're right that people are sometimes forced out of jobs sooner than they want. We often call this forced retirement, but in reality, many of these people end up finding other (lower-paying) work because they need the money. So, "forced retirement" is often just a euphemism for getting fired. Whether that turns into full retirement, semi-retirement, or full employment is different in each case.
You're wise to save up in case you're forced out of work before you're ready to retire.
I can see where the CPP at 60 option could be a conversation starter.
ReplyDeleteBut isn't the fact that CPP is reduced if taken early common knowledge?
Perhaps the problem is that people just don't know how much their CPP will
actual be.
@Anonymous: The fact that CPP is reduced if you take it at age 60 is fairly well known. However, fewer people understand that this reduction is permanent; they incorrectly think that by age 65 their payments will be the same as they would have been if they had started at age 65.
DeleteHowever, in my experience, people don't do much with the numbers at all. They just seem to hope that CPP + OAS + payments from their RRIF will be enough.
How do you come up with your numbers? $500,000 at an average return of 5% over 30 years will give you an annual payout of $32.5k per year.
ReplyDeleteA 21k shortfall for 30 years at the same average of 5% requires $323,000 which is a reasonable amount to save.
@Anonymous: I don't know if you mean 5% real return (above inflation) or 5% nominal return. If you mean a 5% real return, this is not a realistic return expectation; a balanced portfolio cannot be expected to beat inflation by 5% per year. If you mean 5% nominal, then you are not accounting for inflation. $32.5k sounds good for the first few years, but it won't seem too good when its buying power is cut in half due to inflation.
DeleteAverage life expectancy for a male in Canada at age 65 is 18.5 years. Assuming it is the same for a 60 year old, which I think is conservative, then a single male retiring at age 60 would need an amount of money that would last for approximately 24 years. If we assume an inflation rate of 2.5% and a nominal return on investment of 5%, which I think is reasonable, then the individual would need approximately $370,000. Granted this number assumes everything goes according to plan which may not be the case. A 6% nominal return would require $332,000. I believe that the $370,000 number is reasonable and should be reachable for the average male. I still believe that too many people are living outside their means and are falling prey to consumerism. The level of money we waste in this country is outstanding. Consistent savings and living below one's means are the true cornerstones of financial independence.
Delete@Anonymous: A real return of 2.5% is reasonable enough, but it doesn't make sense to plan for only your life expectancy. You may live longer than average. This is the problem with longevity risk. Insurance companies can count on averages, but individuals can't.
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