Weekend Reading: $100,000 Lifetime Loss of CPP Edition

Weekend Reading: CPP Lifetime Loss of $100,000

Fewer than 1% of eligible recipients choose to take their CPP benefits at 70. Most Canadians take CPP at age 60, as soon as they’re eligible, perhaps unknowingly giving up substantial lifetime income.

Dr. Bonnie-Jeanne MacDonald, Director of Financial Security Research at the National Institute on Ageing, wants to change the conversation around when to take CPP. Her latest research looks at the substantial (and unrecognized) value of waiting to claim CPP/QPP benefits.

I had the pleasure of speaking with Dr. MacDonald about this research and her key findings. She says the financial services industry needs to reframe its messaging to clients about the decision to take CPP. Rules of thumb aimed to make decisions easier can ultimately lead to confusion and even incorrect solutions.

The study describes three reasons why retirement planning practices currently encourage Canadians to take their benefits early.

  1. Lack of advice – More than two-thirds of Canadians nearing or in retirement do not understand that waiting to claim CPP benefits will increase their monthly pension payments.
  2. Bad “good” advice – Canadians who do seek retirement financial planning advice are being encouraged to take CPP/QPP benefits early using concepts like “breakeven age” to explain the decision. More on this later.
  3. Bad “bad” advice – This includes poor anecdotal advice from friends and family, and advice influenced by potential conflicts of interest from a financial advisor.

Dr. MacDonald says the breakeven approach is misleading and has been proven to powerfully influence the decision to take CPP early. 

“It pushes people to mentally gamble their subjective life expectancy against the “breakeven” age.”

Indeed, a 60-year-old male has a 50% chance of living to age 89, while a 60-year-old female has a 50% chance of living to age 91.

CPP Lifetime Loss

Changing the conversation around CPP starts with using behavioural psychology to reframe the problem. Enter the “Lifetime Loss” concept that demonstrates the expected financial loss of taking CPP earlier rather than later. It encourages Canadians to look beyond the short-term and consider their entire financial future.

“An average Canadian receiving the median CPP income who chooses to take benefits at age 60 rather than age 70 is forfeiting over $100,000 (in current dollars) worth of secure lifetime income.”

CPP Lifetime Loss

Dr. MacDonald says we should be using behavioural psychology techniques to influence the CPP uptake decision, such as changing how the information is framed by advisors (using lifetime loss framework instead of breakeven age), to the application forms sent out by Service Canada, which may be unknowingly encouraging Canadians to apply for CPP early.

Finally, Dr. MacDonald and I discussed the issue of retirement spending for older Canadians. Most people believe expenses will decline as we age since we’re no longer spending as much on travel and hobbies. But Dr. MacDonald says that long-term care is a greater concern, and that 75% of home care for older Canadians is currently provided by family members (unpaid).

That dynamic will change in future years. Retiring Canadians now have fewer adult children, and those children are more likely to be geographically separated from their families than past generations. 

“Without adequate family support, work that has traditionally been done for free (e.g., transportation, daily care, preparing meals, etc.) will come at a cost, and those services are expensive to replace.”

This makes deferring CPP an attractive option, as you’re essentially purchasing a very secure pension at an excellent price. The financial incentives are even higher than we think. By deferring CPP from age 65 to 70, you will increase your retirement benefit by 42% (0.7% for every month you defer). But this fails to account for the inflation-adjustment applied to CPP benefits. The real increase is closer to 50% (49.2%).

I encourage you to read the research paper – it’s lengthy but written in plain language with clear visuals that explain the key findings and solutions.

This Week’s Recap:

There was a lot of interest in my post highlighting Emerge ARK ETFs and their eye-popping returns. Several of you asked if I would invest in these myself. The answer is no. I’m 100% dedicated to my total market approach to investing, and I avoid anything that will tempt the irrational part of my brain to try to chase returns. 

But just because I’m an emotional robot when it comes to investing doesn’t mean that you are. Many readers (and clients) have dabbled in tech stocks this year (through ARK ETFs, or Invesco’s QQQ, or by simply picking individual stocks). It’s hard not to get caught up in the frenzy when tech stocks have been driving the stock market returns for many years.

I don’t advocate for picking individual stocks at all, but I recognize that some investors want to express themselves through their portfolio by owning what they know, or what’s new and exciting, or what hedges their fears.

That’s why I’d prefer to see investors build some guardrails around their behaviour by limiting their “explore” to no more than 5-10% of their portfolio, avoiding individual stocks, and instead choosing a thematic (and more diversified) ETF to scratch that itch. 

My guardrails include avoiding stock market news (“What investors need to know about the stock market today”), avoiding looking at my investments as much as possible, and staying 100% invested at all times. This way I’m rarely tempted to do anything with my portfolio.

Promo of the Week:

Just a reminder to join our new (private) Facebook group – Personal Finance Canada – where we’ve been having some great discussions about investing, retirement, credit cards, and more.

The group is administered by me and travel expert Barry Choi, but we also have other experts in the group on CPP, retirement planning, and investing there to answer your burning questions about money.

Please join us and leave a question or comment for the group.

Weekend Reading:

There’s still time to enter the $1,000 cash Christmas giveaway over at Credit Card Genius.

The Measure of a Plan website has updated its investment portfolio tracker – a spreadsheet for DIY investors.

My Own Advisor’s Mark Seed and Money Coaches Canada’s Steve Bridge explain what is a financial plan and what it should cover.

Michael James on Money explains how to transition your investment portfolio as you head into retirement.

Millionaire Teacher Andrew Hallam uses The Misguided Beliefs of Financial Advisors paper to show how advisors punch themselves by purchasing actively managed mutual funds and chasing past performance:

“I was surprised to learn the advisors ate their own cooking…and burned their own food. They bought themselves actively managed funds instead of index funds. In other words, they bought the same things for themselves that they recommended to their clients. That doesn’t reveal a lack of ethics–just a lack of knowledge.”

File this under something I usually ignore, but is interesting nonetheless. Maclean’s “charts to watch in 2021.”

Rob Carrick shares a new option for safely parking U.S. dollars, plus a 2.3% TFSA savings account.

Jason Heath continues to descend into the particular, this time with ways to unlock retirement savings in a LIRA.

Morgan Housel shares another gem with “A few things I’m pretty sure about.” I completely agree with this one:

“Most professions would benefit from at least one a day month where you did nothing but think. No meetings, no calls, no deliverables. Just a seat on the couch thinking about what’s working, what’s not, and what to do about it.”

Finally, a must-read by Zandile Chiwanza on why she had to use her “white-passing” middle name to get an apartment in Toronto.

Have a great weekend, everyone!

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  1. Carol B on December 12, 2020 at 1:19 pm

    There’s a “National Institute on Aging” funded by taxpayers? Not only that, there is a Director of Financial Security Research ? Who knew?

  2. Stephen H on December 12, 2020 at 1:57 pm

    That DIY investment portfolio tracking spreadsheet is incredible.

    I just inputted my trades over the past couple of years, and boom! So many insights!

    Dividend tracking, capital gains, performance %, benchmarking versus the S&P.

    Super cool. Thanks for sharing 🙂

  3. Charlie Warga on December 12, 2020 at 9:27 pm

    Can you tell me how this figure was arrived at. The way I figure it is that you take the amount you would receive over the 10 years from 60 to 70 and subtract It from the amount you would receive above what you received at 60 from 70 to life expectancies
    e.g 60 to 70 $650 per month for 10 years 12 x 10 years x$50 is $78000 the difference between waiting and early pension $975 – $650 = $325 times 20 years if life expectancy is 90 years so 20 x 12 x $325 is $78000 which is a zero loss of income

    • Aaron on December 12, 2020 at 10:31 pm

      Check out the chart in this older post and compare the cumulative payments at later ages for the age 60 and age 70 start dates.. none of this is really new but it’s good that it’s getting attention finally.


  4. Johnny Eff on December 13, 2020 at 3:39 am

    Great article. Wish I would have read it before choosing to take it at 60. Any idea why the federal government has not used actual actuarial data to determine the rates, therefore making them more fair. It almost seems like a scheme built to save the fund money. Probably the savings they accrue will keep the CPP fund healthier and I’m all for that, but still it seems unfair. Thanks.

  5. Richard on December 13, 2020 at 9:44 am

    Rob Carrick’s article: A new option for safely parking U.S. dollars and a 2.3% TFSA savings account is locked out on the Globe and Mail website..

  6. Markaram on December 13, 2020 at 11:34 am

    Taking CPP at 60 gives you a headstart on pensions. Some people need the money and others less so. Nevertheless it’s a personal decision based on many factors. Most Canadians take it at 60 because why leave money on the table when the future is so uncertain and you have already done 40 years of full-time work. Take it while you can!

    • Robb Engen on December 13, 2020 at 11:42 am

      Hi Markaram, yes there are a number of factors that go into your personal decision to take CPP, but the entire point of the research paper shows that you leave money on the table by taking your benefits early. We have a hard time envisioning ourselves in 20-30 years and so we tend to make decisions that benefit us now at the expense of our long-term future.

  7. Peter Levesque on December 13, 2020 at 7:05 pm

    My wife died at 53. Take the money as soon as you can. You never know when you are going to die. Live for the now.

  8. Jason on December 14, 2020 at 10:45 am

    Let’s look at this another way, waiting till 70 will cost you $6ok out of you nest egg to cover no CPP and if you died at 70 your spouse will get a $2500 death benefit and a Survivors benefit (a % of your CPP).
    If you have a large nest egg and won’t miss the $60k then waiting till 70 makes sense, but if you have a small nest egg and don’t want to take a chance that during the 5 years you might end up taking even more out during a market decline that is a risk you will have to live with, your choice.

    • Robb Engen on December 17, 2020 at 3:38 pm

      Hi Jason, why would you make a decision based on the small chance you die at 70, versus the more realistic chance you live to 85, 90, or even 95?

      Why save at all if you’re going to die at 70? Just work until you kick the bucket…

      • Jason on December 17, 2020 at 5:48 pm

        Rob I have MS and have not worked since I was 38, some of my friends with MS never made it to 60 but others made it to 70+ and 1 till 90. In reading the CPP site they say many take it early due to illness. My CPP-Disability will be converted to regular CPP at 65 automatedly as they said in a letter I received from them.

        I did replace most of my mutual funds with ETFs and TD E series funds.

        • Robb Engen on December 17, 2020 at 9:10 pm

          Hi Jason, sorry to hear that. My wife was diagnosed with MS at 26. I hope you’re managing well.

          A shorter life expectancy is certainly one good reason to take CPP benefits early. This, along with several other circumstances, are outlined in the research paper.

          I hope that no one takes this research as a blanket argument that everyone must defer CPP to age 70. It’s very intentional and clear about who would benefit and who would not.

  9. David on December 14, 2020 at 12:51 pm

    I am somewhat frustrated with these over simplified statements, especially if they come from someone with a Ph D.

    In my case I had no intention to work to age 65 or beyond so I took the cut on CPP and my DB plan and retired at 60 – and have not regretted that. In the process of course I also proofed to myself that the notion of one needs 80% of their last gross or net for a comfortable retirement is just not that true and also over simplified. 35% work fine and I can still save money.

    My wife on the other hand will wait with CPP until age 70 as she was a stay home Mom for about 10 years and did not earn that much money. And of course we do not need the money yet – see last paragraph.

    But again the statements are so over simplified that I ever so often wonder on why this comes up time and again.

    • Robb Engen on December 17, 2020 at 3:36 pm

      Hi David, you’re right in that no one person is “an average” – we all have unique circumstances and so the CPP uptake decision depends on a whole host of factors.

      What the research is trying to say is that if we start with the notion that taking CPP at 60 may not be in your best interest (36% reduction in benefits), and that deferring to CPP may give you more income and protect against longevity risk (i.e. running out of money), then we can use that information and apply it to our own circumstances to help determine the appropriate age.

      I often hear of people who have taken their benefits early with “no regrets”. To me that’s like saying my actively managed mutual fund has made me a lot of money over the years, without bothering to compare it to an appropriate benchmark (that might have generated even higher returns).

      You can’t compare your decision to an alternate reality where you deferred CPP and may or may not have been happier. Psychologically, we adapt to our circumstances and make the most of our situation. Telling others that you (specifically you) are happy that you took CPP early is not helpful for others who need information to apply to their own situation.

  10. Robert Britton on December 16, 2020 at 10:57 am

    These articles about taking CPP later tend to be very ivory tower-ish and divorced from the real world. They assume a case that may not even exist. Basically the flaw is assuming that you can reduce people to an accounting.
    Where is the person that invests his early CPP and the real calculation for what he actually receives? If you invest (or more likely, do not withdraw as much from sheltered accounts) for 10 years, you have already grown a lot of money to balance the equation. There are many different scenarios like this, differing by individual circumstances. There ae ot many where delaying will cost you much.

    However, the main blind sport is much bigger. These theorists seem to be unaware that financial needs are completely different in your 80’s than in your 60’s. Most people need money far more in their 60’s than later, and that is when they need the CPP shot in the arm. You will not be buying many new cars, taking as many luxury cruises, or starting many expensive new hobbies in later decades. By waiting you probably benefit the government’s coffers, but you are also depriving yourself of maximum financial flexibility when you actually could use it.

    I am very glad I took CPP at 62, and only wish I had started earlier. I am now almost 68.

    • Robb Engen on December 17, 2020 at 3:27 pm

      Robert, the decision to delay CPP does not mean deferring spending in your 60s. It assumes you maintain your desired spending, but you tap into your personal savings to do so. This approach locks-in a guaranteed, risk-free increase in benefits from age 70 on.

      No one is suggesting you spend less in your 60s, or that somehow you sacrifice spending now just to lock-in higher CPP benefits later. Spend your riskier personal assets first and transfer that risk to a guaranteed, paid for life, indexed to inflation stream of income.

      This is not a judgement of anyone who has opted to take CPP early. There are a number of reasons why that may have been a good idea. But this research is saying, please take a longer-term view of your retirement spending and consider the benefits of deferring CPP.

  11. Harry on December 28, 2020 at 9:35 pm

    The link you provided to this paper does not appear to work anymore. Is there a new link?

    • Robb Engen on December 29, 2020 at 3:59 pm

      Hi Harry, thanks. Not sure what happened with the old link but I managed to find the new one and have updated the links in this article.

  12. Ron on December 27, 2021 at 7:24 pm

    My wife and I are both taking it at 60. I just started. The one thing I can say is that not one single article by itself will lead you to the best decision. This is because situations are are all unique and not all relevant factors are ever considered.
    We were good savers and lucky to have good pensions. A critical factor is “CPP AFTER TAX”. When this was factored in for us, the CPP after tax WAS LESS if we deferred to 70.
    I would have to be at least 86 to start gaining. With other secure income sources and assets, why would I reduce the value of my estate by waiting until 70 and sacrifice growth of personal assets.

    The actuary/academic’s take is techically correct but only in certain situations.
    You must use financial mathematical modelling under different scenarios. A good financial planner can do this. We could not level are tax brackets for a 20 year retirement so the recommendation did not apply for our siuation.

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