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.
- 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.
- 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.
- 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.”
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!
