The Canada Pension Plan Labyrinth
When I was high school, I loved and read as many old myths and ancient history stories as I could get my hands on. I especially loved ancient Roman and Greek stories and would read them under the covers with my flashlight. One story that I especially loved was that featured a monster called the Minotaur. The myth recounts that King Minos of Crete at Knossos hired Daedalus, an architect, to construct a maze or labyrinth so elaborate that the beastly Minotaur, could not find his way out. By keeping the monster caged, the king protected his subjects from certain death. Eventually, the young hero, Theseus, shows up and disposes of the Minotaur. He also escapes the labyrinth by following a golden thread back to entrance of the maze and gets rewarded, as all young heroes do.
Retirement planning can often feel like an intricate maze fraught with nuance and confusion. In several of my previous blogs, I have referenced different concepts such as the Canada Pension Plan, Old Age Security, Registered Retirement Savings Plans, Tax Free Savings Accounts, Open Accounts, and plain ordinary savings accounts. Trying to get one’s head around all these programs and the nuances within each plan is enough to make your head spin. It’s no wonder that Retirement Planning and Investment planning can feel like King Minos’s labyrinth.
*One important decision that people must deal with is when to take their Canada Pension benefits. The best decision can provide a lot of income to people, however many people leave a lot of money on the table, because they use outdated or incorrect information. Here are some Outdated “Rules of Thumb” that are no longer appropriate when planning your Canada Pension Plan Income:
- Most people die in their 70’s
- You need less income as you age
- You will spend less in retirement in your later years
- Managing financial risk means increasing allocations in cash and bonds as one ages
These outdated “rules of thumb” are based on former truths that are no longer reality but have survived and continue to be used today.
The best way to consider your Canada Pension Plan options is to consider two options. The most common option that people are familiar with is the “Break-Even” model and the other is the “Lifetime Loss” analysis. The Break-Even model assumes an early death whereas the Lifetime Loss analysis assumes a long life. Given that most Canadians will live well into their 80’s or 90’s, it may make sense to consider deferring CPP beyond age 65 up to age 70.
This is very important because life expectancy increases with age. This is an actuarial phenomenon that I will try to explain this way. If a person lives to age 67, it is probable that the person will live another 15 years or to age 82. If that same person makes it to age 82, it is probable that he/she will make it another 7 years or to age 89. The reason that this logic works is because when young people pass away, death is primarily due to accidents. As people get older, illnesses start to take people. So, if acute and chronic diseases pass you by or get cured, the probability of long life stays in your favour.
Al’s Nuggets:
- Do the math! Work with your advisor to work out the Break-Even model vs the Lifetime Loss calculation.
- If you have worked in Canada between ages 18 and 70, you are eligible for the Canada Pension Plan. How much you will get will depend on contributions during your earning years. Check your “My Service Canada Account”! *
*From Notes “Improving CPP Planning for Canadians: Timing is Everything” FP Canada, Spring 2022. *