Managing and drawing down retirement savings is an “impossible task” with contributing factors including the trend away from workplace pension plans, historically low interest rates and high life expectancies.
In the keynote address at Benefits Canada‘s 2021 DC Plan Summit, Bonnie-Jeanne MacDonald (pictured), director of financial security research at Ryerson University’s National Institute on Ageing, highlighted a solution that doesn’t require any changes to Canada’s retirement system — a delay in taking Canada Pension Plan or Quebec Pension Plan benefits.
“Canadians aren’t required to begin receiving CPP and QPP as soon as they retire. Benefits can be taken as early as age 60 or as late as age 70 and the benefit amassed is adjusted according to the age the individual is at the time they start receiving the benefits. These adjustments are substantial.”
Referring to her own research published in December 2020, MacDonald said delaying taking CPP/QPP from age 60 to age 70 could more than double the benefit. “Delaying CPP and QPP benefits is the most misunderstood, underused and optimal decumulation solution that Canadians have and only one per cent use it.
“The majority of Canadians — seven out of 10 — start their CPP benefits at either age 65 or 60, less than five in 100 claim their benefits after age 65 and only one in 100 at age 70,” she added, noting most Canadians can afford to delay CPP/QPP. “The affordability question is really an important one because the concern is that many Canadians are not saving enough and this raises the question of how to get the most out of a minimal savings to support financial well-being in retirement.”
One of the main themes that came out of the research was the need for the Canadian retirement industry to fundamentally rethink its approach to advising those who are nearing retirement, said MacDonald, which includes a major change in the way it addresses the decision around taking CPP/QPP.
“In this current environment, Canadians are facing longer periods of time in retirement, they have scarcer sources of secure pension income, they’re facing core interest rates. . . and retiring Canadians — and those advising them — need to take this long-term, holistic view of their financial planning. We need to move away from short-term thinking to long-term planning and appreciate there are significant advantages of establishing greater retirement income security later in life.”
It’s important that industry professionals that influence these decisions, including pension plan sponsors, work in the best interest of the people who depend on them, she said. “This includes providing them with the very best possible information to make an informed decision that will protect their financial interests now as well as in your older years.”
MacDonald outlined four approaches for communicating the benefits of delaying CPP/QPP — looking at it as an investment, taking a risk-return analysis, doing a market-price comparison and simply telling plan members what they can expect to lose when they take the benefits early.
“Taking the benefits early typically means forfeiting significant levels of pension income. For example, Canadians receiving median CPP income who choose to take the benefits at age 60, rather than age 70, can expect to lose over $100,000 of secured income in today’s dollar.”
In conclusion, MacDonald said pension plan sponsors can play a critical role in helping their members with this important decision. “Keep in mind that helping your members take the most of their benefits, it’s not only going to give them retirement income security, it’s also going to enable them to spend the savings from their DC plans more confidently and joyfully in retirement. And for me that’s really the goal.”
Read more coverage from the 2021 DC Plan Summit.