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  • Eric Watchorn

Wealth Management

Often sought after, yet not enough realized, … perhaps …

According to ‘LIMRA Secure Retirement Institute’ 6 in 10 pre-retirees want guaranteed income for life – it is actually the number on feature they want in a financial product.

Why would so many want guarantees when we have just been apart of the longest bull-run in equity market history?

Do we inherently realize that things cannot go up forever? How do we lock in gains? How do we take some risk off the table, so to speak?

Few jobs have defined benefit plans. Yes, they may have a defined contribution plan – which does no offer any guarantees to your pension. It shows you what you decide to contribute, and perhaps there is an employer contribution component - that’s it.

Many investors feel that they need at least a certain amount of funds guaranteed for life for retirement. Longer lives and mortality rates show that many are at risk of running out of retirement savings in their RRSPs/RRIFs or other accounts.

The fear of, what is more and more often referred to since the 2008 crisis, the ‘sequence of returns’ affecting a retirement account through the withdrawal stages has many seeking these guarantees.

Let’ not forget the Canada Pension Plan. Its is the basic relied upon guaranteed pension that just about every Canadian has access to. We all know its not a massive benefit, yet it’s definitely nice to have there. Options exist as to when to begin receiving the benefit, so the questions is, ‘when should I?’

Would it make sense to begin taking the benefits at age 70?

Is it worth delaying it to that age?

The majority of Canadians (7 out of 10) take their CPP retirement pension at either 60 or 65. Between 1-6% take it between age 65 and 70. Many opt for the emotional argument in that if you die early, you’ll leave money on the table – so take CPP as soon as you can.

Often advice is delivered using a ‘breakeven age’ as the main point of concern. It compares two starting ages, say 60 and 65. We often favour the near term psychologically, and thereby tend to undervalue the lifetime income security that CPP offers. To add, academic research shows that we also tend to underestimate our life expectancy, making it even more likely that we choose an earlier start.

Current mortality in Canada for a 60 male is 85.9 years of age, and it is 88.5 years of age for a 60 year old female. Yet the suggested breakeven cross-over age is usually hardly over age 80.

So, perhaps the lifetime loss calculation is a better way to access the real-life difference between taking it earlier vs later.

For someone with average life expectancy entitled to the median CPP income who takes it at age 60 rather than delaying to age 70, the lifetime loss in current dollars is more than $100,000.

This approach would factor in drawing down RRIF savings until CPP begins. This approach truly leaves people way better off.

However, we are being very general here. Individual circumstances affect the consideration and the calculations of lifetime loss. There are many situations where it would make sense to begin early, such as a known life-limiting health condition, or when someone is trying to preserve income tested benefits or shield against the Old Age Security clawback.

Helpful information and lessons of behavioural finance to revert to are:

  • Loss aversion holds that we feel the pain of loss twice as much as the joy of gain.

  • Longevity of one’s life based on current statistical models that can be trusted.

  • Anchoring age 70 as the default option and focal point – if at all possible.

We offer clients a personal pension with guarantees for life – feel free to ask us how to make that work for your RRSP or TFSA. It allows for upside market participation and a minimum retirement growth in down markets.

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