Canada Pension Plan optimization.
My wife, Nancy, is a healthcare professional, and I am never sure how much interest she has in financial matters. She appears to listen attentively when I start to talk about issues affecting retirement, but I think she does so to humor me. She is, I think, more interested in new techniques for wound management than tax minimization or income optimization.
So, I was really surprised when she handed me a slip of paper with an email and told me about one of her colleagues named Shirley. Shirley was in her final 18 months of work. Her husband was looking to retire before that. He will be 63 and she will be 61 when they pull the trigger on their retirement.
Shirley had mentioned in one of her conversations with Nancy that, like their parents, she and Dan would be starting their CPP right away, to align with when they began to draw upon savings to fund their retirement. A light went on in Nancy’s head as she remembered one my breakfast lectures on CPP entitlements and the financial benefit of starting CPP at the right time.
All she said to Nancy was, “You should ask Doug what your right time to start CPP is.”
I sent Shirley a quick email to encourage her to take great care in her decision and suggested a process to help her investigate the implications of making a less than an optimal decision. My email focused on three main issues:
- Most people fail to appreciate the cumulative financial significance and income security that CPP adds to their retirement lives. Consequently, they tend to underestimate the financial consequences of making a poor decision.
- As of 2012, for the first time in over 48 years, the rules around CPP had changed. These changes now make CPP start date calculations significantly more complex and important.
- Poorly made start date decisions can have significant and unanticipated implications upon the widows’ allowance which the surviving spouse is entitled to.
To validate my concerns, in my email I suggested that Shirley try our CPP Optimizer tool. All she needed to do was enter three simple pieces of information about herself and her spouse:
- Their birthdates – to establish age.
- Their best guess at how long each of them would live – critical to incorporating the impact of the survivor’s benefit entitlement.
- Their projection of what they would receive from CPP if they both waited to age 65 – which would have been impacted by their histories of employment income between the ages of 18 and 65 inclusive.
Shirley agreed to give it a try.
I was quite confident that she would discover, as most others who have worked with us here at Retirement Navigator™ do, that the cumulative difference in total lifetime income benefits between a poor decision and the right decision often exceeds $100,000.
I explained that each of them, individually, had 121 different start dates to choose from (each month between reaching age 60 through to the month they reach age 70 inclusive) and that the best start date for one spouse, is frequently not the best start date for the other. As a result, the number of possible combinations and permutations that need to be considered to make the best decision is 14,641. Finally, I warned her that far too many Canadians continue to rely upon ‘conventional thinking’ that starting to draw CPP as soon as you can is the right choice, when in reality this outdated and dangerous ‘wisdom’ has a bad habit of leading people toward costly decisions.
Less than 20 minutes later, Shirley called me.
As suspected, she had discovered that, in their case the difference between making a poor decision and making the optimal decision exceeded $135,000 over their lifetime.
Now that they understood the value of making the right decision, you can imagine how anxious they were to meet; to learn the specific start dates that would provide the largest lifetime incomes ;for the two of them.
After we completed the process, they remarked on how easy it was to make the right decisions, when you have access to the right tools and how thankful they were that they had not proceeded with their original plans. Had they done so, they would have had the rest of their lives to look back in regret at how a poor decision would have reduced their lifetime entitlements by well over $100,000.
Unfortunately, few decisions relating to retirement come with an UNDO or REDO button. A wrong decision can leave you looking back in regret – for the rest of your life.