CPP & RRIF Income: Thinking Outside the Box

By Erin Gendron, May 20, 2021

Most new clients coming into our practice hold two very common assumptions about retirement income.

The first is that any time you can defer paying tax, you should, and that means holding off on converting your RRSP into a RRIF until the statutory deadline – the end of the year you turn 71. If this is not possible, you should minimize your RRIF payments to the greatest possible extent by relying on other sources of income.

The second is that as soon as you qualify for Canada Pension Plan (CPP) payments – age 60 – you should start taking them.

While this approach may be suitable for some, for many people – particularly those with significant savings and potential for longer-than-average life expectancy – acting on these assumptions would mean leaving a surprisingly large amount of retirement income on the table.

Bucking conventional wisdom

Instead of taking CPP payments early and RRIF income late, many would benefit from doing the exact opposite: delaying CPP until age 70 – or as close to age 70 as possible – and starting RRIF payments well in advance of the conversion deadline to meet cash flow needs.

When you take CPP before age 65, your benefits get cut by 0.6% a month, or 7.2% per year. This means that if you start taking CPP at age 60, you’ll see a total reduction of 36%. By contrast, if you start taking CPP after age 65, your benefits increase by 0.7% a month, or 8.4% a year, which means that delaying for as long as possible – to age 70 – boosts your CPP payments by a startling 42%.

A recent study put a dollar figure on this difference, explaining that “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.” Despite this, over the past decade most Canadians began taking CPP at age 60, with fewer than 1% holding off until age 70.

Let’s take a look at a hypothetical, but very typical, example to illustrate how this powerful insight can be integrated into a tailored, holistic retirement income plan.

Case Study: Bob & Judy

Long-time neighbours Bob and Judy both plan to retire at age 60 after decades of hard work and diligent saving. In addition to a $30,000 annual pension, they each have $500,000 in RRSP savings and both are eligible for $1,100 in monthly CPP payments at age 65. A $4,500 net monthly income ($54,000 annually) would allow them to live the retirement lifestyle they each envision for themselves.

Bob and Judy have nearly identical financial circumstances, apart from one very important detail: Judy has an Investment Advisor, while Bob does not.

CPP: Worth the wait

Bob begins taking his CPP benefits as soon as he retires. Like most people, he’s focused on the short term and concludes that since he’s eligible to have that extra money in his pocket, he may as well take it. He receives $704 per month ($8,448 annually), which is well below the $1,100 he would have received had he waited until age 65 and less than half of the $1,562 he would have pocketed had he waited until age 70.

Bob enjoys a very fulfilling retirement and passes away at the end of his eighty-seventh year. Overall, he collected $312,000 in CPP income (pre-tax) over his 27 years of retirement.

Judy takes a very different approach. At the suggestion of her advisor, who always encourages long-term thinking, she delays her CPP payments until age 70. For the income she needs until that time, she makes withdrawals from her retirement savings. Once Judy turns 70, she begins collecting $1,562 in monthly CPP benefits ($18,744 annually), which her advisor points out is 42% higher than what she would have received had she started taking CPP at age 65.

Like Bob, Judy enjoys a fulfilling retirement and passes away at the end of her eighty-seventh year. Over the course of her 27-year retirement, she collects $487,000 in CPP income (gross).

Bob’s lifetime loss for taking CPP early is $175,000 (the difference between Judy’s $487,000 and his $312,000). This loss becomes particularly important when we consider that Bob had a 45% chance of living to age 95, which would have significantly increased his cash-flow needs.

RRIFs, death & taxes

Judy had to rely on higher RRIF withdrawals to meet her income needs in her early retirement years, while Bob took more modest withdrawals to meet his after-tax income goal. What impact does this have over the long term?

Assuming equal rates of return, at age 70, Bob’s RRIF is valued at $444,000, while Judy’s is $336,000. Importantly, however, at age 70, Judy’s income needs are met with her increased CPP income, and as a result her RRIF withdrawals can be saved in her TFSA and non-registered account for future use.

Fast-forward to age 87, Bob’s RRIF is now worth $256,000. Approximately $137,000 in taxes will be payable on this amount by his estate, leaving a net estate value of $119,000.

At age 87, Judy’s RRIF is worth $222,000, while her TFSA and non-registered account have grown to $85,000, for a total of $307,000. Estate taxes of $117,000 leave a net estate value of $190,000, which is $71,000 more than what Bob was able to leave to his loved ones.

Final thoughts

As is often the case in life, the most common way of doing things isn’t necessarily the best way. And so it is with retirement income planning.

For many, delaying CPP and relying more on RRIF withdrawals during the early years of retirement can result in more income overall, a lower lifetime tax bill, and a larger bequest to loved ones and charities.

As with all aspects of wealth management, your best course is to speak with a specialist – an Investment Advisor with expertise in holistic financial planning – to learn which approach to retirement income is most appropriate for your personal financial circumstances.

Erin Gendron, CFP® is an Investment Advisor and Financial Planner at CrossPoint Financial, iA Private Wealth in Ottawa, Ontario. She can be reached at (613) 228-7777 or erin@crosspointfinancial.ca