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Inflation and Cash Flow

For most of us, retirement is a period when income consists of savings, a government payment, and either an employer-arranged pension or RRSP. The government-provided benefits adjust for inflation as do some employer pensions. While one's assets may grow, and decline in value, payments from savings or investments do not adjust for inflation.

Canadians who have been in the workforce are entitled to receive the Canada Pension plan, starting at age 60. The amount will be what the pensioner would have received at his or her age 65 less 36% due to starting payments early. The Old Age Security benefit starts at age 65 but it can be postponed by the recipient and for every year of deferral, the OAS benefit rises to a total increase of 36%, compared with the monthly benefit at age 65. 

If a Canadian chooses to defer applying for his or her CPP to age 70, the amount payable may be as much as 49% higher. 

For example, a person at age 60 is entitled to a lifetime pension of $6773/year (i.e. the maximum CPP benefit at 65 less 36%). If that retiree delayed the start of his CPP to age 70 he would receive $16,779 per year for life, a total of additional payments received of $100,000 by age 85, his life expectancy. This difference ignores the annual increase of CPP due to inflation and which starts enhancing the monthly benefit at this higher monthly benefit level at age 70. A female retiree does even better because her life expectancy is over 2 years longer. (Source: MacDonald, B.J. (2020) “Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits: The Substantial (and unrecognized ) Value of Waiting to Claim CPP/QPP Benefits." National Institute on Ageing, Ryerson University). 

Comment 

When you look at a forecast of your cash flow in retirement look at the impact of deferral of these two government benefits. If you can financially bridge the gap between your retirement date and your age 70 you will have locked in two government benefits at their highest payable levels with annual inflation adjustments every year on those higher benefits. It is certainly a much lower cost than purchasing an annuity from a life insurer that increases annually by 2%. 

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