Jacques celebrated his 60th birthday and has just officially retired. His QPP declaration shows that he is entitled to a monthly pension of $800. Should he touch her immediately or wait?
Jacques faces a dilemma: should he receive his QPP pension immediately or postpone it for a few years? The retiree wants to know at what age it is advantageous to wait until age 65 to apply for the QPP, taking into account the withdrawals he will have to make from his investments.
To procrastinate or not?
First of all, Jean-Philippe Vézina, tax specialist and financial planner at Équipe Jean-Maurice Vézina, reminds us that the QPP pension is taxable and is added to income. “You should know that if you apply before age 65, it will be reduced for life, decreasing by 0.5 to 0.6% for each month you receive before your 65th birthday. “A pension at age 60 will be 30 to 36% lower than the pension you would have received from age 65,” he explains.
However, if you delay payment after age 65, you will be entitled to an increase of 0.7% per month, for a maximum bonus of 58.8%. In 2024, a postponement until your 72nd birthday is possible.
Receipt of pension at age 60
Jacques wants to earn a net income of $50,000 per year, indexed at 2.10%, by the time he is 95. He has an RRSP, a TFSA and receives a pension plan from his employer. He also owns a condominium.
He has a dynamic, moderate investor profile with a 4% return on his investments. The growth rate of his pension fund is 1%, as is that of his condominium.
If Jacques receives the QPP pension immediately, his taxable income will be higher in the first five years due to his employer’s pension plan. From 2028 onwards, the taxable income will be lower as this pension fund decreases at age 65.
“In this scenario, Jacques receives a net income of $50,000 per year, indexed to 2.10%. At the age of 95, you will be left with a net worth of $500,000 or the value of the condominium,” explains Jean-Philippe Vézina.
Postpone your pension until you are 65 years old
A shift also means an improvement in QPP, which will rise from $800 to $1,237 per month. This practically covers the entire reduction in the pension fund from the age of 65.
However, Jacques has to make up the shortfall in the first five years through deductions from his investments. Drawing on your TFSA does not increase your taxable income.
“In this scenario, Jacques may have a net income of $50,000 per year, indexed to 2.10%. At the age of 95, a net worth of $683,500 remains, that is, the value of the condominium and investments,” says Jean-Philippe Vézina. A delay until age 65 is therefore more advantageous for Jacques, as he could also have the choice of increasing his net income in retirement or leaving a larger inheritance to his children.
The turning point
If age at death is a crucial factor in assessing the viability of the analysis, the turning point must also be taken into account. The latter is the age at which the two scenarios become equivalent in terms of the net worth of the assets. So if Jack survives the turning point age, this scenario will be more profitable.
· RRQ at 65 instead of 60: Jacques’ turning point is 76
· RRQ at 70 instead of 65: Jacques’ turning point is 87
There is no one-size-fits-all solution and many factors come into play. It’s not just about money, personal aspects also have to be taken into account. A financial planner can help you evaluate each scenario based on your expectations and needs.
HIS FINANCIAL SITUATION:
· Pension from an employer pension fund: $55,000 until age 65, then $35,000
· MSRP: $225,000
· TFSA: $50,000
· $350,000 condo that he wants to keep and not factor into retirement planning.