Do Rules of Thumb Really Work?

Even simple questions turn out not to have simple answers. For example, choosing the age to start CPP and OAS: What start-age lets me get the most out of these pensions?  The rule of thumb is this: delay taking both benefits as long as possible.

But is this rule of thumb correct for you?  The simplest way to answer this question is to look at the payouts: CPP and OAS Annual Benefits are inflation-indexed and increase by 8.9% for each year delayed beyond age 65.

Ever the sceptic, I calculated the payouts using some simple tools.  As it turns out, it takes until age 83 to break even based on 2% inflation (1% over the government index).  With inflation 2.5% over, by delaying, you don’t come out ahead until age 87.

Optimal age to start CPP, OAS based on 2.5% inflation over gov. index:

Even this is oversimplifying. We haven’t considered a broader financial picture: what assets are in our portfolio? What are their expected returns? How much is going to be spent each year? What if there aren’t enough liquid assets to delay taking CPP or OAS? What if chasing returns puts the entire portfolio at risk?

Real-life retirement scenarios are too complex to be built from rules of thumb or Microsoft Excel. Building a robust financial plan requires optimizing pension start-ages in the context of all other portfolio parameters.

For best results, use an optimization engine to calculate retirement financial status. Holistically consider all portfolio elements: the answer depends heavily on current assets, expected returns, and life expectancy. 

Retirement plans are complex: Many different approaches can be taken.  The best plan may involve tweaking spending plans over different phases of retirement; maybe it involves downsizing a house or selling a cottage partway through. Each of these approaches will have different tax implications.   The optimal plan from an asset standpoint, can only be calculated by a sophisticated optimizing engine.

The use of an optimizing engine, such as Retirement-Optimizer, lets you build a complete retirement plan and use a sophisticated computer solver to determine the best pension start-age given all of your other parameters. Don’t let 1-dimensional analysis cause your retirement plan to leave money on the table. Optimize your retirement! 

these analyses are simple to do with sophisticated tools such as retirement-optimizer.ca

Advertisement