When preparing your withdrawal strategy, you wonder whether you should postpone your retirement pension under the Québec Pension Plan (QPP) and your Old Age Security (OAS) pension.
What you need to know is that the
age at which you start receiving your retirement pension under the QPP has an impact
on the extent of the financial risks associated with retirement.
Let's take a look at the risks and effects of postponing receving a retirement pension under the QPP or the Old Age Security pension.
Liquidity risk
Planning for retirement must always be based on solid foundations: it is better to rely on guaranteed sources of income, such as the QPP pension or the OAS pension, than rely on hypothetical sources of income. For example, the sale of your house could take more time than you anticipated and not yield the amount you expected.
It is also wise to keep part of your savings in liquid investments, which allow you to withdraw your savings at any time with few to no penalties.
Careful!
Your retirement pension under the QPP and your Old Age Security (OAS) pension are not considered liquid investments. In the case of an unforeseen event, you cannot receive a larger payment than the one you receive monthly.
Rate of return risk
Generally speaking, the more savings are invested, the more efficient they become. It is nevertheless recommended that you diversify your savings vehicles to control the risk related to return. Usually, when you retire, the majority of your savings should be sufficient to ensure guaranteed income. Therefore, the risk related to return is associated with fluctuations in uncertain investments or income that is not guaranteed. For example, the capital you invest on the stock market could decrease rapidly in the event of a market correction.
QPP pensions, which cover all persons working in Québec, have a risk-free rate of return. However, a QPP pension may not be sufficient to ensure you can maintain your standard of living in retirement.
Inflation risk
Inflation measures the increase in the cost of goods and services over time and has a direct impact on your purchasing power. When prices rise, your purchasing power decreases and inversely when prices fall it increases. Therefore, in order to maintain your purchasing power over time, inflation must be taken into account.
Generally, retirement income from personal savings is not indexed. For example, with a 2% annual inflation rate, your savings of $10 000 will have a value equivalent to $8203 after 10 years and, as a result, part of your purchasing power is lost.
Pensions under the QPP and the Old Age Security (OAS) program are indexed based on the Consumer Price Index (CPI). Therefore, they are not affected by inflation.
Longevity risk
An important aspect of planning for retirement involves setting aside enough savings for the rest of your life, despite the fact that you do not know in which year you will die. However, risks related to longevity can be reduced by postponing your retirement pension under the QPP.
If you postpone your pension under the QPP, you probably will need to use your personal savings during a certain period. However, postponing will allow you to receive a higher pension until your death.
Remember, the amount of your retirement pension under the QPP will be indexed based on the cost of living and will be the same for the rest of your life, even if you live a very long time.
For more information, consult
The amount of a retirement pension web page.
Postponing your retirement
Postponing your pension could compensate for a lack of savings. The longer you extend your savings period, the shorter your withdrawal period will be and the better your financial comfort will be in retirement. Working for an extra year may seem like a long time, but remember you can choose to retire gradually by reducing your work hours during the last years of your career.
Remember that your withdrawal of retirement savings plan will evolve over time: review it on a regular basis to make sure it still fits the bill.