Thinking about taking CPP early to avoid selling stocks at a loss? Proceed with caution

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As markets whip back and forth and portfolios shrink, some Canadian retirees may be tempted to rethink plans to delay Canada Pension Plan or Quebec Pension Plan benefits. The idea is simple: Start taking government payments sooner to reduce the need for withdrawals from your equity investments, giving them time to recover.

But financial planners say that starting CPP early should be a last resort – not a reaction to short-term market turbulence.

That’s because the longer you wait to take CPP, the more you get, and the increase is substantial. While you can start collecting as early as age 60, deferring until 70 boosts payments by 42 per cent.

“The increases by delaying are significant,” said Marlene Buxton, a Toronto-based certified financial planner and owner of Buxton Financial for Retirement. “They add up to a lot, especially for people who live longer.”

Yet most Canadians don’t wait. In fact, only about 4 per cent are expected to hold off until 70, according to a Globe analysis of data from the 2021 Actuarial Report on the CPP. For many, the choice is less about a financial strategy and more about necessity, Ms. Buxton said.

Ideally, retirees would have at least three to five years’ worth of living expenses set aside in liquid investments, such as cash or bonds, to draw from during market downturns, often called a “cash wedge,” Ms. Buxton said. This negates the need to sell stocks at a loss or rush into early CPP. But that kind of financial cushion is becoming harder to build, as Canadians face higher living costs and mounting debt.

A recent Edward Jones survey found only 39 per cent of Canadians planned to contribute to their RRSPs this year, down 10 percentage points from last year.

There are scenarios in which tapping into CPP early isn’t always a bad move. For those with shorter life expectancies, low savings, or limited income, the guaranteed and inflation-adjusted nature of CPP can provide crucial support. Research from the Global Risk Institute shows that earlier CPP benefits can help reduce poverty risk among lower-income retirees.

But making that call purely because the markets are volatile is risky, financial planners say. Taking CPP early locks in a lower benefit for life, which can have long-term consequences, said Matthew Kempton, a portfolio manager at Verecan Capital Management in Halifax.

While CPP offers stability – it’s government-backed and indexed to inflation – it shouldn’t be used as a fallback for poor portfolio planning, planners say.

“There’s a lot that goes into the decision of when to take CPP,” Mr. Kempton said. “How long one might work, how healthy one is, different sources of income throughout retirement – all of those things are important. I think very low on the ranking of an item to make this meaningful of a decision is what the market is doing.”

Andrew Feindel, senior wealth adviser at Richardson Wealth Ltd., said that early CPP might make sense if someone is fully invested in equities and needs immediate cash. “But they shouldn’t have been in that situation to begin with,” he said.

He noted that retirees with balanced funds – such as a typical 60/40 split between equities and bonds – may have other options besides triggering CPP early. Since you can’t just sell bonds on their own from a balanced fund, one strategy is to sell more of the portfolio than you need right away. That way, you can cover your immediate expenses and have extra funds to reinvest to rebalance the asset mix.

For example, someone who needs $4,000 in cash to pay for expenses could choose to sell $10,000 worth of assets, use $4,000 for living costs, and reinvest the remaining $6,000 straight into equities. This allows the investor to take advantage of lower stock prices and maintain their target allocation, rather than selling equities at a loss or changing their CPP plan owing to temporary market swings. But this route isn’t ideal, he said.

For those who have a few years still before retirement, if market turbulence alone is enough to shake your CPP timing plans, that may be a sign the plan wasn’t strong to begin with. “You should restructure your plan,” Ms. Buxton said, “because downturns like this will happen again.”