Do you Need to Save Less if you Apply for Your Pensions Later?

See how the age at which you apply for your pension under the Québec Pension Plan (QPP) impacts how much you must save to have the income you need. In financial simulations, it is often taken for granted that you should have enough money until age 95. Why is that? Because it is based on life expectancy. One in four people will live to that age. Let's suppose you start using your savings before applying for your pension under the QPP and Old Age Security (OAS) pension. This may not be what you originally thought you would do, but by doing so, you would need to have saved less because your pensions would be higher.

Let's imagine three scenarios based on this information: 

1. you stop working at age 60;
2. you do not have a workplace pension plan;
3. you will need a retirement income of around $40 000 per year.

Scenario 1: pensions applied for as early as possible

You choose to receive your pensions as early as possible, therefore, at age 60 for the pension under the QPP and age 65 for the OAS pension. In that case, you must have saved $690 600 to meet your needs throughout retirement. These savings will allow you to compensate for the gap between the retirement income you need and what you will receive from public pensions.

Scenario 2: pensions applied for at age 65

You choose to receive your pension under the QPP and your OAS pension at age 65 instead. In that case, you must have saved $623 600 before age 60. It is $67 000 less than in the first scenario. These savings will allow you to first meet your needs between ages 60 and 65. They will then compensate for the gap between what you will need and what you will receive from public pensions as of age 65.

Scenario 3: pensions applied for as late as possible

You postpone your pension under the QPP and your OAS pension to the maximum. You therefore wait until age 72 for the pension under QPP and age 70 for your OAS pension. In that case, you will need $501 300 in savings to provide you with the income you need for your entire retirement.

In all three scenarios, you stop working at age 60, have the same total income during retirement and are expected to live to age 95.

In the third scenario, you would need to have saved $189 300 less during your lifetime than in the first scenario, in which you apply for your pensions as soon as you can receive them. Saving $189 300 is a big difference, only because you start receiving your pensions as late as possible!

These scenarios are taken from the study Quand débuter ses prestations publiques : les avantages de la flexibilité  (When to start receiving public benefits: the advantages of flexibility; French only) from the Chaire de recherche en fiscalité et en finances publiques of the Université de Sherbrooke. You can use their calculator: Retraite – Épargne requise et régimes publics de retraite  (Retirement – Savings required and public pension plans; French only).