Thinking it through with our experts

Income disparities between men and women are numerous in the labour market, but what about once they retire? Is it realistic to think that men and women are entitled to an equivalent retirement, despite data showing that inequalities persist in the workplace? Let's take a look.

In Québec, the average after-tax income for individuals was $44 500 in 2022. It was lower for women ($40 400) than for men (48 800 $) See note¹. We can assume that this shortfall affects women's ability to accrue sufficient savings for their retirement. The number of hours of absence for personal or family obligations may also limit their saving ability, since that number was 3.5 times higher for women than for men in 2023 See note².

The financial impact is therefore felt throughout women's professional careers, as they earn less than men during their careers and work fewer hours than men to care for their loved ones.

The various sources of retirement income

The retirement pension under the Québec Pension Plan (QPP) is one of the sources of income that help reduce income disparities in retirement. For example, the months during which a person had no income while receiving family benefits for a child under age 7 are excluded from the calculation of the pension. The period can extend until the end of the year during which the child turns 18. This is the case when a person receives the Supplement for Handicapped Children Requiring Exceptional Care for that child.

Earnings from years of low income are also excluded from the calculation of the pension, up to a maximum of 15%. This reduces the impact of periods of absence that could be disadvantageous for the pension amount, such as parental leave.

However, in the case of an early retirement pension, that is, a pension paid before a person turns 65 and reduced for life, the financial impact is greater for women than for men. Since women have a higher life expectancy than men, they must deal with a reduced pension for longer than men, as shown in the following table:

Regarding the other sources of income in retirement, such as supplemental pension plans (SPPs) and public-sector pension plans, women are also in a less favourable position than men. Although 15% more women than men contribute to such plans, each year, women contribute on average about $500 less than men See note³.

Individual or group registered retirement savings plans (RRSPs) are the main private retirement savings vehicles used by persons whose employers do not offer a pension plan. Men (36%) are more likely than women (30%) to contribute to such a plan, and they contribute more: the average contribution was $7300 for men and $5300 for women in 2020.

Could a lack of time and resources to adequately prepare for retirement be one of the reasons for the disparities observed between men and women? According to a survey conducted by Retraite Québec, women consider themselves less prepared for retirement than men. Furthermore, fewer women (43%) than men (55%) plan financially for retirement.

Since women generally have a longer life expectancy than men, financial planning for retirement is even more important for them. It may therefore be advantageous for women to consider postponing their application for a retirement pension under the QPP to increase the portion of their retirement income that is guaranteed for life.

1. Take advantage of compounding, which gives your savings a nice boost

   Compounding works as if the income from your investments were reinvested on a regular basis. Therefore, you will gradually obtain a higher return on your assets. The earlier you start saving, the more time your money will have to grow, and the more you will benefit from this advantageous phenomenon.

2. Know the different savings vehicles, and understand their advantages and benefit from them

   The different savings vehicles, such as RRSPs or TFSAs, have many characteristics. Knowing them better and understanding their advantages and disadvantages allows you to make informed choices adapted to your situation.

   Determine your investments in the savings vehicles based on your investor profile and your savings goals. If an investment is preventing you from a good night's sleep, do not do it. Ultimately, whether you invest in bonds, in stocks or real estate, you are saving, and that's what matters!

3. Be better prepared to face unforeseen events

   Having money aside enables you to deal with the various unforeseen events or life events that could arise. Life is not a long quiet river. However, by taking control of your finances and by saving, you are in a better position to deal with unexpected situations, financial risks such as inflation, and well... the vagaries of life! Your journey will only be smoother.

4. Carry out projects that are important to you

   By taking control of your finances, you are taking action! You can dream of the day when you will have the money to take the trip of your dreams, or you can save now and make sure you realize that project. Achieving your goals will fill you with a sense of accomplishment and pride.

5. Having adequate retirement income

   You know the various sources of income to which you will be entitled once you retire. Specialists say that you will need from 60% to 80% of your gross annual income to ensure that you have adequate income throughout retirement. The government benefits offered by the Québec Pension Plan (QPP) and the Old Age Security (OAS) program allow an average worker who retires at age 65 to have government pensions of between 35% and 40% of his or her prior employment earnings.

   Therefore, you must plan now, taking into account several factors such as your needs throughout retirement, the age at which you wish to retire and the various financial risks that may arise. If necessary, do not hesitate to be accompanied by a financial planner.

Should personal savings be emphasized and employer pension plans ended? This question is on nearly everyone's lips these days, especially for members of a pension plan having financial problems. Yet the answer is clear: NO!

Nothing beats a pension plan offered by an employer!

It's unfortunate, but financial planning for retirement is often an afterthought. Most Quebeckers do not know how much they will need to save for retirement. Are they planning blind? Are they saving enough?

Contributing to a pension plan forces you to save systematically. And since the employer also makes contributions in most cases, the amount saved increases quickly. In addition, group savings

• deliver better returns than personal savings
• provide immediate tax benefits through payroll deductions
• have preferential management fees.  

Understanding your pension plan is important but not necessarily easy.

This being said, you always need to know where your money's going. Take the time to review your statement of benefits. You could be in for a surprise! You may find that you need additional savings. For most of us, public plans do not provide enough to maintain your standard of living in retirement.

Everyone retires. So you may as well as take advantage of all the savings vehicles available to ensure you can retire comfortably.

You hear it over and over: saving early pays off! But does that really apply to retirement?

Yes, through the magic of compounding!

There are many examples of how compound interest works. The case of Stephanie and Fred provides a particularly persuasive one.

Stephanie saves 1 000 $ a year for 10 years from age 25. She stops saving at age 35 but lets interest compound on her capital. Her total investment is therefore 10 000 $.

Fred starts saving 1 000 $ a year for 25 years from age 40. His total investment is therefore 25 000 $.

Assuming a 5% rate of return, Stephanie will have accumulated 7 000 $ more than Fred at age 65. It's the magic of compounding in action! Amazing, no?

Financial planning for retirement is far from a priority for many. And if truth be told, it requires a great deal of effort. As any marketing executive will tell you, it's not a very "hot" topic! Combined with the low interest rates, it's no surprise that planning is given short shrift.

And yet, interest rates should not be a roadblock to saving. There's more than one way to save for retirement.

The message bears repeating: you do not need to save for retirement in an RRSP or TFSA. While it is true that any actuary involved in financial planning for retirement would prefer to see you invest in true retirement savings vehicles, you can choose to invest in real estate or equities. The important thing is that you save!

Looking for the winning formula? Every situation is unique! One thing's for sure, even if interest rates are low today, it is still a good idea to save up your capital. When interest rates bounce back, you'll be able to max out your investment income.

With an aging population and an expected increase in life expectancy, managing longevity risk is becoming an increasingly bigger challenge. Evaluating its consequences is therefore essential, especially with regard to planning for your retirement.

Here is a look at what life expectancy really is. Life expectancy provides a measure of the average number of years an individual is expected to live, based on the year of your birth or a given age. Life expectancy may be estimated according to two different methods:

• period life expectancy is the most common method and measures the mortality rates observed during a given calendar year or a given period;
• cohort life expectancy measures the mortality rates of a group of individuals born in a given year over the course of their lifetime.
  

Period life expectancy

Period life expectancy summarizes the risks of death all the age group was exposed to during the same given time period. The indicator makes comparisons easier between territories or historical periods.  It is the most frequently used demographic data.

Cohort life expectancy

Cohort life expectancy measures a given cohort's actual mortality rate. However, to determine a given cohort's life expectancy with certainty, all the individuals who made up the cohort must be deceased. Therefore, calculating life expectancy in this manner is more complex and can only be achieved retrospectively. The cohort method summarizes the mortality rate of a group of individuals born in a given year over the course of their lifetime. This method takes into account the improvement in survival rates, which generations have benefited from or could benefit from during their lifetime. That is why we sometimes refer to this indicator as increased life expectancy. Cohort life expectancy is generally higher by a few years than period life expectancy.

Financial planning for your retirement

One of the main challenges in financial planning for your retirement is to determine the number of years your long-awaited retirement will last. Life expectancy at age 65 provides a good estimate of the average number of years you could spend in retirement and for which you will need sufficient funds.

The following table shows that, Québec in 2016, life expectancy at age 65 was 23.8 years for women and 21.0 years for men. In 2065, it should reach 26.5 for women and 24.2 for men.

Life expectancy (in years) of Quebeckers at various ages, including mortality risk reduction for posterior years

According to the life expectancies indicated in the table above, a man aged 65 can expect to live until age 86, whereas a woman can expect to live to age 89.

The more an individual ages, the more his or her life expectancy increases. Therefore, according to the period mortality table, individuals who have already reached age 65 can aspire to a higher life expectancy than the one they had at birth.

Therefore, when you plan your retirement you should aim to have income until at least those ages.

Unfortunately, a large proportion of Quebeckers underestimate their life expectancy, which shows in the financial planning of their retirement.

Life expectancy: an indicator representing the entire population of Québec

Being able to rely on life expectancy would make planning for your retirement much simpler. However, survival probabilities show that about 50% of the Québec population will live longer than their life expectancy and more than 1 out of 10 people will surpass the indicator by more than ten years! That is good news only if you have planned for sufficient income to meet your needs throughout your retirement. If not, you will have to set up measures to face the financial risk that comes with longevity.

Longevity risk corresponds to the financial risk associated with living a life that lasts longer than you expected, therefore outliving your savings.

Charlotte, for example, will turn age 65 in 2020. She based her retirement plan on her life expectancy to make sure that she would have a proper income for 24 years, that is, until she turns age 89. She therefore has enough savings to maintain her lifestyle for an average life expectancy. There is, however, something that she did not realize: she has a fifty fifty chance of not having enough money saved! To be fairly certain that she does not end up in that situation, Charlotte should have had enough savings to last until age 110. The sum of her retirement assets should have been enough to provide income for 45 years.

As demonstrated in our example, exorbitant savings are needed to eliminate longevity risk completely. However, you can decrease it without having to make too many concessions. Here's how:

1. Plan your retirement savings properly

   • A good preventative measure consists of "hoping for the best, but planning for the worst".
   • You need a plan to accumulate assets, but also a plan to withdraw them.
     
   • As your retirement projects become a reality, your financial plan must be followed closely and adjusted. Should something unexpected happen, the pace of withdrawal of your assets must be adjusted rapidly to limit the adjustments necessary to maintain the projected withdrawal period.

2. Make sure that you estimate your life expectancy accurately

   • Remember that life expectancy has increased over the last decades; we can live over age 80!
   • Look at cohort life expectancy or life expectancy including mortality risk reduction after the year indicated to get a realistic idea.
   • Take into account your actual age instead of looking at the life expectancy at birth, which includes death risks you were exposed to at a younger age. It is important to know that as a person ages, his or her life expectancy increases.
   • Adapt the general life expectancy with your lifestyle and your relatives' age at their time of death. It is realistic to think that you could live at least 5 years longer than your parents did.

3. Choose the right time to retire to obtain maximum benefits

   • The Québec Pension Plan (QPP) and the Old Age Security (OAS) program let you put off your payments and therefore get higher amounts for the rest of your life. As a result, you will receive a higher pension amount even if you live up to 45 more years. Putting off the time at which you begin receiving your benefits is one of the most effective ways to make sure that you have a minimum income until the day you die.
   • Several supplemental pension plans (SPP) also allow you to increase the amount of your benefits in exchange for the postponement of your retirement.
   • Postponing retirement can also make up for a lack in past personal savings. For each additional month of postponement, the savings period increases and the withdrawal period decreases. Some people can greatly improve their financial comfort in retirement by postponing it by one year. Working one additional year may seem like a long time, but do not forget that you can retire gradually by reducing your working hours.

4. Convert part of your savings to life annuities

   • In exchange for a premium, insurance companies offer life annuities. The payments are predetermined and paid until death. They eliminate longevity risk on a portion of your income.

In our society, the cost of goods and services has a tendency to increase every year. This is what we call inflation. Inflation has a direct impact on your buying power. When prices increase, your buying power decreases. However, your buying power increases when prices decrease. To maintain your buying power, you must take inflation into consideration.

Inflation is usually measured using the consumer price index (CPI) set by Statistics Canada using a basket of consumer goods and services. The index allows us to analyze the evolution of the prices of goods and services by comparing then from one year to the next.

The following table shows the future cost of $10 000 in buying power, calculated using different inflation rates over three decades.

As a result, with a 2.0% inflation rate, if you spend $10 000 per year, making the same purchases in 10 years will cost you $12 190.

Generally, inflation varies between 1% and 3% per year. It was higher between 2021 and 2024. However, most specialists expect the annual inflation to decrease to 2.0%.

Annual indexation of the pensions under the Québec Pension Plan

When a value is adjusted according to an index or reference rate, it means that it is indexed.
Pensions under the Québec Pension Plan (RRQ) are indexed in January of each year. This helps beneficiaries to maintain their buying power over the years.

To establish the indexation rate for pensions under the QPP, the average CPI is used for the 12-month period ending on 31 October of the previous year. The annual average (Québec Pension Plan's Pension Index) is then compared to the one from the previous 12 months.

For example, from 2024 to 2025, the Québec Pension Plan's Pension Index increased from 156.3 to 160.4. The Pension Index for 2025 was therefore 2.6% ([160.4 – 156.3] ÷ 156.3 = 2.6%).

The annual indexation of pensions is provided for under the Act respecting the Québec Pension Plan. Even if the indexation rate is negative, the pension cannot decrease.

Summary

Inflation is a key factor to consider when planning your retirement withdrawal strategy. Part of your savings is protected: your pensions paid under the Old Age Security Program and the Québec Pension Plan, for example. As for the remainder, you have to plan enough savings to counter inflation and maintain your buying power.

Other useful information

• Understanding the indexation of pensions under the Québec Pension Plan

A rate of return risk is associated with the uncertainty of investment income. However, there is no risk if your return on an investment is certain. For example, if you put $10 000 under your mattress for a year, there will be no return on your savings. You are therefore not taking any risk. On the other hand, if your investment of $10 000 could give you a $500 to $1000 return after one year, there is uncertainty related to the return on your investment, which is the notion of risk related to rate of return. Thus, the risk is not only associated with a loss: it is related with possible variations of income from investments.

A rate of return risk is an important element to consider when preparing for your retirement. Preparing financially for retirement requires putting money aside now, to use later. The money you save is often invested in financial products that allow you to complement your savings with investment income. If you planned your retirement thinking that you would receive $1000 from your $10 000 investment, but you only received $500, you have not lost any money, but you may be in bad shape financially!

There are three ways to manage risk related to rate of return: avoid, transfer or control.

1. Avoiding risk

   If you don't invest your savings, you avoid any risk related to rate of return. However, it also means that you are not receiving any investment income! Do you really have the means to deprive yourself of such income? That would require saving even more to achieve the same savings goal. Investing your savings increases its effectiveness. Investment income allows you to accumulate more money or make your savings last longer when you withdraw assets. Therefore, it is not recommended to completely avoid rate of return risk.

   The table below illustrates for how long, according to different annual rates of return, it is possible to withdraw $1000 per month on an initial capital of $120 000

   Maximum withdrawal period according to different annual rates of return

   • An annual rate of return of 1%, allows you to increase the amount of your initial capital by 6 months.
   • An annual rate of return of 5%, allows you to increase the amount of your initial capital by almost 4 years.
   • Investment income allows you to accumulate more money or make your savings last longer when you withdraw your assets.

   Annual rate of return	How long $120 000 in capital lasts when $1000 is withdrawn every month
   0%	10.0 years
   1%	10.5 years
   2%	11.1 years
   3%	11.9 years
   4%	12.7 years
   5%	13.8 years

   Note that...

   A fixed-term investment vehicle with a guaranteed return, such as a guaranteed investment certificate (GIC), allows you to avoid rate of return risk only over the term of the investment, that is, over a one-, two-, five-year term etc. However, your retirement and withdrawals must be planned over a number of years. When a GIC matures, the rate of return of the new certificate you want to buy will not necessarily be the same as the rate of the certificate in which you originally invested. Future returns are therefore uncertain.

2. Transferring risk

   Transferring rate of return risk means using savings vehicles where the risk is covered by a party other than yourself. For example, the Québec Pension Plan (QPP), which covers all Québec workers, does not have a rate of return risk for its contributors since the risk is borne by the all those who contribute to the plan. Contributing under a defined benefit pension plan is also a good strategy for transferring risk, since the risk is assumed by the employer. In addition, it is possible to buy a life annuity (payable until death) from an insurance company so as to protect against the risk related to the rate of return associated with withdrawals.

   These savings vehicle also have the advantage of offsetting:

   • longevity risk, since they provide guaranteed income until death;
   • risk related to inflation, where benefits are indexed annually.

   As a result, amounts that are invested significantly reduce the risk related to your retirement savings. However, remember that those savings vehicles do not protect against liquidity risk, an aspect to consider when financially planning for retirement.

3. Controlling risk

   It is not everyone who can or wants to transfer a rate of return risk. Certain employers do not offer defined benefit pension plans and certain people prefer to keep a portion of their assets invested in more traditional savings vehicles, thus allowing themselves to be better equipped to face liquidity risk. Under these circumstances, controlling the risk is the best option for managing rate of return risk.

   To do so, you can choose the level of risk that suits you best according to your investor profile. A financial advisor authorized by the Institut québécois de la planification financière can help you determine your investor profile and provide you key investment advice. Note, however, that your investor profile is not static: it evolves over time. It could be easier to accept the risk associated with rate of return if you are young and still 20 to 30 years from retirement. However, the risk may seem less and less reasonable as you get closer to retirement or start to withdraw your funds. For that reason, it is a good idea to review your investor profile periodically.

   Furthermore, to better control the rate of return risk, investors are recommended to diversify their investments, that is to say, not to put all their eggs in one basket! Generally speaking, bonds and GICs represent a lower rate of return risk, whereas shares or other investment products listed on the stock market are higher risk. Diversifying your investment products allows you receive a more stable rate of return.

In short...

Unless you place your retirement savings under your mattress, a rate of return risk is inevitable! However, you can transfer those risks, for example, by waiting longer to apply for your pension under the QPP or your employer's defined benefit pension plan, or purchasing a life annuity from an insurance company. Another strategy to counter such risk is to control the level of the rate of return risk that fits your current investor profile and with which you are comfortable.

Investment objectives and strategies vary from one person to another; it is up to you to make the decisions that are right for you and plan for your retirement with strategies that best suit your situation. Finally, don't forget that, in addition to using Retraite Québec's online tools, you can speak to specialists, such as financial planners, to help you achieve your objectives.

A liquidity risk is related with your ability to ensure the availability of funds to meet your short-term needs. An example of such a risk is when you invest a large sum of money to meet your long-term obligations without having the liquidity needed to meet your immediate needs. In such a case you could expose yourself to losses or getting yourself into debt.

During your retirement, the risk related to liquidity is closely linked to your retirement savings withdrawal strategy. That risk becomes particularly relevant if you are counting on an illiquid asset, such as your house, to plan your retirement income or if you outlive your personal savings.

How can you protect yourself against risk related to liquidity?

1. Plan and implement a savings withdrawal strategy for your retirement

   Growing your personal savings is a crucial aspect of financial planning for retirement. However, planning its withdrawal is just as important!
   
   Once you retire, you may need additional income at times to pay for expenses, such as a new car, roof repair, or even that trip of your dreams. A sound strategy allows you to plan for adequate withdrawals of your savings to ensure you always maintain a level of income suited to your needs. It will also promote appropriate management of other retirement related risks, such as:

   • longevity, that is, the possibility that you outlive your savings;
   • inflation, which could lead to a gradual loss of your purchasing power;
   • rate of return, that is, the uncertainty associated with investment income.

2. The age at which you apply for your retirement pension under the Québec Pension Plan (QPP) is a key element in your strategy since it could have an impact on each of those risks.

   Given that a retirement pension under the QPP is a monthly amount that you receive until your death, it provides you with a source of income for life. That income will be greater or lower depending on your age at the time you apply for your pension. If you wait until between age 65 and 72 before applying, the amount of your pension will be greater. That increase in your QPP pension resulting from the fact that you applied for your pension later reduces the risk that you will exhaust your personal savings if you live longer.
   
   Furthermore, your QPP pension is indexed annually, which protects against inflation and allows you to maintain your purchasing power year after year.
   
   Finally, as a QPP pension beneficiary, you do not have to shoulder a rate of return risk that you would for other savings vehicles, such as registered retirement savings plan (RRSP) or a tax-free savings account (TFSA). Therefore, QPP pensions are very advantageous in a number of ways.

3. Prepare for the unexpected with an emergency fund

   Even if the withdrawal of your retirement savings is perfectly mapped out, unexpected events can occur. That is why you should keep money aside that you will only use in case of unforeseen events. The amount of the emergency fund will vary according to the degree of security you want and your financial capacity. If you wish, you can invest this amount to earn investment income, but you will still need to be able to withdraw it if need be.

4. Keep an appropriate portion of your worth in liquid investments

   It is wise to invest part of your savings in liquid investments that allow you to withdraw at any time, with few to no penalties. However, that type of investment generally yields a lower return; therefore, it is recommended to diversify your savings vehicles.
   
   In the case of term investments, you could stagger maturity dates, which allows you to have regular access to your cash. If when a bond matures you don't need the cash, you could reinvest it to increase your retirement savings.

5. Use specialized products tailored to meet your needs

   You own a house, and you are thinking about using this asset to finance your retirement? Several of options are available to you:

   • You could reduce the living space that you are using by renting out a part of your home, which would give you extra income.
   • You could sell your house. However, be careful, this could take some time and you may have to accept an offer that results in a loss. You will also have to plan for a new home and the costs of that will have to be assessed.
   • You can make an arrangement with your financial institution to cash in a part of your home's value while you continue to live there. This type of product allows you to compensate the lack of liquidity of immovable assets. Make sure that you are not charged high fees and interest and examine the requirements related to such a product.
     

   You will not necessarily spend in one go all of the amounts raised from the sale of your home or specialized products like reverse mortgages. If additional revenue is generated, you will need to plan the fiscal impact.
   

To better plan for your retirement, you must not only set financial goals and determine savings strategies, but also carefully plan the withdrawal of your investments over time. Just as an unsuitable investment can reduce your return on capital, an ill-planned withdrawal of your savings could have an unwanted impact on your retirement income.

Therefore, it is important for you to establish a withdrawal strategy. Each savings vehicle has its distinctive features in terms of when to invest and withdraw income. It is important you remain informed regarding the tax rate applicable to the withdrawal of your investment income. Nobody wants to see their savings vanish in taxes!

The following are examples of good retirement savings withdrawal strategies:

• Set money aside in a tax-free savings account (TSFA) for unforeseen events. This could prevent you from unplanned withdrawals of your registered retirement savings plan (RRSP) and probably prevent you from paying a high amount in taxes. A TFSA could also be to your advantage if you know that your income will increase over time. Therefore, you will reduce taxable incomes and increase your possibility of being eligible for certain government programs.
• Convert your RRSP into a registered retirement income fund (RRIF) to meet your needs in the lead-up to your retirement. This could lower the number of mandatory withdrawals as of age 72, and reduce your tax rate.
• Splitting your pension income with your spouse. If your retirement income is higher than your spouse's, pension income splitting could allow you to make significant tax savings.

Given the complexity related to asset withdrawals, establishing a structured plan with a financial planner is to your advantage. Your financial planner can give you advice on:

• determining the order you should follow to withdraw your assets, thus ensuring an adequate level of savings at all times depending on the projects you wish to pursue
• minimizing the impact of the tax rate upon the withdrawal of your assets, as well as the loss of benefits and income-based government credits
• reducing the consequences of the main risks you will face in retirement:
  • liquidity, which is related to your ability to ensure the availability of funds to meet your short-term needs
  • rate of return, which affects invested assets
  • inflation, which could lead to a gradual loss of your purchasing power
  • longevity, which could lead to the depletion of your capital before the end of your life.

The age at which you begin receiving your retirement pension under the Québec Pension Plan (QPP) can also affect the extent of the financial risks associated with retirement. However, this pension, which you receive for the rest of your life, could increase how long your capital will last because you could reduce the number of withdrawals that you will need to make during the last years of your retirement.

Regarding personal savings, there is a rule that defines the appropriate distribution of the withdrawal of your assets until death, that is, the 4% rule. This rule applies well in most cases. The following table shows the fluctuations of three different portfolios based on withdrawal rates. You will notice that in the three cases, the 4% withdrawal rate provides income up until at least 95 years of age.

*Withdrawals are set as a percentage of the initial capital, but take inflation into account. A 90% probability was used to determine the age reached. Please note that the age of 120 simply indicates that the capital will not be exhausted during your lifetime.

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.

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.