Timing can have a sub-stantial impact on the financial well being of Canadians approaching retirement, yet it is a subject that is all too often ignored, suggests a recent report by Bank of Montreal’s Retirement Institute.

This is why you should discuss the decision of when to retire very carefully with clients. States Tina DiVito, head of BMO’s Retirement Institute, in the report, When to retire: Age matters!: “The timing of your retirement … may mean the difference between having a retirement nest egg that is more than adequate to last a lifetime, or running out of money.”

But choosing the right time to retire is no easy matter for either advisors or their clients, says May Fung, a senior manager with BMO’s Retirement Institute. That’s because the timing depends on a host of factors, ranging from the terms of federal and company pension plans, to the client’s health, family situation and the state of the economy.

“If you can, stay working longer,” Fung says. “But that is not for everybody.”

CHANGING LIFESTYLES

The question concerning the age at which to retire has become more prominent in recent years because of changes in people’s lifestyles as well as the state of the economy, the report states.

In fact, in the 1970s, most Canadians worked until they were 65, but now, many are losing their jobs in their mid- to late-50s, leaving them financially unprepared, with little or no government or company pensions — and sometimes limited savings.

That can be a frightening proposition for clients, given that the average life expectancy of Canadians has risen to 83 for men and 85 for women. Says Fung: “We have to help clients through the maze [because] they will be retired for a long time.”

Fung encourages advisors to sit down with their clients well ahead of the proposed retirement date to make sure they are well prepared. That conversation has gained particular importance now with changes to the Canada Pension Plan coming into effect on Jan. 1, 2011.

The first set of changes will see Ottawa increase pension payments for those Canadians who delay their CPP past the age of 65. In fact, the size of the monthly pension cheque will increase by 0.57% for every month the pension is postponed. That incentive will rise to 0.64% a month on Jan. 1, 2012 and to 0.7% a month on Jan. 1, 2013. The benefit is currently at 0.5%.

On the flip side, the federal government is also raising the penalty for Canadians who sign up for their CPP before they turn 65. Currently, the penalty is a deduction of 0.5% a month before age 65, but the penalty will rise to a deduction of 0.52% a month as of Jan. 1, 2012; it will then increase incrementally every year until it reaches 0.60% in 2016.@page_break@“These [changes] slipped under the radar,” says Carol Bezaire, vice president of tax and estate planning with Mackenzie Financial Corp. in Toronto, adding that they have not grabbed the public’s attention because they are complicated and will be phased in slowly over the next five years.

However, these changes will have a huge impact on Canadians approaching retirement — and few clients realize how significant they really are. In fact, although the changes don’t sound like much, they do add up.

For instance, a client who holds off collecting CPP until the age of 70 will receive a pension cheque that is 42% bigger every month for the rest of his or her life than a person who retires at 65. In contrast, a client who signs up for CPP at the age of 60 will receive 36% less every month than a client who begins collecting CPP at age 65.

SUBSTANTIAL PENALTIES

In dollar terms, the penalties and rewards of retiring earlier or later are substantial. Clients who retire at 70 will collect about $100,000 more from CPP by the time they turn 90 than those who retire at age 60.

There is another reason why timing is of importance: Government pensions are age-sensitive. Old-age security doesn’t kick in until the recipient turns 65, and the amount collecting in CPP cheques also depends on the number of years that a person has been in the workforce.

Canadians who have worked the maximum number of years can receive a pension of more than $900 a month — far greater than the average CPP cheque of about $500.

The terms of the client’s company pension plan should also be considered by financial advisors and clients alike. Some companies allow employees to leave a few years early and with a full pension; however, the size of the cheque can depend on the number of years of service and the size of the final salary. In fact, those last few annual raises before retirement can make a big difference to the size of monthly pension income.

Additionally, personal savings are vital for Canadians who are approaching retirement — especially if they plan to retire early. That’s because these savings would make up the bulk of their total income before government and company pension plans kick in.

Thus, Fung says advisors should consider the health of the markets carefully. Those who retired in 2008 — just as the markets dropped — might have preferred to wait a little longer. IE