Choosing the Best Time to Take CPP
You can enjoy a richer payout by waiting – but should you?
If you’re like most workers who have diligently contributed to the Canada Pension Plan (CPP), chances are you’ll reach for those benefits as soon as you can, at age 60. Government records show only 7% of new CPP recipients in 2017 waited until after 65 to start collecting.1
But deciding when to take CPP shouldn’t happen without careful consideration. There’s a lot at stake. Your decision could impact your Old Age Security (OAS), tax rate, investments, estate planning and more. A wrong choice could cost you dearly in lost benefits. Don’t forget, once you begin receiving payments you can’t change your mind. Plan wisely.
Take early or defer? How it works
How much CPP will you receive? The size of your benefit is based on the number of years you’ve paid into the program as well as how much you’ve contributed. There are provisions to boost your payment by excluding years of low or zero earnings from your pension calculation due to, say, unemployment or child-rearing.
If you start CPP early, your payout will decrease by 0.6% for each month you collect prior to your 65th birthday, or 7.2% annually. Translation? Receiving CPP at 60 means giving up 36% of your standard retirement pension.
On the other hand, there’s an incentive to defer past age 65 to the tune of 0.7% per month, or 8.4% annually. If you wait until age 70 to collect, you can raise your payment by 42%.
In 2018, the maximum CPP retirement pension at age 65 is approximately $1,134 per month or $13,610 annually. Depending on whether CPP is taken early or deferred, a top payout could range from $8,710 to $19,326 – a difference of thousands of dollars per year. Timing matters.
What the math says
It’s obvious waiting until age 70 to receive CPP produces a larger monthly benefit than applying at 65 or earlier. But putting things off only makes sense if you think you’ll collect long enough to make up for what could turn out to be years of foregone payments. Here’s where longevity and the concept of a "break-even" age come in.
The break-even age if you begin benefits at age 60 instead of 65 is approximately 74. That means if your family history, health and lifestyle suggest you’ll live past age 74, you’re better off waiting until 65 to collect. On the other hand, if you’re 65 and contemplating deferring to age 70, that move only pays off if you live past 82.
More pieces to the CPP puzzle
Because it ignores inflation, what you could earn by investing CPP dollars taken early, and how your tax rate might change over time, determining a break-even age for benefits is simply a starting point. There are other considerations which should enter the mix.
Do you need the money? Cutting back your work hours or moving fully into retirement has major implications for your cash flow. If you don’t have alternative sources like rental or investment income to fund expenses, you may have little choice but to take CPP as soon as you’re eligible.
That said, if you have a defined-benefit company pension it’s a good bet that plan will include a ‘bridge’ payment before age 65 designed to top off your income. It may be enough to allow you to defer CPP. Just remember, the bridge payment will eventually stop so be careful not to overspend when that happens.
If poor health is motivating you to want CPP early, consider applying for the CPP disability benefit instead. On average, it’s a more generous monthly payout and automatically converts to a retirement pension at 65.
Are you already retired? While CPP may be structured to help insulate your benefit calculation from years when you had little or no income, that protection is limited. If you’re already retired and still haven’t applied, waiting only piles on extra zero-earning years which can wind up shrinking your payment.
Could you face the OAS clawback? If your income is sufficiently high, there’s a possibility you’ll lose part of your other government pension: Old Age Security. Every extra dollar of 2018 net income beyond $75,910 reduces OAS by 15 cents. So, taking CPP early, and receiving the smaller payout, can help protect your OAS benefit.
Deferring Old Age Security
You can’t collect OAS until you turn 65. However, as with CPP, you have the option of deferring your payout in exchange for a larger benefit. Every month you wait increases the amount you receive by 0.6%, or 7.2% annually, up to age 70. That means you can hike your benefit by as much as 36%.
Is CPP or OAS the better candidate for deferral? Canada Pension Plan rewards you with an additional 0.7% for each month you delay versus 0.6% for OAS. It also offers a survivor’s benefit which can help you and your spouse mitigate the financial risk of one of you dying prematurely2 3. Regardless, deferring OAS can be a wise move if collecting that income would either increase your tax rate or trigger a clawback of your payout.
How secure is your income? Canada Pension Plan payouts have important advantages. For one, they’re guaranteed, plus, they’re indexed to inflation which helps protect purchasing power. Income you generate from your own investments can be far less reliable.
That’s why if you don’t have a solid corporate pension or annuity income to count on, it can be worthwhile to first turn to your RRSP, RRIF and non-registered accounts to fund your retirement. That way you delay drawing on CPP, trading market risk for a larger, guaranteed, indexed benefit.
How well do you invest? There’s an argument that says you’ll get more bang for your retirement buck if you take CPP early and invest those payments. That’s often easier said than done.
Each year you put off taking CPP from ages 60 to 65 is equivalent to earning a 7.2% rate of return (after inflation). Not only is that return guaranteed, it bumps up to 8.4% annually for deferrals between ages 65 and 70. Performance like that isn’t easy to match.
Because CPP is taxable, shielding CPP dollars in a tax-sheltered account bolsters the case for accepting the money early. But for most people, especially balanced and conservative investors, postponing payouts is hard to quarrel with.
Do you foresee an income spike? Retirement sometimes coincides with one-time events which cause a spike in taxable income and your marginal rate. If you’re selling your business or a second home, for example, it might pay to wait until your income returns to normal before you start receiving benefits.
Do you wish to leave a legacy? Wanting to maximize wealth to hand down to your loved ones or favourite causes favours taking CPP early. Why? Unlike your assets, CPP benefits can’t be passed down – they die with you. Holding onto your capital instead of spending it gives you the opportunity to further grow your legacy through saving and investing.
Also, couples where there's a significant age difference will want to consider the options and provisions available with the CPP Survivor Benefits.
Want to work while you collect CPP? You can
If you opt for financial security by sticking with your career a little longer, once you turn 60 there’s nothing preventing you from collecting CPP and working at the same time. Your CPP contributions will go toward building a post-retirement benefit (PRB) which is added to your pension payment. That’s true even if you’re already entitled to the maximum amount of CPP.
If you’re working, receiving CPP, and are between age 60 and 65, CPP contributions are mandatory. Once you turn 65 contributing is optional, but any contributions you do make will beef up your pension. At age 70, contributions, and additional pension credits, stop.
It's important to note that if you took your CPP and continue to work, your post-retirement benefits may not increase each year as much as you'd think. The maximum PRB for one year is equal to 1/40th of the maximum CPP retirement pension. If you contribute less than the maximum, the amount of the year's PRB will be proportional to your contributions. For example, if you contributed half of the maximum contribution level, you will receive 50 percent of the maximum PRB.
Coming Soon: An Improved CPP
Beginning in 2019 the CPP is being enhanced CPP is being enhanced, delivering greater benefits in exchange for higher contributions. The enhanced CPP will eventually replace one-third of a contributor’s eligible average earnings – up from one-quarter today – strengthening incomes for future retirees. The upper limit of eligible earnings covered by CPP will also rise. Once fully implemented, these changes will increase the maximum retirement pension by about 50%, as well as boost post-retirement, disability and survivor’s pensions based on an individual’s contributions.
Eligibility for Canada Pension Plan benefits or the amount recipients are already collecting won’t be affected by the enhancements.
Get smart advice
Choosing when to take CPP is far from a simple decision. We’re here to help you make the right choice.
Your BlueShore Financial advisor can assess your retirement readiness and recommend strategies to let you get more out of the Canada Pension Plan – and the next chapter in your life. Speak with us to learn more.