One of the questions we get the most about retirement planning is, “when is the best time to take CPP”? As people enter the retirement phase of their lives, they switch from saving money to making decisions about when and what type of income to receive. When to start taking CPP is a big decision, and like many financial decisions, there are many aspects to consider when deciding when to take CPP.
What is the Canadian Pension Plan (CPP)
There are countless articles on what precisely the CPP is. One of the best places to look is the Canadian government site and their CPP Overview. It outlines details into qualifications needed and how to apply. We encourage our clients to sign up for the My Service Canada Account online service to review their specific CPP contributions and Estimated monthly benefit.
The typical age to start the pension is 65. However, you can start receiving it as early as age 60 or as late as age 70. If you start receiving your pension earlier, the monthly amount you’ll receive will be reduced. However, if you decide to start later, you’ll receive a larger monthly amount.
For 2020, the current maximum monthly CPP benefit is $1,175.83. The average CPP benefit is much lower than the maximum. For March 2020, the average is $696.56
When should YOU start your benefit?
The honest answer is “It all depends”. The answer is not straightforward, and ultimately the decision on when to apply for CPP should be part of a broader retirement plan. It’s essential to develop as clear a snapshot of your retirement income and expenses as possible. It’s necessary to determine if there is a gap between the money you will need and the money you will have.
There are advantages and disadvantages to taking CPP early or waiting a little later. We highly recommend you take a little time and weigh the options. Failing to do so could damage your retirement — and your wallet.
3 Advantages of Taking Early
Reduced Life Expectancy – If your health is deteriorating and you have concerns about your longevity, taking CPP early could make sense. Without sufficient personal savings or income to support your lifestyle in your 60s, you may have no choice but to take CPP early.
OAS Clawback – High-net-worth individuals might take the CPP payment to lower overall taxes and maximize the OAS benefit. Taking earlier payments and decreasing the annual CPP income will reduce the risk of having the OAS benefit clawed back.
Late Stage Retirement spending – The rationale of enjoying early retirement activities — like travel, dining out, a new car, etc. is higher expenses and the need for higher income. For the Late stage of retirement, people often don’t have the ability or desire to spend more money, and those extra expenses don’t relate — so having a higher monthly CPP is excellent, but they may not be able to spend it.
3 Advantages of Delaying
You Are Still Working: After age 65, CPP contributions become optional if you are still employed. However, CPP benefits are included in your taxable income and thus increase your taxes. If you don’t need the extra income, deferring CPP income by a couple of years could result in tax savings. The same goes for OAS payments.
Average Life Expectancy or Better: If people in your family generally live past age 90 and are in good health, it may make sense to delay CPP to age 70 for more benefits and minimize your longevity risk.
The length of time you contributed to the plan: Other factors can also affect your pension amount, each year you contribute to the CPP will result in an additional post retirement benefit and increase your retirement income. If you were out of work or moved to Canada during your career, the extra contribution years could help.
What we have learned in working with clients is that financial decisions are often emotional. Financial decisions with spreadsheets and calculators are an essential part of reaching a decision, but if we ignore our clients’ comfort level or peace of mind, that is not wise advice.
Readers are invited to share their comments; however, the author cannot address questions regarding an individual’s specific financial situation. If you have a technical question regarding your CPP, please contact your Wealth Management Advisor.
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