Without knowing how long we will live, there’s really no right or wrong answer on the best time to start taking Canada Pension Plan (CPP) benefits; there is no one-size-fits-all solution. What worked for your neighbour or your co-worker may not be the best decision for you. Canadians are fortunate to have the flexibility of selecting their CPP start date; but with 120 months to choose from between ages 60 and 70, that decision can be daunting. There are a variety of factors to consider and discuss with your financial planner before applying for CPP.
Here are 4 factors to take into consideration before you make the decision
1. How CPP payments are calculated
The trade-off for receiving CPP early is that your benefits will be reduced. The reduction for collecting your CPP benefits before your 65th birthday is 0.6% per month or 7.2% per year. If you begin receiving CPP benefits at age 60, you’re looking at a permanent reduction of 36%.
Those who delay their CPP past age 65 are rewarded for their decision to wait in the form of an increased pension. The increase is 0.7% per month for every month that you collect CPP benefits after your 65th birthday; totaling 8.4% per year. If you hold off on receiving CPP until age 70, the permanent increase is 42%
If you are unsure of the estimated amount of CPP you will receive, you can request a statement through your My Service Canada Account.
2. How much CPP you will receive at different ages
As of October 2022, the average monthly amount received by new beneficiaries was $717.15 at age 65. Let’s compare how this amount would look if CPP were taken at age 60, 65, or 70:
| Age That You Choose to Receive CPP | |||
| Age 60 | Age 65 | Age 70 | |
| Reduction or Increase in Benefits | -36% | 0% | +42% |
| Monthly Benefit | $458.98 | $717.15 | $1018.35 |
| Total Accumulated Benefit | |||
| By Age 70 | $55,077.12 | $43,029.00 | $0.00 |
| By Age 75 | $82,615.68 | $86,058.00 | $61,101.18 |
| By Age 80 | $110,154.24 | $129,087.00 | $122,202.36 |
| By Age 90 | $165,231.36 | $215,145.00 | $244,404.72 |
You may have heard reference to the breakeven age – the age at which the benefits received would be equal when taken at different ages. Electing to take CPP early means that you receive more payments, but at a lower amount throughout your lifetime. If you choose to begin receiving the reduced CPP payments at age 60, by age 74 you will have received the same accumulated benefits as you would have had you waited until age 65. This is the breakeven age. After this point, it is more beneficial to have taken CPP later. Simply put, if you expect to live past age 74, your accumulated benefits will be higher if you wait until age 65. The breakeven age for taking your CPP at age 65 compared to age 70 is approximately 82 years old.
Bearing in mind only this math, it’s hard to argue against delaying CPP until age 70. The payment at age 70 is a 122% increase from the payment at age 60. By age 90, you’ve received over $75,000 more than someone who began receiving CPP benefits at age 60. So why do more Canadians take CPP at 60 than at 70?
3. Your specific circumstances
Although the math is quite convincing, there’s more to the decision than the numbers.
One of the biggest uncertainties surrounding when to take CPP is life expectancy. As of 2018, the life expectancy for Canadians at age 65 is 20.9 years. Delaying your pension and receiving an increased benefit into your eighties is enticing but that’s assuming you live a long, healthy life. And although CPP does offer a survivor benefit for the surviving spouse, the benefit is quite modest with an average CPP Survivor’s Pension for those 65 and older of $313.59 per month as of October 2022. If you are healthy and anticipate living into your eighties, delaying your CPP will maximize your lifetime benefits. But for many Canadians, receiving a reduced pension is a fair trade-off for the peace of mind of receiving benefits
Another factor to consider is your cash flow needs in retirement. Perhaps you plan on travelling more in the early years of retirement or want to enjoy yourself while you’re young and healthy and find yourself needing more cash flow in earlier years. When you contemplate taking your CPP, it is important to have a clear picture of your retirement income and expenses and determine if gaps exist. Without adequate sources of retirement income, those delaying may find themselves rapidly depleting their retirement savings. If receiving CPP is necessary for you to meet your current spending needs, you may have no choice but to apply for early CPP.
On the other hand, after the age of 65, you may want to continue working for some time while also receiving CPP. During this time, you can opt to continue contributing to CPP toward post-retirement benefits (PRB) up to the age of 70.
There are many factors that may influence your decision on when to take CPP, including your marital status. This decision is not isolated but made in the context of your life plan.
4. Tax implications
If the success of your retirement cash flow plan is not dependent on receiving CPP, but you plan to take it early and invest it for peace of mind, be sure to consider the trade-offs. CPP income is taxable so you will be investing after-tax income. Unless you have contribution room available in your registered accounts, the income and growth earned on the investment will be taxable as well. This, coupled with investment fees charged, makes it difficult to beat the 7.2% you could earn annually by delaying another year before age 65.
Summing it all up
Most of us contribute to the Canada Pension Plan (CPP) our entire working career, so it’s no surprise that the decision on when to begin receiving CPP benefits is one of the more difficult decisions that we make regarding our retirement. Although the standard age to start CPP is 65, benefits can be received as early as age 60 and as late as age 70; allowing for a 10-year span to choose a start date. And once that decision is made, you are locked in for life. We take all these factors into consideration in relation to your financial life plan and can look at the bottom line in terms of dollars and cents to help you determine when to start. Contact us to get your plan started. When you’re ready, you can apply for CPP benefits online.
The information in this commentary is for informational purposes only and not meant to be personalized financial planning advice. The content has been prepared by the team at Fraser & Partners from sources believed to be accurate.
