CPP – Take Early or Later?

Do you have questions about when the best time to take your CPP is? Our financial advisors in Calgary can help.

As with every financial decision, planning and analysis is required. Just like you wouldn’t finance a car purchase without understanding the total cost of borrowing, deciding when to collect Canada Pension Plan (CPP) payments should be done with care. 

If you take your pension early, your benefit will be permanently reduced until your death. On the contrary, if you start taking it later, then your benefit is permanently increased. This penalty and bonus is calculated to provide a little incentive to delay collecting. 

For most people, the prevailing opinion is to begin collecting as soon as they can, at age 60. This is often an emotional decision, “It’s my money, and I want it back”. 

To make this decision, start with calculating the effect, and then examine how the cold hard facts should be interpreted for each situation. The following scenarios do not account for income tax or inflation since both would require a detailed understanding of your individual situation, and is beyond the scope of this analysis. 

This analysis also does not include the Post Retirement Benefit if you are collecting CPP and continue to work and therefore continue to contribute to CPP.

What you Need to Know

Scenario #1 – Taking CPP at age 65

According to Service Canada’s website, as of March 2020, the average CPP retirement amount each month was $696.56 with the maximum benefit amount being $1,175.83.

The first step is to contact Service Canada to determine your amounts, and then plan accordingly. For the purposes of comparison, we will use an even figure of $700 per month.

Scenario #2 – Taking CPP at age 60

Assuming the monthly benefit is $700, taking CPP five years early at age 60 would reduce your CPP income by 36% in 2020 (60 months early x 0.6% per month penalty). That is, $252 less, leaving a payment of $448 each month.

If you start collecting in 2020 at age 60, in the first five years, CPP payments would total $26,880 (60 months x $448).

The question almost everyone wants to know the answer to is “when is the breakeven point if I had waited until age 65?” At age 65, you would start collecting the full $700, which is $252 more each month, and the $26,880 will be “caught up” in 112 months ($26,880 / $252) or 8.9 years. If you waited until age 65, you would only need to collect until your 74th birthday to break-even.

From that point forward, the person who waited to collect will continue to collect the full $700, while the early collector will receive $448, $252 less each month. Again, these figures have not been adjusted for inflation.

Scenario #3 – Taking CPP at age 70

Assuming the monthly benefit is $700, taking CPP at age 70 would increase your income by 42% (60 months late x 0.7% per month bonus). That is, $294 more, increasing the monthly payment to $994.

How would this compare to those who collect at age 60 or 65?

For the 60 year-old, they would have collected $53,760 in the first 10 years, and it would take 8.2 years for the 70 year-old to catch-up.

The 65 year-old collecting $700 each month for five years would have received $42,000, and with the premium of $294 each month, it would take nearly 12 years to catch-up.

According to the World Health Organization, life expectancy for Canadian men and women is age 80 and 84, respectively. Service Canada knows all of these facts, and is counting on people believing that they will not follow the averages, that they are negatively affected, and are not gambling that they will be on the high-side of the average age of death.

Expressed another way, each person who collects at age 60 that dies at the average age of 82 “saves” the government ~$24,528 compared to those who wait until age 65. 

Questions to ask yourself:

Do you need the monthly income immediately at age 60?

  • If you stop working, you may need to replace your employment income with government pensions
  • If you continue to work, and pay into CPP while you are collecting payments, your benefit rate will require additional analysis.

How is your health? Would that income at age 60 be more useful while you are more active?

  • If you stop working, would this income allow you to delay accessing your saved capital and allow you to travel, or other active pursuits?

How is your health? How long do you think you will live?

  • A frank discussion with a physician may provide some insights regarding the prospects of a long life.

Will you be collecting a Defined Benefit Pension?

  • Most of these pensions plan for the eventual collection of CPP, and prior to these CPP payments being received the pension plan will “top up.” When CPP starts to be paid, the pension is reduced by the same amount.
  • Taking your pension or CPP early may affect the amount of the payments

Bottom Line

Plain and simple, the decision of when to collect CPP should be included in your Financial Plan. 

Unfortunately, often times the decision is usually made before an analysis is completed since this is one of the most often discussed topics among those who are approaching retirement, or the age of 60. And the decision is typically to collect as soon as possible. 

However, it is important to consider at least some of the aforementioned points to help you make the best decision and our financial advisors in Calgary can help. 

If you have questions about financial planning in Calgary and wealth management in Calgary or would like to explore your options, connect with us to speak with a financial advisor in Calgary and get the answers you need to achieve your goals.