When should I take the CPP?

A common question of retirees and soon-to-be retirees is when to elect to take start payments from the Canada Pension Plan (CPP). The traditional or ‘expected’ time to begin to receive a CPP retirement pension is the month after your 65th birthday. However, in accordance with changes that have been in place for the last few years, you can now take your CPP as early as age 60, or defer it as long as age 70.

If you elect to take your CPP early, the downside is you will receive less. The upside is that you will receive your CPP sooner, and for a longer period of time.

From a strictly mathematical perspective, taking CPP prior to age 65 will result in a reduction in payments of 0.6% per month prior to age 65 (7.2% per year). This means that your pension will be reduced by up to 36% if you elect to take it as early as age 60.

If you take CPP after age 65, your monthly payment amount will increase by 0.7% for each month after age 65 that you delay receiving it (8.4% per year). By age 70, your payments will be larger by 42% than if you had started taking CPP at the traditional age of 65.

That’s complicated. So how do I decide?

Well, to start, there’s a handy-dandy early CPP calculator at Tridela.ca that can help with the basic math.  

With that tool in hand, the decision on when to take it then becomes a very personal one. It depends on what your cash flow (income vs. expenses) will be in retirement, as well as your personal health and expected longevity, and lifestyle factors such as travel and entertainment.

While no one likes to think about or even contemplate dying, the reality is the average life expectancy for Canadians is age 80 for men and 84 for women. On a more positive note, Statistics Canada predicts a continued rise in life expectancy of about two years over the next 15 years.

The Break Even Point

If you take your CPP starting at age 60, and your friend waits until age 65, the break even point is when you both turn 74. In layman’s terms, if Christine takes her CPP at 60 and Paul takes his at 65, Christine’s monthly CPP payment will be 36% lower than Paul’s, but of course she will collect it for five additional years. At age 74, Paul will start to pull ahead of Christine in terms of gross, overall CPP collected.

Taking it as early as 60 when you haven’t retired

Even if you are still working at age 60 and don’t retire, you are eligible to collect CPP. However, you and your employer will still be required to make CPP contributions until age 65. Between ages 65 and 70, if you are still working, you you will no longer have to contribute to CPP – although you can choose to do so, thereby increasing your CPP benefits. Wow, that’s a lot to think about and consider!

I still have no idea when I should take it!

We hear you. Ultimately it’s a very personal decision. If you’re intent primarily on maximizing your overall CPP payout, a good retirement advisor can help you with that. There are a number of things to consider in the ‘maximization’ equation: income, expenses, retirement goals, health and life expectancy, the impact of additional income on Old Age Security clawback (ouch), and overall taxation on your various retirement income streams. Some advisors actually use proprietary software and algorithms just to address this! Clearly, the answer to ‘when do I take CPP’ is not a simple one.

The Contrarian View – It’s not just about the Math

While many advisors, in crunching the numbers, will tell you that it’s often worthwhile to delay taking the CPP until you reach age 70, the reality is that many people choose to take it as early as they can…as soon as they turn 60!

Why would they do so?

It’s complicated, yet also kind of simple. There are three phases to retirement. There are the go-go years, which are the first 10 or 15 years of retirement, when you’re still pretty healthy and active. You’re travelling, you’re having fun, you’re indulging in your hobbies and passions, you’re going out to some nice restaurants. And why not…you’ve earned it!

Then there are the slow-go years. You’re starting to deal with some health issues, you’re travelling a bit less and you’re somewhat less active. In the slow-go years, you start to spend a little less money and you’re focusing a bit more on a comfortable lifestyle close to home.

The final phase is the no-go years. You’re at the point where you either need help and assistance to continue living in your own home, or you need to move to a retirement home or long-term care facility. At this point, you’ll likely be devoting most of your financial resources towards your day-to-day living needs and care.

So what’s your Point?

The point is that a dollar is often worth more to you when you’re young and healthy, in the go-go years, than later on when you’re slow-go or no-go.

Many people decide to take the money early, at age 60, while a) they’re still alive, and b) while they can still enjoy it. It’s not just about maximizing the payments you may (or may not) receive over your lifetime, it’s about quality of life! Forget about leaving it all to the kids…what fun is that??? Some things you can do with the extra money while you’re young and healthy might include:

• Go to Vegas!
• Take that Mediterranean Cruise!
• Buy that Harley you’ve always wanted!
• Start your own charitable foundation – how thoughtful of you!

Whatever you decide, there really is no right or wrong decision. Take it when you need it, or alternatively, when you want it! And let us know what you think….leave a comment and let us know when you intend to take the CPP, and why!

Armchair