Should You Take CPP Early?
Often a question I get asked in my financial planning practice by those at or close to Canada Pension Plan (CPP) benefits start date of age 60 is “Should I take my CPP early?” The reality is the answer is not normally as cut and dry and usually comes back to “It depends.” There are several factors to consider. Do you require the additional income immediately? Are you still working and thus possibly in a higher tax bracket compared to retirement? Have you considered the opportunity cost and crossover age where waiting to take CPP made sense?
Here are some considerations:
The Canada Pension Plan benefits can commence as early as age 60 reduced by 0.6% for each month prior to age 65. What this means is 0.6% x 12 months = 7.2% per year or 36% lower than the benefit you would have received at age 65.
Example, a client from Oakville recently visited me to discuss this very situation. For privacy reasons let’s name him John. John was approaching age 60 and wanted to know the ramifications. Given he had worked more than 40 years at the Yearly Maximum Pensionable Earnings (YMPE), he would qualify for the maximum CPP benefit. It should be noted the average CPP pension is just over $500/month, far below the current maximum. The current maximum of $1,134.17/month as of 2018 will be “adjusted every January if there is an increase in the cost of living as measured by the Consumer Price Index” (as per the Canada Pension Plan – overview found at https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html).
If John decided to take his pension at age 60, his initial pension would be reduced by 36%. In other words, John would receive $1,134.17/month minus 36% = $725.87/month for the rest of his life. This amount would be adjusted accordingly if there was an increase to the cost of living as measured by the CPI. If John decided to wait his pension would increase by 0.6% per month he decided to wait. In other words it would increase by $6.81/month for each month he waited. If he waited a year, this benefit without taking into account increases would be $6.81/month x 12 = $81.66/month and every year thereafter.
Similarily, if John decided he did not require his pension, in fact wanted to defer the benefit as long as possible it would actually increase the benefit by 0.7% per month after the age of 65, until age 70. In other words, it would increase the monthly lifetime pension by 0.7 x 12 = 8.4% per year or 42% over the amount received at age 65.
What should John do?
|Income Paid Before 65||$43,552.13||$38,761||$32,010.81||$23,300.39||$12,630.12||N/A|
In other words, if John were to elect taking his CPP benefits at age 62, ignoring opportunity costs it would take him to nearly age 76 before the benefit of waiting was financially more beneficial.
Every circumstance is different and requires discussion and analysis. Although rare, for someone like John he may like the idea of receiving the maximum government pension and instead of taking at an early age or at age 65, he may opt to wait until 70. Why? Well John could use his registered retirement savings plan (RRSPs) to supplment the income he would received from CPP and lock in a benefit which is 78% higher at age 70 compared to taking early age 70.
At same time, John may decide that he would rather have the income immediately rather than wait.
We would be happy to provide further analysis for your family’s specific circumstances. Contact Protect Your Wealth today to learn more! We proudly service clients in Ancaster, Burlington, Dundas, Hamilton, Oakville, Waterdown and the surrounding areas.