If you're approaching that magical age of 60, then you have most likely asked yourself the question, "should I be taking my Canada Pension Plan payouts right away or defer it to age 65...or even age 70?" Well, if you clicked on this blog to find the perfect answer to this question, then you might be slightly disappointed. If you don't mind reading a lot of "but's" "maybe's" "what if's", and you are able to apply your own personal situation when it comes to answering this question, then you're in luck!
CPP can be drawn as early as age 60, but is reduced by 0.6% per month from the age of 65. This works out to a 36% total reduction of your CPP at age 60 compared to age 65. You can also defer taking your CPP past the age of 65 to age 70 which would increase your benefit by 0.7% each month it is deferred past that age, or a total of a 42% increase if you waited until the age of 70. In 2018, the maximum CPP benefit is $1134.17 if taken at age 65. The maximum at age 60 would then be reduced to $725.86, and if deferred until age 70 it would be $1610.52. These are the maximums, and it should be noted that the average CPP benefit actually received by Canadians in 2018 was $666.56. CPP benefits received is based on how long you've been contributing to the plan and how much you have contributed as well. You can request directly from the Canada Pension Plan an official statement of contributions.
By simply looking at the math we will obviously have a larger benefit the longer we wait. The breakeven point of how much total money you will receive when taking the money at age 60 compared to 65 occurs at age 74. The breakeven point of deferring until age 70 compared to age 65 would occur at age 81. So, if you think you might live well into your 80's, 90's, or even to 100, then the total dollar amount received from CPP will just continue to magnify the longer that you live past those breakeven points. I've created and attached a "fancy" graph to help illustrate the breakeven points of taking CPP at age 60, 65, and 70. (Thanks to https://www.onlinecharttool.com)
Sadly, these numbers or this chart still won't make it a simple answer as there are still many other factors to consider. One of the most important, but also toughest questions, is how long do you think you will live? The average life expectancy for Canadian men is age 80 and 84 for women, and these numbers are expected to continue to rise going forward. Examining your own health and family history when it comes to longevity will also help you gauge this decision. Obviously, nobody has a crystal ball on when we are going to die, so this always creates a difficult decision. If you think you're going to live a long life, but at age 60 cash flow is tight whether you're still working or retired, or if you are carrying some debt at this time, then it might make sense to just draw early to help supplement income or help pay down debt.
We can make the valid argument that taking early is the way to go regardless of life expectancy, as you could die at any moment, and if you don't use it you lose it. I would also say that you will likely enjoy the extra income more so during your 60's while you're still healthy compared to in your 80's. Some people may not have confidence in the governments ability to maintain the current stability of CPP and could possibly make negative changes to the rules of the plan, which could entice someone to take early as well. Some people will not need the extra income at age 60, but may have the ability and desire to invest early CPP payments in a tax sheltered account like a TFSA and earn considerable interest to pushback the breakeven ages even further. Even though to earn a considerable amount of interest more than 3% today, you would have to assume some sort of market risk and there would be no guarantee on returns whereas deferring until age 65 guarantees you a benefit increase of 36% or 7.2% per year. This could still be a possible option for some people regardless of market uncertainty, especially if you fear leaving CPP to later on in life, dying early, and not getting anything from it.
Another possible downfall is if you are still working at age 60 and plan on drawing early from CPP while you work, then you will be paying a lot more tax on those benefits compared to if you waited until retirement when your overall income will likely be lower. The total after tax dollars received could be substantially reduced compared to just looking at the gross dollar comparisons when deferring in this situation.
Many people assume your retirement income will be less if you plan on retiring at age 60 and wait until age 65 to take CPP, but it doesn't necessarily mean you will have less during those 1st 5 years. You would just have to draw more on other sources in those early years such as RRSP's, work pensions, TFSA's, or other non-registered investments, and then reduce some of those amounts accordingly once CPP begins at 65. Some people may have limited or no other savings which would make CPP even more vital when planning.
When to take CPP can always be a long winded conversation as there are still many other factors to still consider. Do you plan on travelling lots in retirement? Playing lots of bingo? Golfing 5 days a week? Season tickets to your favourite NHL, NFL, MLB, or NBA team? Potential health care costs down the road? Downsizing homes? Working part time in retirement? Old Age Security clawbacks? Pension plans through your work with bridging options?
So when is the optimal time to apply for CPP? Well, we can look at the math and and make a choice, but the math in this situation won't always be the right decision for your own plan. Retirement will look very different for each and every Canadian, so when planning for your own future it will come down to whatever happens to best suit your own particular situation at the time. CPP is an important component of your financial strategy, and should always be a part of devising your personalized retirement plan.
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