Start CPP early or delay? Consider these questions
Should you apply to start your Canada Pension Plan (CPP) retirement benefits as soon as you turn 60? It depends. Weigh the pros and cons.
REASONS TO START EARLY
If you answer yes to the following questions, consider starting your CPP retirement benefits as soon as possible.
Is your health poor? Do you have a shorter-than-average life expectancy? Break even analysis says you need to live until at least age 74 to make it worthwhile to delay the start of CPP benefits until age 65. If you’re risk-averse, it’s a “bird in hand” decision.
Do you need additional cash flow? Having another $500 per month, for example, can make you more financially secure when used to pay off debts. Furthermore, having more cash flow from CPP benefits could allow your RRSP and TFSA savings to grow larger before withdrawals begin.
Do you expect your income to be low enough to qualify for Guaranteed Income Supplement (GIS) at 65? If so, you’d be subject to the 50 per cent GIS clawback. Having a smaller CPP, due to the discount for starting early, means you’d keep more of your GIS benefits.
Have you stopped working? Were you out of the workforce getting a post-secondary education, for example? If so, waiting until 65 to start your CPP could add more zero-income years to the formula. Sometimes waiting can reduce basic CPP entitlement instead of enhancing it.
REASONS TO DELAY
On the other hand, deferring CPP gives you a bigger cash flow source that is fully indexed to inflation and is something you cannot outlive. If you anticipate having a longer-than-average life expectancy, you may profit from delaying CPP benefits to age 65 or even age 70.
Indeed, deferring CPP is a way to transfer investment risk and longevity risk to the government.
Starting CPP five years before age 65 means a 36 per cent benefit reduction. Waiting five years from 65 to 70 would give you a 42 per cent benefit enhancement. Therefore, CPP benefits more than double for a 60-year-old who waits 10 years to start CPP at 70.
Let’s use an example based on maximum benefits available. If you start at 70 and live to 85, you could receive $1,582 per month for 15 years, to give you a total of $284,000 lifetime benefits. That would be 33 per cent more than the $213,000 total from receiving $713 per month for 25 years from age 60 to 85. These calculations simply assume that CPP benefits are spent and not invested.
Fred Vetesse, chief actuary at pension consultants Morneau Shepell, says the enhancement factor for deferral assumes you are able to earn a six per cent rate of return on your investments. Your starting CPP retirement benefit is further enhanced due to increases in the wage index.
If you answer yes to the following questions consider delaying the start of your CPP benefits until age 65 or later.
Are you in good health? If you don’t smoke, are not overweight and exercise regularly, break even analysis says your extra longevity can make CPP deferral pay off.
Are you still working and making maximum RRSP contributions? Even without any cash flow from CPP, you can save aggressively. Therefore, you can afford to delay the start of your CPP. Assuming you have an above average life expectancy, the
Deferring CPP gives you a bigger cash flow source that is fully indexed to inflation and is something you cannot outlive.
enhanced returns from delaying the start of your CPP could be considered a good investment.
Are you currently collecting CPP disability benefits, which are much higher than retirement benefits? Collect CPP disability benefits as long as possible until your CPP retirement benefits automatically start at 65.
Terry McBride, a member of Advocis, works with Raymond James Ltd. The views of the author do not necessarily reflect those of Raymond James Ltd. Information is from sources believed reliable but cannot be guaranteed. This is provided for information only. We recommend that clients seek independent advice from a professional adviser on tax-related matters. Securities offered through Raymond James Ltd., member of the Canadian Investor Protection Fund. Insurance services offered through Raymond James Financial Planning Ltd., not a member of the Canadian Investor Protection Fund.