Should you wait to start CPP? Do the math

When it comes to the decision about whether to start your Canada Pension Plan early or wait until later, there’s plenty of opinion.

The general advice is that if you can wait to take the pension then wait, because you’ll get more, and because it’s indexed you’ll get more for longer.

But some readers are frustrated because that’s too general and doesn’t take into account the specifics of their case.

That’s true; one size doesn’t fit all and the best way to figure out what’s best for you is to seek the advice of a financial planner or other professional.

It’s their job to look at the details of your financial life and help you reach the right conclusion.

“I know of a number of people who are delaying their CPP based on analyses like yours and (who) don’t do the calculations specific to their own circumstances,” wrote Bill Welch.

He retired last year at 57 and is trying to figure out what to do about CPP.

He was referring to a recent column that looked at break-even points for the ‘60 versus 65’ decision.

Welch said general advice doesn’t help those like him who retire before 60. The longer they wait, the more years of zero income go into the calculation of their CPP pension.

The plan allows you to drop out low-income years without reducing the pension amount.

This is how it works: to get the maximum, you must have contributed to CPP at the maximum level for 391⁄ years between the ages of 18

2 and 65.

Since that span is 47 years, the formula lets you drop about eight of the lowest-paid years.

Many readers wonder what happens if you retire at 57, for example, and wait until 65.

Do those eight extra years of no contributions lower the pension to the point where it’s better to start early? Bruce Westcott is in that boat. “I’ll be 60 next month and have claimed no income for the past three years,” he wrote, adding that he paid the maximum into the plan for 35 years. “Service Canada has indicated that if I wait until 65, my pension may actually go down. I have spoken to three people and got three different opinions. I am confused.”

Chris Buttigieg, Senior Manager of Wealth Planning Strategy at the Bank of Montreal, says Service Canada should be able to provide Westcott with exact amounts he’ll get at each age. (You can sign up for their online epass that lets you look at your specifics.)

“If you have multiple years of low or no income, the low earnings drop out. This option is beneficial for those whose careers have been interrupted for a variety of reasons (such as returning to school, early retirement, lay off, providing child care, recent immigrants with shorter contributory periods, or taking of a leave of absence),” he says.

“If the gentleman has been maxing out his contributions for 35 years, he should be able to drop approximately six years of low or no income

“(Starting a pension at 65) is still better than the pension at age 60 but may have a lesser value because he ends up receiving payments for five fewer years.” FRED VETTESE CHIEF ACTUARY AT MORNEAU SHEPELL

from the calculation.” This would take him to 63 or 64, depending on his birthday. Fred Vettese, chief actuary at benefits consultant Morneau Shepell, says if Westcott contributed for 35 years between 22 and 57, that would leave seven more years between 18 and 60 with little or no contributions. If he waits until 65 that’s another four years with no earnings. “(Starting a pension at 65) is still better than the pension at age 60 but may have a lesser value because he ends up receiving payments for five fewer years,” he said. Reader John Stapleton pointed out yet another wrinkle in the decision. It relates to the Guaranteed Income Supplement, which is available to low-income Canadians over 65. “Almost anyone who is GIS-eligible should take early CPP,” he said. “He is correct,” said Malcolm Hamilton, Senior Fellow at the C.D. Howe Institute. This is because part of the GIS will be taxed back, since the CPP pension is taxable income. If you draw CPP at 60 there is no clawback because the GIS isn’t received until 65. All of this is more evidence that individual circumstances differ considerably, so rules of thumb are only a guide. You have to do the math to come up with the answer that works for you.