Tips on making the most of your CPP payouts
Sources of income, health, age help determine when to access your retirement fund
In 2012, Aukje Byker was finding work stressful as a teacher at Mohawk College in Hamilton. Byker had taken a sabbatical for a year beginning in 2009 and, although she’d been apprehensive that she might have trouble filling the hours, that wasn’t the case. “In no time at all I was extremely busy,” she says.
In fact, she was so rejuvenated by her time off that she reduced her work schedule by 20 per cent on returning to her job, with a resultant drop in pay.
That initial taste of freedom left Byker craving more than her reduced schedule could provide. So she began to think about retiring early. Her biggest concern: would she have enough money to sustain herself? So Byker consulted an accountant about whether it made sense for her to begin collecting her Canada Pension Plan (CPP) payouts and her pension at 62.
The accountant’s take: “If I retired, I would be paying lower taxes and if I took my CPP (Canada Pension Plan) payouts, I would actually be making the same as I made working the reduced load,” Byker says. So she took the leap.
In Byker’s case, the decision was a no-brainer. But for many Canadians, the question of when to take CPP payments is a thorny one. That’s because the government rewards those who wait. Taking CPP prior to age 65 will reduce your payments by 0.6 per cent per month (or 7.2 per cent per year). If you wait to take the payments until age 70, on the other hand, the initial amount payable is at least 42 per cent greater than if you began taking CPP at 65.
So do you hold off on taking CPP in favour of increasing your monthly payout? Or do you take CPP payments as soon as you can with the idea that a bird in the hand is worth two in the bush?
Here’s what to take into account:
What’s your break-even point? According to the CPP calculator at retirementadvisor.ca, the mathematical break-even point for taking early CPP is about 73. That means if you start to receive your CPP at age 60, you will be better off than the standard retirement age (65) until the age of 73. If you think you will live past 73, then it is more beneficial to delay taking CPP until age 65.
“The problem,” says Dan Bortolotti, associate portfolio manager with PWL Capital in Toronto, “is that no one knows how long they’re going to live.” His advice: “If you’re approaching retirement and you’re in ill health, take it right away.” If, on the other hand, you’re in great shape and longevity runs in your family, delay as long as you can.
Do you have other pension money? CPP is indexed for inflation. So if you don’t have a gold-plated pension plan, it can be a valuable addition to your retirement income. In fact, an argument can be made for spending some of your own savings in early retirement — particularly if you’ve accumulated a lot of cash in RRSPs — in order to hold off on taking CPP.
“Let’s say you take out $30,000 a year from your RRSPs starting from age 60 to 70, and you wait until age 70 to take CPP,” Bortolotti says. “You will have smaller withdrawals to make from your RRSP (giving you more control over your taxable income) because you’ve been draining it for 10 years and you will have a much larger defined benefit inflation-indexed pension plan — the CPP.”
Do you have a bridge benefit? Public servants with defined benefit pension plans often get what’s called a “bridge benefit” if they take their pensions early. Essentially, it is an additional monthly payment they can take as early as 55 to carry them to age 65, when CPP and Old Age Security (OAS) kicks in. “It’s designed to smooth out your income,” Bortolotti says.
But, he adds, “I have seen people take the bridge benefit and also take early CPP at 60. I would argue that’s a mistake, because now they’re frontloading their benefit.”
Although you’ll make more money between 60 and 65, he points out that, when the bridge benefit falls away at 65, your income is going to drop. “You want your income to remain as consistent as possible,” Bortolotti says.
Do you need it? “This seems very obvious, but you should take it when you need it,” Bortolotti says. “For me, the default is to take CPP after you stop working.” Although some people begin taking CPP benefits at 60 and continue working because they need the supplemental income, as a rule of thumb, “if you don’t really need it to meet your expenses, I would highly recommend you defer taking it until you stop working,” Bortolotti says.