To help make good financial decisions today, that impact your tomorrow, you need to make some assumptions about the future. When you should take your Canada Pension Plan (CPP) benefit is one of those decisions.
So, when and why take CPP at age 70?
This post provides the goods including a link to one of our case studies.
What is CPP?
The Canada Pension Plan (CPP) is a retirement pension, that is paid monthly, but it’s a taxable benefit that is designed to replace part of your employment income when you retire.
When it comes to our Canada Pension Plan (CPP), to qualify for it, you should know that current government rules dictate you must be over the age of 60.
If you qualify, you’ll receive the CPP retirement pension for the rest of your life.
To qualify you must:
- be at least 60 years old
- have made at least one valid contribution to the CPP.
- Check out our comprehensive post here for more details on CPP including how it works!
The standard age to start CPP is age 65.
However, you can start receiving it as early as age 60 or as late as age 70.
If you start receiving your pension earlier, age 60, the monthly amount you’ll receive will be smaller. If you decide to start later, age 70, you’ll receive a larger monthly amount. The maximum monthly amount you can receive is reached when you turn 70.
Why is taking CPP such an important decision?
There are many reasons to delay CPP to age 70, or even take CPP at the standard age of 65. The decision about when you take CPP can be related to one or more of the following:
- Your desired or needed income stream.
- Whether you plan on working while receiving your CPP.
- How much you have contributed and what your benefit might be.
- The sum of your personal savings, investments or company pension plan (in addition to CPP income).
- Your current health, family health history or any disabilities.
- Other income streams in retirement such as business investments, winding down a corporation, rental income, etc.
At Cashflows & Portfolios, we believe one of the inexpensive, safe and smart ways to boost your retirement income is simple: delay your CPP benefits. Yet most Canadians don’t bother.
In a study we read, according to the National Institute on Aging, a whopping 95% of Canadians take CPP at the age of 65 or earlier, with only one percent deferring until the maximum age of 70.
That’s incredible, given the following:
- CPP incentivizes retirees who delay their payments past age 65 by 0.7 percent each month or 8.4 percent a year. This translates to a 42% income boost in CPP payments at the age of 70 compared to age 65 (and for life!).
- In dollar terms, take even average CPP payments – at just over $700 per month at the time of this post for the average benefit to new beneficiaries – a 70-year-old would earn 42% more or a total of $994 per month. That’s a difference approaching $300 per month.
CPP incentivizes retirees who delay their payments past age 65 by 0.7 percent each month or 8.4 percent a year. This translates to a 42% income boost in CPP payments at the age of 70 compared to age 65 (and for life!).
The reasons most Canadians begin their CPP at 65 (or sooner) vary.
For some, a traditional retirement begins at 65 so it seems logical to collect their pension at that age. Others take their CPP early because they believe in “a bird in the hand is worth more” – money now is more valuable even though that not entirely true.
In other cases, maybe folks don’t feel they will live as long as they need to, to collect CPP money.
For “Sally” in that case study, these were some takeaway messages:
- If you believe your genes are good, and you have a strong chance to live beyond your early 80s then depending if you need the cash it may be very beneficial to defer CPP until age 70. This is only if you can afford to defer the income until age 70.
- If not, if you can’t afford to defer and you need the money of course – then take CPP when you can at age 60.
Finally, what usually comes up in these calculations and case studies, “Sally” choosing to take her CPP at age 64, 65, or even 66 are not her “best” choices.
As such, we continue to believe a larger, secure pension that’s guaranteed and inflation-protected for life is worth its weight in gold.
Do you even have a choice?
Thankfully, CPP is properly funded and well-run. So, you should put some fears to rest that it won’t be going anywhere anytime soon. You can read this detailed actuarial report on CPP if you wish, but take our word for it: the latest report includes contribution plans to the year 2095.
We think anyone thinking about any sort of retirement in the next 30-40 years from the date of this post today should be OK with that plan…
Now, choosing between alternative CPP benefit ages (age 60, 65 and 70 for key milestones) is still not trivial – since there is an infinite number of combinations and future factors that could make this decision perfect or somewhat flawed only in hindsight.
Here are some key options we’ve encountered with clients:
Option #1: Delay CPP payments from age 65 to 70, using a portion of your RRSP/RRIF savings and CPP at age 70 for income going forward. We believe this is the most popular choice for many Canadians (and many of our clients) with healthy to modest RRSPs/RRIFs balance sheets. This way, they slowly draw down their RRSP/RRIF assets and by delaying CPP to age 70, they transfer some of the longevity risks and inflationary risks away from their personal assets to CPP.
Option #2: Claim CPP payments at age 65 while combining a portion of your RRSP/RRIF withdrawals for income needs. This hybrid approach is also a decent option since it offers up a blend of government CPP benefits AND personal savings to manage income needs near or at the traditional retirement age for many Canadians (age 65). Add on OAS (Old Age Security) benefits and even without many TFSA assets – those income streams are likely enough for many Canadians.
Option #3: Claim CPP payments at age 60, but only if you need the money. Not everyone is blessed with long life, a good RRSP/RRIF balance sheet, nor other assets for their retirement preparations. If you need to fund your lifestyle in your 60s, and/or if you have poor health conditions, then you might wish to take CPP as early as possible.
Why you should take CPP at age 70 summary
If secure income is what you want – we believe taking CPP at age 70 is generally your answer. If your objective is to enhance the chance you’ll have a long lifetime of inflation-protected, secure income, then delaying CPP payments can be reasonably defined as one of the best risk-free investments you can make. Worse case, you take your CPP benefits a few years before age 70 but you’d be wise to avoid pulling the trigger on these benefits if you can before then.
Otherwise, if you want the money or need the money then by all means take CPP at an earlier age. Just don’t be too disappointed with the outcome when it comes to covering your inflationary retirement needs.
- Check out this outstanding paper entitled The CPP Take-Up Decision – Risks and Opportunities.
- Make sure you check out our case study with a client: When to take CPP in retirement.
- Can you retire using only your TFSA?
- Can you retire with just $500,000 invested inside an RRSP?
- Can you retire on a lower income? How?
- What is OAS and the OAS clawback? Can you avoid the OAS clawback?
- Need some help figuring out any retirement income plan? Check out our free retirement calculators!
Need any support with your retirement income projections?
Knowing how to save and invest wisely, to help you get the most out of your portfolio, is something we can help with. We’ve been there!
In addition to that asset accumulation work, if you need some help solving your retirement decumulation puzzle (including when you should take CPP at age 60, 65, or 70 and what your retirement income spending might be) – we can help with that too!
If you are interested in obtaining private projections for your financial scenario, read more about our retirement projections service.
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We look forward to posting more great content and case studies over time. Thanks for reading.