Canadian Pension Plan (CPP): Hurry Up or Wait?

Ray Hoger, ARTA President

This article is based on material from the website boomer&echo.com, one of my favourite financial websites. The article is titled Reframing the CPP Enhancement: A 122% Increase In Benefits in which the author, Robb Engen, discusses the timing of Canada Pension Plan (CPP) benefits.

As we all know, CPP’s normal start time is age 65. If we choose to start early (age 60 – 64.9) we pay a penalty of 0.6% monthly (7.2% annually). But if we delay receipt of our pension after age 65 (age 65.1 – 70), we can earn a bonus of 0.7% monthly (8.4% annually).

Engen wants us to rethink the numbers. Instead of following the 34% of Canadians who take CPP at age 60 and accept a 36% penalty, join the 1% (National Institute on Aging, Get the Most from the Canada & Quebec Penson Plans by Delaying Benefits, 2020) who wait until age 70 and enjoy a 42% bonus.

To keep it simple, let’s say you have an age 65 CPP of $1000. Choosing to start your pension at age 60 would provide $640 per month. At age 70, you would receive a pension of $1,420. Engen suggests we that we consider the decision at age 60: $640 a month for life or, in ten years, decide to accept $1,420 a month for life. Are you willing to wait and more than double your CPP payment? Something else to remember: when your CPP is adjusted for inflation, would you rather have three percent of $640, or three percent of $1460?

Now, of course, this strategy will only work if you can use your savings or RRSPs to help bridge the gap between ages 60 and 70. This approach also allows more control over your taxable income when you must deal with the mandatory RRIF withdrawals. Lowering the size of your RRIF withdrawals will also lower the potential risk of OAS clawbacks.

There are times when taking CPP at age 60 is advisable. You may need the money to cover living expenses. Maybe you have a serious health problem, or expect a shorter life span. Your CPP could be low to begin with, meaning that waiting would result in minimal benefits.

Honestly, there is no perfect answer for when to start CPP. What is important is to consider all these options with advice from a certified financial advisor. They can look at your individual situation and provide a list of options designed specifically for you. Make an informed decision based on facts rather than guesses, or a friend’s advice formed by their personal experience.

I have always worked with a fee-only financial advisor; their income isn’t dependent on the value of your assets. This independent approach gives you unbiased service and a complete range of investment choices. A company-affiliated advisor is often commission-based, and their advice might be limited to the companies limited menu of options. Make sure you know how your advisor is being paid. They recommend, you choose.

Ray Hoger
President, ARTA