What a Difference a Year Makes: The Impact on CPP of Extending Retirement by One Year
If you are nearing retirement, you may be wondering about when to begin receiving the Canada Pension Plan. There is a common idea that you should take it as soon as possible, at age 60, just in case you don’t live long enough to make use of it. The argument is that, if you are still working, you can invest it to generate more income, the theory being that investment returns will more than offset the 36% discount “hit” you are receiving for taking it 5 years earlier than the standard age of 65. This is an uncertain proposition at best.
Others will argue that CPP will go bankrupt so it’s best to take what you can while you can. That may have been a concern at one time, but that is certainly not the case now.
Still others think that they may die before they get back what they paid into it so beginning sooner than later is better. This fails to consider that, if you have made it to your late 50s, you have already gotten past a lot of potential sources of early death and, therefore, have a good chance of making it into your 90s.
As one illustration of the benefits of delaying the beginning of CPP, I present the following case of someone approaching age 65 who is debating whether to delay CPP by even one year to age 66.
Let’s suppose it is mid-2021 and you are turning 65 in June 2022. You are single and have earned the Year’s Maximum Pensionable Earnings (YMPE) often enough over your working career that you will qualify for the maximum Canada Pension Plan (CPP) of $1,253.59 per month beginning in July 2022.
Whether or not you retire in 2022, you wonder about the benefit there might be in delaying the start of CPP by even one year.
Inflation runs at a steady 2.1% for the rest of your life.
You live until the end of the year 2057 when you turn 100.
Whether starting in 2022 or delaying to 2023, the first CPP payment comes in July, meaning only half a year’s income is received in year one. In 2024 the first full year for both scenarios, starting CPP at age 65 means income that year of $15,682 for a cumulative total of $38,563. Starting at age 66 results in $17,104 in 2024 but the cumulative amount received is just $25,480.
Since there is only a one-year difference in start dates, delaying the start allows you to surpass the 65-year-old standard in the year 2033, the year you turn 76. The amount received that year in the case when you started at 65 is projected to be $18,907, for a cumulative amount of $195,377. If you started at 66, you would be receiving $20,622 in 2033, and your cumulative CPP would have reached $196,520.
At Age 90
A single male aged 65 has approximately a 50% chance of reaching age 89; a single female has an even chance of reaching age 91. I will choose age 90 for the midpoint between the two ages. If you had started your CPP at age 65, in 2047 (the year you turn 90) you would get approximately $25,292 in income that year and would have accumulated a total of $505,808. If you had waited until age 66 to start CPP, you would have received $27,586 in 2047 for a total of $535,112.
At Age 100
There is about a 10% chance that a single female 65-year-old would reach 100. Her male counterpart has a 10% chance of making it to 97. I will use age 100 as your last year of life, regardless of your sex.
In that final year, if you started CPP at 65, your income in 2057 would be $31,134 for a cumulative total of $789,858. If you had started at 66, your income would be $33,959 for a cumulative total of $844,932.
Even a relatively minor delay of one year can make a meaningful difference in the amount of money you can receive over a lifetime. The indication in these calculations that by age 76 you are already at an advantage argues for delaying CPP.
However, as always, personal finance is “personal.” If your circumstances are such that you need the money from CPP now to make ends meet, then delaying is not an option. If you know your lifespan is limited, then delaying is not a reasonable choice to make. If you are likely to qualify for the Guaranteed Income Supplement (GIS) at age 65, then strategies to increase CPP are usually counterproductive.
What about if you decide to delay CPP and then find out you have a life-limiting condition? To quote the government website: “If you apply after you turn 65, you can get retroactive payments of the CPP retirement pension for up to 11 months. The start date you choose to begin receiving your benefit will affect how much you’ll receive each month.” That means a delay of one year past 65 would have little to no impact on the total you would receive. Note that retroactive payments are not an option if you begin CPP before age 65.
To conclude, delaying the start of CPP is probably an advantage for the recipient, but your personal circumstances are, as always, an important consideration.
*Calculations from Snap Projections
This is the 170th blog post for Russ Writes, first published on 2022-10-31.
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Disclaimer: This blog post is intended for general information and discussion purposes only. It should not be relied upon for investment, insurance, tax, or legal decisions.