When should I begin taking CPP?

It is the nature of my profession that I read a lot about personal financial matters. One of the most difficult of such matters has to do with retirement. Financial economists will say that retirement planning is difficult because there are so many variables, or as I might say it, there are a lot of moving parts. Chief among those moving parts is one’s lifespan. How long am I going to live? The answer to that question for most of us is unknown. So, with such a fundamental variable unknown, how do we know when we should begin receiving the Canada Pension Plan or CPP?


I have often read opinion pieces in the Financial Post or The Globe and Mail in which a professional in the field, such as an actuary or a financial economist, has argued that for most of us it would be better if we were to delay taking CPP. Inevitably, in the comments section that follows, people will object, and argue for applying for CPP as soon as possible. Why?


The Emotional Reasons for Taking CPP Early

Often, people will recount a situation in which an older relative or friend retired at 60 and was dead within a very few years, typically of cancer or some other dread disease. They then point out that taking CPP at 60 would at least have given that person a few years to receive back what they had put into their pension.


Another reason for taking CPP early is resentment. They resent having had to pay into this government-mandated pension plan and want to get their money out of the hands of the government as soon as possible. They feel they could have done a lot better themselves if they had been able to invest that money on their own and want to get back what they put in as soon as possible.


Still another reason for taking CPP early is fear. In the early years of the Canada Pension Plan, which was established in 1965, there wasn’t a reserve of funds. The government saw a situation of poverty among the elderly and passed legislation to implement the plan. Funding came from current contributions and went out to retirees. As Canada’s population aged, and the workforce population declined relative to the number of retirees, fears began to arise that the CPP might not be sustainable. That attitude persists among some.


The Reality of Canadians’ Lifespans

The argument that seems to carry the most emotional weight is the fear of dying at a relatively young age. Fifty years ago, in 1970, life expectancy in Canada was just short of 73 years. For women it was 76 and for men it was a measly 69. In the last 50 years, that life expectancy has jumped about 10 years. Let’s imagine you are a couple, both turning 60 years old in about 6 months, and you are wondering whether you should take CPP at 60 or wait until later. According to FP Canada, which uses a mortality table published by the Canadian Institute of Actuaries, a 60-year-old male has a 50% chance of living to age 89, a 60-year-old female has a 50% chance of living to age 91, and if you took them together, for example in the case of a married couple, a 50% chance that one of them will live to age 94.


Now consider that these figures represent a 50% probability of your age at death. Half the 60-year-olds in Canada will live longer lives and half will live shorter lives. When it comes to planning for retirement, do you arrange your finances on the chance that you will live fewer years or the possibility that you might live longer? Which is the more prudent choice?


FP Canada, the licensing body for the financial planning designations QAFP™ and CFP®, encourages planners to use the 25% probability figures when creating clients’ financial plans unless specific circumstances suggest otherwise. For the 60-year-old male that means planning to live to age 94, while the 60-year-old female can plan with age 96 in mind. In the case of a married man and woman, there is a 25% chance that one will make it to age 98. Sure, you might die many years earlier, but the odds are you will live a long life. The greater risk is not that you will die too soon, but that you will live so long that you will outlive your money.


Reasons to Take CPP Early

Having said all that, there may be reasons to take your pension early.


You need the money now

You have a low income

If your income is so low that you are having a hard time making ends meet, then you need that extra source of income now. There is no point in waiting for a higher payout if you cannot afford to live.


In addition, if you have been unable to save anything for retirement, and you don’t have a workplace pension plan, then you may very well qualify for the Guaranteed Income Supplement (GIS) when you reach age 65. GIS needs to be applied for and you also need to have applied for Old Age Security (OAS). The reason for taking CPP sooner is that the clawback on GIS payments is quite severe and since CPP is counted against your GIS payments, it is to your advantage to take it relatively early and at a lower level so that you can keep the GIS with little or no clawback.


You want to fund your expected early retirement lifestyle

Some may choose to retire early because they have ambitious plans for their early retirement years. If those plans require money, like travel, then receiving CPP sooner may make sense, as long as they recognize that they will have less money later on.


You are in poor health

After your mid-70s, those who have delayed taking CPP until age 65 or later have begun to catch up to the person who began CPP at 60. If your health is such that you are unlikely to live to your late 70s, it makes sense to take CPP as soon as you are eligible.


You have stopped working

CPP is based both on how much you have contributed each year and how many years you have contributed. If you begin your pension at 65 the CPP program will drop out the eight lowest earning years (96 months) of earnings in the 47 years between 18 and 65. This represents 17% of your earning years, your “contributory period,” in the parlance of Service Canada. If you start CPP earlier, then you will have proportionately fewer months or years that will be removed from consideration. If you begin receiving CPP at 60, you will only have 42 years or 504 months taken into consideration. Seventeen percent means only 86 months (7 years and 2 months) will be dropped out. There are other dropout provisions available, though. If you were the primary caregiver of a child under age 7, those years can be dropped out first, as can any periods when you were receiving the CPP disability pension.


The point of rehearsing the details in the paragraph above is that, if you cannot drop out your low income earning years, you may find that delaying the start of CPP may not have as positive an impact for you as you might have expected. It may therefore be to your advantage to not delay taking CPP.


Your CPP payments will raise your income to the point that Old Age Security (OAS) is clawed back

As of 2020, if your net income is greater than $79,054, you have to repay part of, or potentially all, your OAS. For each dollar you are above the threshold, $0.15 will be recovered under the terms of the OAS pension recovery tax. Let’s suppose that your net income in 2020 is $100,000. That is $20,946 above the threshold. Multiplying that figure by 15% yields $3,141.90, which will be applied against your OAS payments during July 2021 to June 2022. If you are eligible for the full OAS, currently at $613.53 per month or $7,362.36, you are losing more than 40% of the benefit. You may therefore want to take your CPP earlier, because OAS is not applicable before age 65. In addition, a lower CPP will also have less impact on your OAS once you do begin to receive it.


You want to leave a larger estate

If you have an RRSP or a defined contribution pension plan, once you turn 71 you must convert those plans into sources of income. If you convert them to a Registered Retirement Income Fund (RRIF) or Life Income Fund (LIF), respectively, once you die, although they are taxed (if there is no surviving spouse or dependent child or grandchild), they are still available for your heirs. If you have money in a TFSA as well, so much the better because those funds are not taxed at all. However, specifically regarding the CPP and OAS, once you are gone so is that cash flow. That suggests it may be to the benefit of your heirs to use income that dies with you first, before tapping into your personal savings.


Reasons to Take CPP Later

You will receive a larger inflation-indexed pension

Contrary to the pessimistic view held by some, the Canada Pension Plan is on solid footing, “sustainable over a 75-year projection period.” If you are approaching 60 and debating whether to take CPP sooner or later, the last thing you need to worry about is whether the CPP is going to still be there for you. What you will get, whenever you take it, is a guaranteed, inflation-indexed source of income. Age sixty-five is the standard year to begin taking CPP. If you choose to begin receiving payments earlier, your starting pension will be reduced by 0.6% for each month earlier that you start. That is 7.2% per year or a 36% reduction if you begin at age 60. On the other hand, if you delay taking CPP until after age 65, you receive an additional 0.7% per month delayed, or 8.4% per year. At age 70, that adds up to a whopping 42% increase over the amount you could receive at age 65.


Let’s imagine a very hypothetical scenario. You were debating whether to take CPP at age 60 right at the beginning of 2021, or wait until age 65 in 2026 or wait until age 70 in 2031. Let’s further assume that at the beginning of 2021, you would be eligible for a monthly payment of $1,000 if you were 65. With the 36% reduction for taking the pension at 60, that would mean receiving $640 per month. Finally, if you delayed CPP until age 70, as of 2021, you would be receiving $1,420 per month. Assuming a steady two percent annual increase for inflation by the time you reached 90, you would have received about $325,000 if you had started at 60, $446,000 if you had started at 65, and over $535,000 if you had waited until age 70.


You want to reduce the risk in your retirement income

While some will choose to avoid risk altogether and invest only in GICs or government bonds, with the low interest rates of today, just about the only way to earn investment income greater than the rate of inflation is by putting a portion into the stock market. Because the stock market tends to do better over time, that makes sense, but it also means that you will have to accept downward swings in the value of your investments that may take longer than you are willing to tolerate. One way to reduce that risk is to swap risky income for risk-free income. In the context of retirement income sources, it means drawing more from your personal retirement resources, e.g., a RRIF or LIF, in order to fill the gap caused by delaying CPP until later.


You want to protect yourself against longevity risk

Personal retirement income sources like the RRIF are great for saving, but your lifespan is uncertain, so knowing how much to withdraw and when isn’t necessarily an easy thing to do, nor are you necessarily going to get the investment return you expected. It’s possible you might run out of money. CPP, however, can be depended upon even if you live to 102 (the age of one of my uncles) and the amount received is significantly greater the more you delay your start date.


You may be eligible for the Guaranteed Income Supplement (GIS)

As I wrote earlier, the GIS is targeted to low-income seniors. Sometimes, retirees who have substantial assets can still benefit from this program. You don’t have to convert your RRSP to a RRIF or annuity until the year you turn 71. If you have substantial assets in a non-registered account that are geared more for capital gains than for income, you have the discretion to reduce tax-attracting activities. Finally, if you have a fully funded Tax-Free Savings Account (TFSA) you can withdraw from that account freely, as withdrawals from TFSAs are not taxable. You can combine OAS of $613.53 per month, GIS of up to $916.38 per month, money from your TFSA and non-registered accounts and live reasonably well until age 70 when you begin to take your maximized CPP payments.


It’s Up to You

This post doesn’t tell you when to take CPP. That will take a much more personalized approach. It does, I hope, give you some ideas of what to consider when contemplating when to begin receiving your pension. What issues concern you as you anticipate retirement and government pension plans?


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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, accounting, or legal decisions.