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By Chris Nicola
Special to the Financial Independence Hub
One question that often comes up about Canada Pension Plan (CPP) benefits is whether to take it earlier or later. If you Google this, you’ll get different answers: some say take it early, others say take it later. It seems the experts don’t quite agree, so I wanted to do a thorough analysis myself.
Jim Yih explains that the break-even between taking CPP at 60 vs. 65 is at age 77. In other words, if I live past age 77 I’ll be better off my taking CPP at 65 rather than 60. Based on this he concludes that one should probably start taking CPP at 60, just to be sure. However, I’m still left wondering: “Am I more, or less, likely to live past age 77?”
Now, before I dive into the analysis, let me quickly explain how taking CPP earlier, or later, works. Assuming you will be age 60 after 2016, the CPP early and late withdrawal rules work like this:
- If you take CPP before 65, you take a 7.2% penalty per year on your CPP payments (up to 36% at age 60)
- For each year you wait after 65, you gain an 8.4% increase in your CPP payments (up to 42% at age 70)
On face value, 42% more does seem like a pretty compelling case for waiting, but, is it? The catch here is that, it will depend on how long you live. Will you live long enough to capitalize on the larger payments, if you wait to start taking CPP? The real question is: Are you, statistically speaking, going to receive more, or less, total CPP by waiting?
The hard working mathematicians at Statistics Canada have provided us with this handy table, which shows how long the average Canadian can expect to live until, given they have already reached a particular age. What I’m interested in, is what age the average person at age 60 can expect to live until.
Males maximize CPP at 68, women at 70
Currently, a man at age 60 can expect to live another 23 years (age 83), and a woman about 26 (age 86). As these are averages, they seem like reasonable numbers to use for our analysis, and age 60 is the earliest point at which we are able to consider taking CPP.
Using these numbers, we can show that a woman maximizes her total CPP payout by waiting until age 70, resulting in an average of $75k (36%) more than if she took it at age 60. A man maximizes his total CPP a little earlier, age 68, receiving an average of $50k (27%) more than at age 60. Overall, a strong statistical case for later rather than sooner.
However, we can take this analysis a step further and factor in some sort of opportunity cost. Generally speaking, money today is better than money tomorrow. (A bird in the hand, is worth two in the bush.) So, assuming all things are equal, any CPP I choose to take early is equivalent to retirement funds that will, instead, keep on growing in my savings. The question now is: What return on investment will make taking CPP earlier a better average payout?
For a man, just under 4% will make it more attractive to take it at 65, and, 9.5% before age 60 beats all. For a woman, around 5% makes it more attractive at 65 and around 10% for age 60. Keep in mind though that this is a continuous scale, so, assuming some reasonable rate of return on retirement savings, it probably makes sense to assume that age 65 is the optimal point. (Keep in mind these should be real rates of return, and must account for inflation.)
Of course, don’t just take my word for it, if you’d like to play with the numbers yourself I’ve created a spreadsheet here. You can also use this life expectancy calculator to calculate a more accurate life expectancy based on smoking status, etc.
So if we’re talking about what’s best on the average, then I’m suggesting taking CPP at age 65 or later. It probably isn’t necessary to hold off until age 70 though, since, even in the worst case assumption of zero rate of return, it doesn’t fare all that much better. However, taking it at age 60 fares worse for any reasonable rate of return. Now, of course, these are average case scenarios, so you should base your decision on the specifics of your own personal situation.
One more point, that I feel is important, is what to do if you haven’t saved all that much for retirement and you feel you may be stretched? Should you then take CPP as early as possible to help? Surprisingly, in this case it probably makes even more sense to wait as long as possible. This way, you ensure the maximum income from CPP if your retirement fund should run out. Of course, again, you’ll want to carefully run these numbers to make sure this really works for you.
As for the argument that taking CPP early means being able to spend more, and enjoy retirement more, in the earlier years? While it may seem that way, the numbers don’t lie. Starting at 65, or later, is going to mean more benefit received, on average. Let’s say, for argument’s sake, that you’re planning on living it up in those early years (heck, I recommend it!); your wealth will still be better off, on average, if you fund that lifestyle from your retirement savings and take your CPP later. (An even better idea is to fund your early excess spending from a TFSA to avoid increases in marginal taxes or clawbacks on your OAS.) This is exactly the reason why we considered a rate of return for our investments in our analysis.
So, that’s the long and the short of it. With the new CPP rules taking CPP later results in a larger total payout, at least based on average life expectancy at age 60.
(nb: Math geeks out there may note that I could have taken an extra step and used average life expectancy for each and every age year to compare the choice to take or wait for each year. I’ll leave that as an exercise for the reader, but it won’t make a huge difference and, if anything, the results will favour the case for waiting.)
Chris Nicola is co-founder and chief technology officer of WealthBar, a Vancouver-based robo-advisor. WealthBar aims to make quality investments and financial advice accessible to all Canadians. This article originally appeared on the WealthBar blog and is republished on the Hub with permission.
Consider 2 things before defering your CPP after 65.
First, if you don’t need the money, you’ve got a very good reason to ask for it: you can invest all of it. That could be enough to get as much as if you had defer your pension.
Second, your CPP is a life annuity. It dies with you. You’d rather spend the money that won’t survive you before spending what could be left to your heirs.
Another consideration is if you are working from 60-65 and contributing to CPP still, the PRB enhances your CPP payout, and therefore pushes the breakeven point back beyond age 80.
One consideration that is not mentioned but has an impact is if you are married what is the amount of CPP your spouse is earning and the survivor’s benefit.
“The most that can be paid to a person who is eligible for the retirement pension and the survivor’s pension is the maximum retirement pension (which is more than the maximum survivor’s pension).”
This means by deferring and increasing your payments it could also mean that the surviving spouse tops out sooner and as a couple they lose out on more CPP benefits.
At the age of 65 or after, if a widow (widower) is also receiving a retirement pension, the combination with the surviving spouse’s pension cannot give more than the maximum of the retirement pension payable to the widow (widower) at the age of 65, whenever the widow (widower) started receiving her (his) retirement pension.
Conclusion : whenever you start receiving your retirement pension, that won’t affect the value of your surviving spouse’s pension.
I have researched this topic on several sites and I can never find an answer that reflects my situation. I fully understand the math and that 65 is generally the best age to start CPP but what if you are not working from 55 on… Without the full 40 years of contributions there are additional penalties so even if you are subject to a 36% penalty for taking CPP at 60 it still seems better than waiting until 65 as the penalties for non contributing years grow by another 5 years. At least the CPP at 60 will begin indexing then so I might as well take it early then wait another 5 years.
Bad math. Take a look at Frederick Vitesse book “Retirement Income fir Life”. If you don’t live past 76 years old, you might be slightly better off.
Another factor to be considered is withdrawal of your RSP’s. Delaying CPP allows you to take out RSP’s each year prior to taking CPP and OEP and paying little if any tax.
But a RRSP could be transfered to your spouse or to a disabled child, or left to your heirs (except for the taxable part). Your retirement pension from the CPP can become a surviving spouse’s pension depending on the value of his or her own retirement pension, but it certainly can not be left to your heirs. Your OAS stops when you die; nothing is left to nobody. Then, would you rather spend the money that will disappear with you and perhaps leave a little more to your spouse ou your heirs? Well, that’s up to you when you can choose… Most of the people don’t really have the choice; they ask for their public pensions (if they are eligible) as soon as they stop working simply because they need the money.
At a financial seminar for retiring Vets, we were told to take CPP at 60 if we retired at 55 and did not plan to work again. That way one will collect CPP and the bridge gap in one’s pension from 60 to 65 when the bridge gap will end. If one waits til 65 then the bridge gap within one’s pension will be gone and then only replaced by CPP (in theory).
I am a woman who is 60. I took my CPP at 60. Three reasons. My health situation, I wanted to stop drawing from my RRIF and it adds to my Govn’t pension.