FP Answers: Does it ever make sense to take CPP at age 65?

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By Julie Cazzin with Allan Norman

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Q: I’m 62 years old and planned to take my Canada Pension Plan (CPP) at age 65. With all the talk about the benefits of delaying until 70, I wonder if taking it at age 65 is still a good decision? — Mehmet

FP Answers. Mehmet, the three main reasons to delay your CPP benefits to age 70 are to protect yourself against rising inflation, poor investment returns and to provide you with a larger guaranteed income late in life, just in case you have depleted your investments.

If you delay your CPP benefits beyond age 65, they will increase in two ways. First, there is a 0.7-per-cent monthly increase or an 8.4-per-cent annual return. Second, your benefit amount is based on something called the yearly maximum pensionable earnings (YMPE), which has historically increased in value at a faster rate than inflation. This means that you get the benefit of the 8.4 per cent increase each year, as well as the increasing value of the YMPE, which may be more than the rate of inflation.

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Here are some common reasons to start CPP at age 65: early expected death; changing tax rates; Guaranteed Income Supplement (GIS) and Old Age Security (OAS) clawback; you need the money now to fund your lifestyle; and/or you expect to earn high investment returns.

Most people want to ensure they receive back some of what they contributed to the CPP. If you are single, once you pass away, your CPP benefits stop. For married couples, the maximum CPP benefit a person can receive is the maximum CPP benefit based on their normal retirement age of 65. If your spouse is already receiving the maximum CPP, they won’t receive any of your CPP benefit.

It’s the lack of survivor benefits that has many people starting CPP benefits at age 65. They’ve contributed to the CPP all their working lives and want to ensure they get some of their money back. But remember that the CPP is designed to protect you against inflation, poor investment returns and running out of money if you live a long life. If you start CPP at 65, what else do you have to protect against those things?

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You may have a pension plan from work, or money saved for your retirement. Or perhaps the CPP benefit started at age 65 combined with OAS will provide you with enough income later in life. Think about the base income you will need later in life if you have depleted your investments.

If you have a shortened life expectancy, it makes sense to start CPP early. If you’re not sure and you’re the male partner, with a shorter life expectancy than your female partner, then it may make sense for you to start at age 65 and your wife to start at age 70.

If you delay your CPP to age 70, will the larger CPP benefits push you into a higher tax bracket? What if you have also delayed your registered retirement savings plan (RRSP)/ registered retirement income fund (RRIF) withdrawals to age 72? Now you have two new taxable income streams to manage. What will the tax implications be?

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Are you in one of those sweet spots where a larger taxable income created by a larger CPP is going to reduce your GIS or OAS? If so, this may be a good reason to draw CPP at age 65.

I also hear the rationale that people expect to earn high investment returns, but I accept it with a grain of salt. Let’s think about this. When receiving your CPP benefit, you lose some of it to tax. Will you really invest the full CPP benefit? Even if you do, will your investment returns beat the guaranteed rate of return of 8.4 per cent that leads to an indexed benefit?

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In my experience preparing plans with a two-per-cent inflation rate and a five-per-cent investment return, I don’t normally see a total net worth advantage to delaying CPP until someone is in their early 80s. If I model returns of less than five per cent or higher inflation rates (to try to demonstrate the risk), then the advantage of delaying CPP shows up earlier.

In most cases, the math tells you to delay your CPP until age 70, but who lives their life based on the answer to a math question?

Generally, if you don’t have any money saved for retirement or very little saved, then it probably makes sense to take CPP early. If you have more than enough money, it likely won’t matter what you do.

It’s the people who have just enough or almost enough and no pension that should really think about delaying until age 70. And if you have the risks mentioned above covered, take your CPP early and feel good about your decision.

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Allan Norman, M.Sc., CFP, CIM, RWM, provides fee-only certified financial planning services through Atlantis Financial Inc. Allan is also registered as an investment adviser with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial.ca or alnorman@atlantisfinancial.ca. This commentary is provided as a general source of information and is intended for Canadian residents only.

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