FP Answers: When should I take CPP?

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FP Answers has received a mountain of questions about the Canada Pension Plan, from who qualifies to how it is calculated to why Canadians can’t contribute more. But by far the most popular question is: When should I take CPP? We asked Jason Heath, an advice-only certified financial planner to provide an answer to one of the most pressing questions in retirement.

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The standard age for a Canada Pension Plan (CPP) pension is 65, but applicants can begin their pension any time between ages 60 and 70. But the timing is much more important than most seniors think. Indeed, the average 65-year-old entitled to the maximum pension could be forgoing more than $120,000 in future retirement income. Applying before age 65 results in a reduction to your pension of 0.6 per cent per month, or 7.2 per cent per year, while the increase after age 65 is 0.7 per cent per month, or 8.4 per cent per year.

In 2021, 31 per cent of applicants began their pensions at age 60 and another 31 per cent at age 65. The rest applied at different ages, with only 11 per cent waiting to age 70. There was a big shift between 2019 and 2020. In 2019, only two per cent delayed the start of CPP to age 70. The percentage was similarly small in previous years. In 2020, for some reason, it jumped to 10 per cent.

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There are several factors to consider if you are deciding when to start CPP. A key one is life expectancy. A 65-year-old woman has a 50-per-cent probability of living to age 91 and a 65-year-old man has a 50-per-cent probability of living to age 89. As a result, women are generally better off deferring their CPP than men. But both sexes should consider it if they are in good health or have a good family history.

If a 65-year-old woman entitled to the maximum CPP starts her retirement pension right away this year, she could receive about $507,000 if she lives to age 91. By comparison, if she delayed the start of her pension to age 70, she could receive about $641,000 — a difference of about $134,000. For a man who lives to age 89, the difference could be about $110,000.

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These figures do not reflect the time value of money, though it’s important to note that CPP benefits are increased each January based on the change in the consumer price index. Nevertheless, a dollar today is worth more than a dollar tomorrow because it can be invested or, alternatively, receiving it as income today can avoid needing to withdraw another dollar of invested assets.

If we assume a three-per-cent discount rate or after-tax return on invested assets, the age 70 applicant in our example would still be about $62,000 better off if she lived to age 91 compared to starting CPP at age 65, and a man would be about $50,000 better off at age 89.

The breakeven ages range from 77 to 82 using a three-per-cent discount rate, and 79 to 84 using a five-per-cent discount rate. The point is a retiree who lives well into their 80s will likely be better off deferring their pension compared to starting earlier.

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If you have less than 39 years of maximum contributions to the CPP and retire before age 65, delaying CPP has other implications. Years without contributions between 60 and 65 can result in a small reduction in your CPP entitlement of about 2.7 per cent per year on average, a reduction that is less than the 7.2 per cent increase in your pension for delaying it. The same life expectancy logic still applies: the longer one’s life expectancy, the more beneficial it is to consider delaying CPP.

The larger a retiree’s RRSP balance, the more beneficial it may be to draw down their RRSP at lower tax rates in their 60s by deferring optional income such as CPP until age 70.

Self-directed investors may also benefit from CPP deferral since it may become harder to manage their own investments later in life. As a DIY investor ages, their risk tolerance might also decrease, or they may need to pay investment management fees that reduce net returns.

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Low-income retirees can benefit from CPP deferral. This may help them qualify for the Guaranteed Income Supplement (GIS) after age 65 if their income is less than about $20,000 if single or combined income is under about $27,000, and up to about $48,000 if married. Deferring CPP can keep income low and increase GIS entitlement.

Those who are widowed and receiving a CPP survivor benefit should consider deferring their CPP. A survivor is entitled to their own CPP benefits plus a portion of their deceased spouse’s benefits. If the survivor’s retirement pension is high, they may benefit from receiving the survivor benefit as long as possible, potentially deferring the start of their retirement pension up to age 70.

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CPP disability benefits are generally higher than CPP retirement benefits, and automatically convert at 65 to a retirement benefit. A CPP disability recipient may benefit from deferring their retirement pension until at least age 65.

But if you have debt, especially high-interest-rate debt, having more cash flow to pay it down earlier may outweigh deferring CPP. Also, an aggressive investor who expects to earn a high rate of return may be better off preserving their investments and starting CPP earlier. As previously mentioned, using a five-per-cent discount rate compared to three per cent pushes back the breakeven age to benefit from CPP deferral by about two years.

Retirees who have defined-benefit (DB) pensions may be better off considering an early start to their CPP as well. DB pensions already provide protection from the risk of living too long, so it may be less important to those who have them to delay and increase their future CPP.

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If you are an employee who is still working and you have more than the maximum 39 years of contributions, there can be a benefit to starting CPP early. The reason is contributions are mandatory before 65 and optional after 65, but can only increase your CPP beyond the maximum if you are receiving it. This post-retirement benefit (PRB) increases your pension by up to 2.5 per cent of the maximum for each year of maximum contributions. The breakeven point is only six to eight years after contributing towards the PRB depending on age, so contributing while receiving CPP is generally advantageous.

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But life expectancy is probably the biggest factor that impacts the CPP timing decision. My mother was in good health in her early 60s and I encouraged her to defer the start of her pension for this and other reasons. Unfortunately, she developed a terminal illness and died when she was 66. She began her CPP once we knew she was sick. One of her fears, like many others, was running out of money. If you die young, you may be less likely to run out. Those who live to age 100 are arguably more at risk and CPP deferral protects against this risk.

If we knew how long we would live, it would help with decisions such as when to start CPP, as well as other financial and non-financial choices. My best advice to those considering a CPP application is the same advice that I gave to my own mother: consider all the factors and make a personal decision on that basis. If circumstances change, so can your timing decision.

Jason Heath is a fee-only, advice-only certified financial planner (CFP) at Objective Financial Partners Inc. in Toronto. He does not sell any financial products whatsoever.

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