Optimal Timing for Taking CPP: Early or Late?
Are you grappling with the decision of when to start taking your CPP benefits? Many individuals contemplate whether to begin early or delay until the age of 65, the conventional retirement age. But should you even consider waiting until the maximum age of 70?
As retirement approaches, there are several challenging choices to be made, and determining the right time to commence CPP is one of them. This significant decision involves careful consideration of both financial and non-financial factors.
From a financial perspective, delaying CPP can be a prudent move if you anticipate a longer lifespan. However, accurately predicting life expectancy is inherently uncertain.
Moreover, there are non-financial ramifications associated with delaying CPP. While not quantifiable, these intangible benefits can hold considerable value. Consequently, individuals with similar financial circumstances may opt for different CPP start dates based on their considerations of life expectancy and the perceived value of non-financial benefits.
Understanding the mechanics of CPP and how the payouts evolve with each year of delay is crucial in making an informed decision.
What is the ideal age to start your pension fund?
The typical retirement age to begin receiving a pension is 65, but there is flexibility to start as early as 60 or as late as 70.
If you opt for an early start, the monthly amount you receive will be reduced, whereas delaying the start will result in higher monthly payments.
However, waiting until the age of 70 offers no additional benefit. At this point, you will receive the maximum monthly amount.
It’s worth noting that retroactive pension payments can be requested, allowing you to apply for CPP retirement pension payments even if you’re over 65. You can receive payments for up to 11 months in arrears. The amount you receive each month will depend on the chosen start date. However, if you start receiving the CPP retirement pension before the age of 65, retroactive payments are not applicable.
In summary, it is advisable not to delay receiving your CPP pension. The age at which you begin will impact the amount you receive:
- If you start before the age of 65, your payments will be reduced by 0.6 percent per month (equivalent to 7.2 percent per year). Starting before the age of 60 results in a reduction of 36%.
- On the other hand, if you begin after the age of 65, your payments will increase by 0.7 percent each month (equivalent to 8.4 percent per year). Starting at the age of 70 can lead to an increase of 42% or more.
Take Your Personal Circumstances into Account
When determining the optimal time to begin receiving your CPP retirement income, it is crucial to consider various factors specific to your situation. These include your health, financial standing, and retirement objectives.
If you are in good health, anticipate a longer lifespan, or possess alternative sources of income like employment or savings, you might choose to delay your CPP retirement benefit. This decision could result in a larger monthly pension, providing a greater safety net and reducing the risk of financial depletion.
On the other hand, starting your pension early may be advantageous if you desire to reduce your workload or require immediate funds to settle debts or finance retirement plans. While this choice will yield a lower monthly payment, it can help meet short-term financial obligations, especially if alternative income sources are limited or nonexistent.
The Impact of Delaying or Taking CPP Early
The timing of when you choose to start receiving your CPP has significant implications for your payments. At the age of 65, you can determine the approximate amount based on your contributions through the Statement of Contributions. However, this amount will be adjusted depending on your chosen CPP start date.
For each year you take CPP early, your CPP payments will be reduced by 7.2%. For instance, if you decide to start at 60, you will receive a lower CPP amount compared to if you wait until 65.
Conversely, for each year you delay CPP after the age of 65, your CPP payments will increase by 8.4%. If you postpone CPP for five years, your CPP at age 70 will be 42% higher than what you would have received at 65.
The difference in CPP payouts between starting at 60 and starting at 70 is 122%. This means that opting for CPP at 60 provides approximately 64% of what you would receive at 65, while starting at 70 offers around 142% of the amount you would receive at 65.
Waiting for ten years to receive CPP payments can be appealing, as it allows for a substantial increase in the payment amount. However, it is important to consider that during this waiting period, you won’t receive any CPP benefits.
While starting CPP early results in smaller monthly payments, the cumulative contributions over the course of a decade can add up. On the other hand, opting for CPP later leads to larger payouts, but it takes time for these higher payments to surpass the accumulated benefits of starting earlier. This period is known as the breakeven point and should be taken into account when deciding between taking CPP early or later.
It is not necessary to start taking CPP early and invest the funds to generate additional income. Although this may seem like an appealing strategy, it can have practical drawbacks. CPP is considered taxable income, limiting the amount that can be invested in an RRSP. Moreover, the potential returns from investments need to exceed the guaranteed 7.2% return that comes with delaying CPP by a year.
Overall, it is generally better to wait and receive a higher CPP pension that is guaranteed and protected against inflation.
Concerns about the government using the CPP fund to repay debts are unfounded and not something to worry about.