When it comes to strategic financial planning for retirement, the answer to many questions is often, it depends. The truth is, decisions around investment strategies and timing are often dependant on specific factors pertaining to the individual and their goals. This is no different when it comes to questions of when to begin collecting Canada Pension Plan (CPP) benefits. And just like that, we have answered when one should commence receipt of the CPP. While it’s possible to begin collecting at age 60, it may be wise to delay receipt of this benefit until later. Below, we’ll discuss the pros and cons of collecting CPP at various points in time, and why there is no ‘correct answer that applies across the board.
Back in the day, a lot of pensions were employer-sponsored Defined Benefit Pension Plans, a type of pension plan in which an employer promises a specified pensions payment/lump sum or both, upon retirement which is predetermined by a formula based on employee’s earnings history, tenure of service, age etc. Therefore, the pension formula and benefit are known in advance and hence many people could defer their CPP until later, as they would know their income in advance.
In the present time, however, most pensions are Defined Contribution Pension Plans. This means that the formula for computing the employer’s and employee’s contributions is defined (the contribution formula is defined), while the actual benefit to be paid is not known until the employee retires. This presents a bigger challenge for planning one’s retirement finances since the specific monthly benefit is undefined.
When it comes to collecting CPP, most people begin at age 65, however, it is possible to start collecting as early as age 60, or as late as age 70. Knowing the optimal time for you will depend on a number of factors, which we’ll discuss below.
The Ideal Scenario: Maximizing CPP Payouts
If you have a pension in the latter category (Defined Contribution Pension Plan) or no pension plan, it may be tempting to collect CPP at 65 or even earlier. However, if it’s feasible, you may want to defer your CPP payments until you turn 70. If you have a sizable RRSP and you are in relatively good health, it is likely that delaying receipt of the CPP until 70 makes sense. In theory, CPP works similarly to a Defined Benefit pension in that it provides a guaranteed monthly income that lasts not just until your death but until the death of your surviving spouse, also known as “Widow Allowance”. For every month that you defer collecting CPP from age 65 until age 70, your benefits will increase by 0.7%, or 8.4% a year (+ indexed for inflation). There are no further increases after 70.
There’s a small caveat here; if you continue working until age 70, you will be required to continue to pay CPP premiums until the age to which you defer the collection of CPP. You can calculate your CPP contribution per year here. In these cases, it will be necessary to conduct a cost/benefit analysis to determine the optimum time to start collecting. However, it is worth noting that if you have unused contribution room, you should also continue to contribute to your RRSP until you defer your CPP payments, and it will be growing in tandem with your CPP and Old Age Security benefits and would generate a higher minimum RRSP annual withdrawal.
Forgetting About the Assumptions: Collecting the CPP ASAP
There are a lot of advisors who will show how much one can save/increase their benefits by deferring their CPP until they are older and advocate for this option. In many cases, it might be the best choice. The biggest assumption they are making when taking this position is that one will be able to enjoy the increased benefit once they reach that age. Making a bet on one’s life expectancy may seem overly practical and even morbid, but if there’s reason to believe your life expectancy could be lower than average due to illness or other factors, it may be best to take your CPP as soon as it is offered.
A couple of things to note: CPP is fully taxable, and once you begin receiving the CPP, you cannot really control how much you will receive. This type of income is difficult to offset against any kind of tax credit, as opposed to investment income or other types of passive income. Also, note that if you are 65 and above, still working, and already collecting CPP benefits, you can opt to stop making CPP contributions while continue to work and earn a salary. To do this, you will need to file the form CPT30.
When “it depends” is Not Good Enough
The truth is, there are many other assumptions that need to be made in order to decide whether it is worth taking the CPP in your 60s or delaying it until later. For example, one needs to consider the investment return of their RRSP. If the return is better than the CPP’s guaranteed 8.4% annual increase, plus an inflation adjustment, then of course it makes sense to take CPP earlier and continue investing your RRSPs: pay yourself the income with the least return first. But generally, if you believe your health is in line with average life expectancy, and your RRSPs on average make under 8.4% annually, then you are better off holding off on collecting CPP income and replacing this income with incremental withdrawals from your RRSPs: this way, you will maximize your income after you turn 70.
Contact McCay Duff LLP in Ottawa for Tailored Advice on Maximizing Your Retirement Income
Instead of gambling on the assumptions, it is best to get advice from a financial advisor who can look at all the relevant details of your situation, and help you decide the optimal time to begin collecting CPP.
The financial specialists at McCay Duff LLP in Ottawa will review your particular circumstances and recommend a financial plan that will provide the most benefit to you as you look ahead to retirement. To learn more about how we can assist you, please contact us online or by telephone at 613-236-2367 or toll-free at 1-800-267-6551.