They say that a bird in the hand is worth two in the bush. But when it comes to government benefits for older Canadians, it's not as simple as that, because we're talking about different breeds of birds and different kinds of bushes.
When I talk to Canadians and ask whether they want to collect their Canada Pension Plan (CPP) benefits before age 65, or after age 65, they often answer, unsurprisingly, that sooner is better, because a bird in the hand is worth two in the bush.
You see, Canadians have a choice as to what age they start collecting some government benefits. But the decision whether to do so is not as easy as simply "grab it as soon as you can." There are a number of factors to consider in choosing when to start. Let me explain.
The basics
Over the past two weeks, I've shared how the CPP and OAS (Old Age Security) systems work. In a nutshell, the typical age for collecting CPP benefits is 65 if you're eligible, but you can choose to collect as early as 60, or as late as 70.
If you collect before the age of 65, your benefits will be reduced by 0.6 per cent (starting in 2016) for each month before 65 that you start to collect. (Prior to 2012, the reduction was 0.5 per cent a month; for 2015 the reduction is 0.58 per cent a month.)
Similarly, if you choose to start your CPP benefits after age 65, you'll be entitled to an increase in your benefits to the tune of 0.7 per cent (formerly 0.5 per cent) for each month after age 65.
In 2012, there were additional changes to the CPP including the necessity to continue contributing to the CPP up to the age of 65 if you're still working – even if you're collecting CPP benefits at the time. If you're working after the age of 65, you can opt to contribute while you're collecting benefits if you want. This will result in "post-retirement benefits," or additional amounts to be paid to you.
And here's one last change that was made: The number of years of low or no earnings that are dropped from the calculation of your CPP benefits increased from seven to eight.
The timing
So, when exactly should you start collecting your benefits? The key factors that can affect your decision include (1) whether you the need the income at an earlier age, (2) your current health and life expectancy, (3) whether you're going to spend or invest those benefits and what rate of return you could achieve, (4) your assumptions about inflation, and (5) your marginal tax rate, among other factors. Sounds confusing, I know.
First and foremost, you should consider taking your CPP benefits early if you need the money. You might also take it early if your health is poor because, the shorter your lifespan, the more you may benefit from earlier payments. Consider taking it early if you expect to collect the Guaranteed Income Supplement (this supplement is available to low-income Canadians, and collecting CPP earlier will reduce your income and therefore may help your cause if you're hoping to collect GIS).
Collecting CPP early can also make sense if you've spent several years out of the work force. How so? The government will eliminate your eight lowest years of earnings from the calculation of your CPP. If you stop working before the age of 65 and don't collect CPP, you may be adding more "zero income years" to an already long list of those years, which can reduce your CPP benefits. Collecting early can avoid that problem.
Now, for some math. As a general rule, if you live beyond the age of 72, you'll be better off waiting until 65 to begin collecting your CPP rather than taking it early. If you live beyond the age of 81, you'll be better waiting until you're 70 years of age to start collecting (I've assumed inflation at 2.5 per cent here).
A word about OAS: You can choose to delay receiving OAS until the age of 70 if you'd like (but you can't take it before age 65). Generally, the break-even age for choosing to delay your OAS benefits is a little higher than for CPP, but if you're going to live into your early 80s, you might defer your OAS until you're 70. Your decision should also take into account your other income because you could be subject to clawback of OAS benefits. If you expect lower income later, you might want to collect OAS later to reduce the clawback.
Tim Cestnick is managing director of Advanced Wealth Planning, Scotiabank Global Wealth Management, and founder of WaterStreet Family Offices.
Tim Cestnick