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Question from Arun, 62, of Alberta: I am having a hard time deciding whether to start my Canada Pension Plan now at age 62 or wait until 65. I am retired with a package, and the payment of the package was deferred to this past January. There would be CPP deduction from that income. I have other sources of income from general investment. Life expectancy in my family is about 85 years. I don’t need income for 2016 because of the $100,000 payment from the package. All friends at my age suggest taking early payout because of life’s uncertainty. I have contributed the full amount to CPP and the estimated payout is $1,020 at 65 or $820 at 62.
Mr. Gillespie specializes in how to generate tax-effective income in retirement.
Clay Gillespie is a financial adviser, portfolio manager and managing director of Rogers Group Financial in Vancouver.
The normal start date for CPP is 65 but you can start it as early as 60. If you start your payments before 65, your payment is reduced by 0.6 per cent a month or 7.2 per cent a year. Thus, if you start it at 60, it would be reduced by 36 per cent.
If you delay taking your pension beyond 65, your payment would increase by 0.7 per cent a month or 8.4 per cent a year. Thus, if you delay your CPP start date to 70, your pension will be 42 per cent higher than if you started it at 65.
In general terms, if you die before your life expectancy, you should have taken your CPP early and if you live beyond life expectancy, it would’ve been better to have delayed the start of your CPP. But of course, it is not that simple because everyone has different personal circumstances that will change whether you should take your pension early or not.
If you are married, you are entitled to a 60-per-cent survivor benefit on the death of your spouse. However, if both partners are getting the maximum CPP pension, then there will be no survivor benefits when one of you dies. Under current regulations, you are only allowed to get the maximum CPP benefit.
Psychologically, it is difficult to delay your CPP as you may be concerned that you will not get a benefit that you paid into during your working life.
But let’s look at this from another point of view. When you retire, one of the greatest risks that you have is running out of money. If you can maintain your lifestyle on your personal investment assets and work pension entitlements, then delaying the start of your CPP pension can be viewed as a version of longevity insurance.
If you live beyond life expectancy, then you will benefit from delaying your CPP. What this really means is that if you live longer than your life expectancy, you will receive more from your CPP and reduce the possibility of running out of money.
However, if you have any major health issues it might make sense to start your pension early.
For many individuals it might also make sense to take the pension early as they will need the income as soon as possible. For example, if taking your pension early allows you to pay back high-interest debt (such as credit cards), then it would probably make sense to take your pension early.
Another issue to consider is that you tend to spend more money early in retirement, as you are more active, but as you age you tend to become less active and spend less money. Thus having more money early might be more beneficial for you.
In other words … it depends.
There is no perfect answer on when to take your CPP as it depends on your personal circumstances. But you should examine your greatest risks and concerns and choose the option that reduces these risks.