When should you begin taking Canada Pension Plan benefits? There are no right or wrong answers, just questions you should ask yourself.
Do you expect you’ll be employed right up until age 65? Do you need the funds to pay off debt or to splurge on lifestyle-related expenses? And, as gloomy as it may be to contemplate, how long do you and your spouse reasonably expect to live?
While taking your CPP at any time prior to age 65 will result in a financial loss, it’s not always about the numbers, says Brad Sarna, a financial advisor at Scott Wolfe Management Inc. in Headingley, Man.
He urges his clients to consider other factors, such as the lifestyle they want to lead, potential health issues that could arise and the possibility of dying prematurely. “What if you chose to take the payments later and then health issues or other factors occur that don’t allow you to do the things you always wanted to do in retirement?" Mr. Sarna asks.
If a pensioner waits until age 65 but dies just before that date, she will have received nothing, he points out. "They’ve missed out on the opportunity to take some of the capital they earned in their working lifetime.”
Mr. Sarna tells his clients to expect a reduction in their allowable benefit by 0.6 per cent each month, times the number of months prior to their 65th birthday. For those taking CPP at the age of 60, this means a loss of as much as 36 per cent. “To break even, you’d have to live past 77,” he says. In other words, those who do the math will discover that all the CPP money received from age 60 to 77 equals the amount of money someone else who has chosen to wait will have received from age 70 to 77. Those with good genes on their side, who believe their lifespan will extend well past 77, should consider waiting longer to take CPP if they want to receive more money in their lifetime.
The decision to take CPP early often depends on sources of additional income in retirement. The most financially savvy way to approach it is by creating a statement of net worth so clients know where they stand financially at any given time. This includes the value of their assets, including cottages, vehicles, registered retirement savings plans (RRSPs) and non-registered investments. The statement would also reflect the value of what they owe and any deferred tax liabilities.
“From there we need to consider where all their fixed sources of income are coming from and how much they require in addition to that amount, to do the things they want,” Mr. Sarna says.
Preretirees should also consider income taxes levied on withdrawals from investment plans, “as this is often the highest ‘bill’ we have to pay, yet it is given the least attention.” Withdrawal strategies should be monitored year to year to ensure families pay the most reasonable amount of tax, he says.
The sooner you start building a retirement plan, the better, says Paul Lewis, senior advisor and president of Halifax-based Granville Group Insurance & Financial.
As lifespans lengthen, Mr. Lewis is witnessing a trend toward delaying CPP. “A person who is eligible for the maximum CPP benefit and waits until age 70 will receive an additional $10,616 of income per year, versus taking CPP at age 60. For a retired couple, that is $21,232 per year of additional income,” he says.
But those who wait will often need to take larger withdrawals from savings such as RRSPs, tax-free savings accounts (TFSAs) and other investments to bridge the gap, which some people object to, says Mr. Lewis.
“Sometimes the reason is they will have less savings beyond age 70, for liquidity or estate purposes. Other times this objection is simply psychological, so we will often calculate how much capital would be required to generate the increased CPP benefit they are gaining from waiting to take it at age 70."
“Once you show them what that increase is in terms of a lump sum dollar amount, they often feel more comfortable with the recommendation.”
On the flip side, people who are retiring before age 65 and who have pension plans that provide “bridging benefits” – to tide them over until they turn 65 – may choose to take CPP early, as it provides additional income that then can be saved or invested for use later on. (Bridge benefit payments are intended to supplement income up until age 65, which is normally when one starts receiving CPP, says Mr. Lewis.)
When working with retired couples who are deciding when to take CPP, financial security advisor Amrit Mavi of Mavi Wealth Management Inc. focuses on calculating the sequence-of-returns risk, or the order in which good and bad financial market years might occur during retirement. Retirees who, in the early years of their retirement, withdraw from a depreciating portfolio could face devastating results.
“Positive returns in retirement keep the principal of your nest egg intact. But if you see negative returns on withdrawals from retirement assets, you’ve lost more than just the amount of the withdrawal – you’ve lost the interest you would have earned on it as well, and you can’t ever earn that back,” says Mr. Mavi, who is based in Regina, Sask.
“To help them decide when and how early they should take their CPP, I look at whether they have enough retirement assets to weather a significant downturn in the markets that might take place specifically at the start of retirement."
This is accomplished with the help of software that considers expected rates of inflation, the amount to be withdrawn from specific asset classes and how early CPP is to be taken. It then presents several scenarios for consideration.
For his younger clients, Mr. Mavi stresses the importance of starting the CPP planning process as early as possible, particularly with entrepreneurs and business owners who choose to pay themselves dividends over salaries.
"A lot of young professionals are choosing not to pay into CPP because they think it’s not going to be there for them in the future.
“This is a huge problem I see. What they don’t realize is that CPP is actually tested 50 years into the future to insure it will continue to be funded and people will reap its benefits. CPP is a huge cornerstone of retirement planning and should not be overlooked.”