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This is the latest article in an ongoing series, Planning for the CPP, in which Globe Advisor explores the decisions behind the timing of when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
A voluntary reduction in income of up to 36 per cent may not sound like a good idea, but it’s a conscious choice many Canadians make when they take their Canada Pension Plan (CPP) or Quebec Pension Plan (QPP) benefits at 60, the earliest age possible.
People take their CPP benefits at 60 for many reasons, even when they know they’ll get more if they wait until age 65 or even 70. Some need the money sooner, have a lower life expectancy owing to health issues, or take the benefits and invest them. Some believe that since they contributed to the CPP during their working years, they don’t want to wait to get it back – especially given the uncertainties of life. The decision comes down to personal circumstances and choice.
Globe Advisor spoke with three Canadians about why they took their CPP benefits at 60:
David Hatherly, 67, Victoria
Mr. Hatherly stopped contributing to the CPP at age 53 after he retired from salaried work in the software industry. He then became a consultant, incorporated his business and paid himself dividends, which means there were no further CPP contributions.
He started taking his CPP benefits at 60 after doing a detailed set of calculations that considered taking the retirement benefit at 60 and 65 and assuming he lived until 82. “Obviously, selecting an earlier or later year to die changes the analysis significantly, but I had to pick something,” he says.
Mr. Hatherly also spoke with a customer service representative at Service Canada, who explained to him the ”drop out” formula that allows up to eight years of your lowest earning years to be removed from the calculation, which can increase your pension amount.
After calculating the net present value (NPV) of taking his CPP benefits at 60 and 65, using a discount rate of 5 per cent and assuming he lived to age 82, Mr. Hatherly found that, in his case, there wasn’t a huge difference between monthly payments. (NPV is a calculation that considers how much an investment is worth throughout its lifetime, discounted to today’s value.)
Then, some emotional factors came into play: “I liked the idea of getting a steady stream from the CPP after paying into it for so many years,” Mr. Hatherly says.
He also wanted to spend the money when he was younger and more active instead of waiting another five or 10 years. “I know many people in their later years whose activity and interest levels are lower. Having the money when you’re healthy to travel and do other activities is nice.”
Seven years later, Mr. Hatherly has no regrets. “Once you make that decision, it’s done. There’s no point rethinking it.”
Karen Hammond, 72, near Dorset, Ont.
Ms. Hammond retired at age 55 after a career in human resources at a Canadian mining company. Her decision to take her CPP benefits at 60 seemed like an obvious decision at the time, given her background.
“Because I worked in HR, I saw a lot of people who took early retirement, and the philosophy was always, ‘When you get a chance to receive government money, take it and run,’ ” she says.
She also remembers when the CPP was considered unsustainable before the Canada Pension Plan Investment Board was created in 1997 to grow the CPP Fund through investment income.
“Early in my career, I never counted on the CPP. I felt there was no way the government could fund it, which always made me think I would take it as soon as possible,” Ms. Hammond says.
“I knew I could have received more money if I waited to age 70. But the reality is, nobody knows how long they’re going to live. ‘Take it,’ is how I looked at it,” she says.
Ms. Hammond doesn’t regret the decision and enjoyed having the extra cash each month in her early retirement years.
Tom Hearsey, 69, Duncan, B.C.
Mr. Hearsey took his CPP benefits at age 60 to help pay off a loan before he semi-retired at age 65. (He fully retired at age 67, having spent most of his career as a self-employed log loading and hauling contractor.)
“I was comfortable with not waiting until 65,” citing his “break-even point” as being in his early 70s. (The “break-even point” is a calculation that informally determines the age at which someone who takes their CPP benefits early will have collected the same benefits as someone who started taking it at 65.)
“There was no guarantee I would live that long anyway,” Mr. Hearsey says of his “break-even” age. “And, if I do make it past that point, I’m confident I will have enough to live reasonably comfortably after that.”
Mr. Hearsey says he weighed the pros and cons of waiting longer to take his CPP benefits, including the increased monthly payments, “but I deemed it not to be significant enough to change my lifestyle by waiting.”
He also consulted an adviser, who confirmed his math, “but I made the decision on my own,” he says.
His advice to others: “Take a good, long look at your finances. Do a retirement budget,” he says, while also considering the individual tax implications of taking it at different ages.
“My recommendation is to analyze your situation. Many people are making a good wage and wish to work to 65 or beyond and don’t need their CPP,” he says. “Others will be receiving a good private pension from their employment. If that’s the case, you may want to take your CPP benefits early because it will not affect your retirement plan significantly.”
Quality of life is also a consideration, Mr. Hearsey says.
“Perhaps taking the CPP at 60 would help boost your quality of life at that age when you are healthy enough to enjoy it,” he adds.
“I’m sure if I do make it to my break-even point, I will say to myself, ‘I guess I should have waited, and I’d be receiving more now.’ On the other hand, I will be thankful I’m still here to collect that lesser amount.”
Next Tuesday, we feature Canadians who decided to wait until 70 to take their CPP benefits, and why.
For more from Globe Advisor, visit our homepage.