"Everybody should just lay down their calculators and just sign up for CPP the instant they turn 60."
– Canadian financial guru, Garth Turner
If you are approaching your sixth decade you may have wondered when you should apply for CPP (because you must apply to receive it). You receive full benefits if you start at age 65, but there are compelling reasons to start as early as 60, particularly now that you can work and continue to contribute while receiving the CPP pension until age 70.
A Quick Refresher on CPP
Working Canadians over the age of 18 who make more than $3,500 per year contribute to CPP to an annual maximum and are entitled to receive the benefit (there is no means testing, although the benefit is taxed).
A “full pension” is available beginning the month after your 65th birthday, but you can apply for the benefit as early as one month after your 60th birthday.
The size of the benefit you receive depends on how much you contributed to the plan and for how long, and the benefit keeps pace with inflation. In 2018, the maximum amount for new beneficiaries receiving the full pension is $1,134.17.
If applying for the benefit prior to age 65, the benefit will be reduced by 0.6% per month, or 36% if applied for at age 60. Benefits to recipients of CPP who are between the ages of 60 and 65 are reduced by 0.6% each month (or 7.2% per year and 36% less than the full pension); however, between the ages of 65 and 70 the benefit is increased monthly by 0.7% (8.4% per year and 42% more than the full pension).
When you apply for the pension, you can drop out a period of time (up to eight lowest earning years) when your earnings are reduced, which results in a higher benefit than if that period were included. There is a similar provision if you stopped working or earned less money during a period where you were the primary caregiver for children under the age of seven
A CPP death benefit is a one-time, lump-sum payment (maximum amount is $2,500) to the estate of a deceased CPP contributor. The executor must apply for the death benefit within 60 days of the date of death.
Do the Math
If you choose to wait until age 65 so you can receive the full pension, it will take you, on average, nine years to make up for the income stream that you would have received starting at age 60. By age 74 or so, you will finally catch up to where you would have been had you started receiving the benefit at age 60.
Those who need to use retirement savings for lifestyle purposes should consider applying for CPP at an earlier age. The pension income will give you added cash flow and allow you to preserve your retirement savings, which will continue to earn returns and grow, Moreover, they can be directed to your beneficiaries through your will (a substantial advantage compared to the small death benefit paid by CPP).
“As a general principle, when the government gives you money, take it. After making contributions for two or three or four decades, why would you possibly forego 60 monthly cheques waiting for a dollop more?”
(attribution: C’LIFE: The CPP Question: When to Start the Retirement Pension?)
Win-Win Scenarios: Take the benefit early and invest it
There are many options you can discuss with your financial planner. In making your decision, you might determine when you are likely to need the money more: between the ages of 60 – 75, or post-75. However, even if you decide you will need it more post-75, you might still consider starting at age 60, putting the benefit into a TFSA and investing it in a balanced portfolio, where it can grow until you are 75.
Jason Sirman is a Senior Financial Advisor with Assante Capital Management Ltd. providing wealth management services to principals of family-owned and privately held companies. Assante Capital Management Ltd. is a member of the Canadian Investor Protection Fund and is registered with the Investment Industry Regulatory Organization of Canada. The information mentioned in this article is for general information only. Please contact him to discuss your particular circumstances prior to acting on the information above. The opinions expressed are those of the author and not necessarily those of Assante Capital Management Ltd.