If you apply on your 60th birthday, you will receive 36% less of the age 65 monthly pension. But, if you wait until you are 70, you will receive 42% more. Should you hold out for the higher income, or start early?
This is one of the most common financial planning questions we encounter. It is crucial that we take a holistic approach to such a decision, which should ideally incorporate: our needs for cash flow, our tax bracket both now and into the future, Canadian life expectancy tables, our personal health and family history, and our investment risk tolerance.
When evaluating our needs for additional cash flow, we will want to consider our current sources of income, which can include employment/self employment income, dividend income, or rental income. We will want to determine if we require additional income to fund our current lifestyle and objectives.
In going through our cash flow, if we find we are accumulating debt, then a decision to take CPP early may be a good option. But wait, how about any other investments we may have, such as RRSPs, TFSAs, or Non-Registered accounts. Would it be better to withdraw funds from our investments to support our lifestyle and pay down debt rather then take our CPP early with a permanent reduction?
If we are still earning employment/self employment income and have no current need for the additional cash flow which CPP can provide, what affect will the additional CPP income have on our income tax bracket? Will this this income push me into a higher tax bracket? How much will I net after taxes by taking the CPP at age 60 vs if I waited until age 65 or even enhanced my CPP by deferring until age 70?
Will my taxable income be lower at age 65 or age 70, thereby allowing me to keep more of my CPP income and lose less to income taxes?
Life expectancy around the world has increased substantially over the years due to modern medicine and people trying to live healthier lifestyles. According to the latest world health rankings (https://www.worldlifeexpectancy.com/country-health-profile/Canada), Canadian life expectancy from birth is 81 years for males and 85 years for females. Canadian life expectancy at age 60 is age 84 for males and age 87 for females. Said another way, if you are 60 years old, there is a very good possibility that you will live well into your 80’s and possibly into your 90’s or even longer.
Given the above statistics, if I lived until 85, would my total lifetime CPP income, be more if I take it at age 60, 65 or 70?
Here is a simplified example, Julia, age 65, is expected to receive $12,000 annually from her CPP, she will receive $240,000 over her 20-year remaining life expectancy. By taking her CPP at age 60, she would receive a permanent reduction of 36%, thereby reducing her CPP to $7,680 annually and subsequently reducing her total CPP income to $153,600 over her remaining 20-year life expectancy. What if Julia defers her CPP until age 70? Well in that case she would receive $17,040 annually and $255,600 over her remaining 15-year life expectancy.
Are we living healthier lifestyles? Are we doing all the things we can control when it comes to a healthy diet and regular exercise which can increase both our quality of life now and our potential life expectancy? For many Canadians, the answer to each of the above questions is yes. The answer to these questions along with consideration to our family history are important factors when planning for retirement and making CPP decisions.
What is our investment risk tolerance? Many Canadians approaching retirement are not investing 100% into equities due to volatility of investment returns and the effect that it could have on their income. If we determine that we don’t need the CPP income to supplement our lifestyle and are comfortable taking some risk with our investments and take the CPP at 60, investing the proceeds diligently each month, are our investments able to generate a return of at least 7.2% per year after tax, so as to recover the annual reduction by taking the CPP at age 60?
This article is for informational purposes and is not intended as specific CPP advice.
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