The CPP Dilemma: To Delay or not Delay?
For decades, those saving for retirement have been focused on building the largest nest egg possible. As their retirement date approaches, the focus turns from asset accumulation to income generation.
In addition to self-generated income like RRIFs (that is, Registered Retirement Income Funds) and annuities, government pensions provide a base of income. Old Age Security (OAS) and the Canada Pension Plan (CPP) are the two bedrock stipends available to Canadians. OAS begins just after your 65th birthday and depends on the number of adult years you have lived in Canada. CPP is based on contributions made during your working career, and it can be taken as early as age 60, and, effectively, as late as age 70.
When should you begin receiving CPP payments? For most people, delaying CPP payments will maximize their lifetime benefit, but many factors like health, taxes, and inflation should be considered.
A Potentially Larger Benefit
When you begin accepting CPP payments could affect your retirement income significantly, as much as $1,020 per month, which is over $12,000 per year.
If CPP income is not needed for immediate living expenses and you are not experiencing or expecting life-shortening health issues, waiting will generate larger payments each month.
If a pensioner accepts payments earlier than age 65, their payment will be lowered by 0.6% for each month (up to a maximum of 60 months or age 60), for a maximum discount of 36%. Delaying beyond age 65 (up to a maximum of 60 months or age 70) earns the pensioner a premium of 0.7% per month or a maximum bonus of 42%.
The current maximum payment at age 60 is $836.20, $1,306.57 at age 65, and $1,855.53 at age 70.
A 60-year-old receiving a lower payment and a 65-year-old receiving their full allotment will "break even” after 9 years. That is, in 14 years, the 60-year-old will receive $139,646 and, after 9 years, a 65-year-old will have received $139,803. Every month afterward the 65-year-old will receive $549 more than the CPP pensioner who began payments at age 60.
With today's average life expectancies, a 60-year-old will generate a lifetime loss of $66,000 compared to a 65-year-old, and a lifetime loss of $110,000 compared to a 70-year-old.
Bottom Line
If you don't expect that you'll reach age 74, then—of course—waiting to take CPP is likely not the best strategy. However, it's presently estimated that more than half of 60-year-old Canadians will live past their 83rd birthday. Accessing CPP early could deprive you of guaranteed income later in life.
An objective conversation to better understand the different strategies and options is necessary to determine the best decision for you. LGK's financial advisors are equipped with the knowledge and commitment to assess your specific circumstances and prepare a plan that gets you to your goals. Email us at LGKWealth@gmail.com, or call 780-426-2400 to discuss this with the experts!