When Should I take CPP?

When it comes to retirement planning, the decision on when to take Canada Pension Plan can be a big one. The normal age to take CPP is age 65 but can be taken as early as age 60 at a 36% reduction or deferred as late as age 70 for a 42% increase. Like many financial topics, the details on this are not taught in school which leaves a lot of the decision process to hear say or what your neighbour did. To nail this question down through you have to dig deeper as the results will greatly impact your retirement income. Also like most financial topics, this one is not one size fits all and will depend on your financial plan. Let’s examine the option of taking CPP early first.

Reasons to Not Take CPP Early

Maximum CPP Age 65 - $1,306.57

1. Permanent reduction in income - If you take CPP before age 65 it reduces the benefit by 0.6% for every early month. That means if you take the benefit at age 60 it is a 36% reduction forever. In the chart below it examines this in more detail with the advantage shown receiving over $50,000 early. If we wait until 65 to get the higher payment however, we only have to live until age 74 to make this payoff. If you live until say age 85 that equates to an extra $62,640. 
2. Limiting RRSP/RRIF Withdrawal Strategies - If you have read our articles on the potential tax savings of digging into your RRIF early this is an important point. If you are retired at age 60 you could be in a low tax bracket making it attractive to take money out of your RRSP earlier. This could save a lot of tax in the long run but if you are receiving taxable CPP it could limit this strategy.
3. You can spend from other sources - I get it, you want to enjoy your money while your young but it does not have to come from CPP. If you have money put aside in investments, it may be wise to use them over this relatively short time period.
4. Pitfalls of investing your CPP money - You could take your CPP early and then invest the proceeds but it may not be that easy. For one thing rates of return over 5 years can vary a great deal. You also have to pay tax on the CPP funds which would limit the amount you would invest. 
5. 2012 Overhaul - Taking CPP early used to look more attractive when you did not have to pay into it anymore. This changed in 2012 when the rules changed so that if you took it early and went back to work you had to recommence paying into it. In addition, the increased the discounts for taking it early. 
6. CPP is Well Funded - When I joined this industry in the 90’s the thought was CPP will not be there due to the baby boom, increased life spans and low interest rates. To their credit CPP took action by increasing contributions and investing in other assets besides lower yielding bonds. Today the fund stands at $536 billion and is ahead of forecasts. 

The conclusion on this is that in most cases we do not recommend taking it early. Exceptions to this would be longevity concerns of getting to age 74 or if you had no other investment money to access. 

What about deferring CPP and even Old Age Security

So what about waiting beyond age 65 to take CPP and OAS. When you do this your CPP can increase 8.4% annually and for OAS 8.2%. It can be advantageous to do this depending on how long you live. The chart below illustrates that you would need to live until age 82 for CPP and age 84 for OAS to make waiting until age 70 payoff. For many this is not a slam dunk and you also need to factor in where your investments withdrawals would come from for that period. For this reason we recommend looking at your longevity as well as financial plan to see what is best for your situation.