Take CPP Early? Or Late?


The Canada Pension Plan (CPP) has a maximum monthly benefit of $884.58 for 2008 (for a 65 year old). That means that if you made the maximum annual contribution to CPP for a certain number of years, then if you were turning 65 this year and elected to take your CPP pension – you would receive this maximum amount. This works out to $10,614.96 for the year.

In addition, the monthly benefit is indexed to inflation every January – so if inflation (as measured by CPI) increases, so does your monthly benefit.

The CPP monthly benefit that you START AT is also adjusted by WHEN you elect to start receiving it. If you are under 65, you can elect to start receiving it if you are no longer working (actually, you only need not be working for 2 consecutive months, once you start getting your payments, you can go back to work – I’ll write about that some other time.) Once you reach 65, you can elect to receive it even if you are working when you make the application.

For every month before your 65th birthday that you elect to begin receiving CPP you must subtract 0.5% from the monthly benefit you are entitled to receive. For every month AFTER your 65th birthday that you delay beginning to receive CPP benefits, you ADD 0.5% to the monthly benefit. These adjustments are applicable for 5 years either way – so if you elect to start taking CPP at 60 your STARTING benefit would be reduced by 30% (since this is 60 months early). If you elect to delay taking CPP until 70 (or later) your monthly benefit is 30% more (60 months late). This is essentially a one-time election since this calculation only applies to the starting benefit amount – thereafter it can only change with inflation.

Senior_citizens_free.jpgSo my question is: do you take it late to maximize your monthly benefit? That is the advice that seems to be given often. If we look at the example above, taking CPP at 60 would give you about $619/month versus $1,150/month if you wait until 70. So usually I will see advice dispensed that you should delay it if you don’t need it since the benefit will be higher later.

Well, my response to this is: Just because you don’t need it, does that mean you have to spend it? Can you not save it yourself? If you can arrange to take it early (stopping work for two months) and go back to work, you could contribute it all to your RRSP (tax neutral since CPP is taxable income).

This is especially significant if you have no eligible survivor who would qualify for a reduced survivor pension amount should you die. If you are single with no dependents, you may find that taking it early and saving it is a better option than waiting to take a higher amount.

Let’s look at a simple, hypothetical example (we will ignore inflation for the time being):

If you took CPP early and put it in your RRSP from 60 to 70, you would be receiving $620/month for 10 years. Assuming you put it into a safe investment that yielded 4% – you would have a lump sum of $91,600 at age 70. From that point on, the interest earned on the lump sum (again assuming 4%) would be $3,664/year or $305/month. Add this to your ongoing CPP of $620 and you have $935/month.

If you had just waited to 70 to take CPP you would have $1,150/month – with NO LUMP SUM. So immediately we see that there is a "peace of mind" benefit if you take it early since you would have access to a lump sum of money in an emergency.

To really compare apples to apples, let’s factor on depleting the lump sum to $0 by age 90 (a longer than normal life expectancy). In this case, the income we could generate from the lump sum amount if we deplete the capital would give us $553/month for 20 years (4% interest). Add this to $620/month from the ongoing CPP and we have a total monthly income of $1,173 if you took CPP early and saved it.

If you had confidence of achieving more than 4% on your money, then you could be even better off taking CPP early.

Even if you just put your early CPP benefits into a high interest savings account, if you died before 90 (in our example, using our made-up numbers) then additionally you would have a larger estate to transfer (or pay for your funeral) versus taking CPP late since you would have the lump sum savings. (Your CPP death benefit has a maximum of $2,500.)

 

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Preet Banerjee
Preet Banerjee
...is an independent consultant to the financial services industry and a personal finance commentator. You can learn more about Preet at his personal website and you can click here to follow him on Twitter.
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Showing 16 comments
  • guest

    hi preet,

    "If you took CPP early and put it in your RRSP from 60 to 70, you would be receiving $620/month for 10 years"

    i assume that this client has not stopped working at 60..(he is having RRSP room year after year)…in a case where the client takes RRSP & is still working…

    can you please factor in his lost free CPP money(i mean employer’s CPP contribution to CPP)..if he starts taking CPP..the employer would put in no more free CPP contributions….

    thanks

  • Preet

    Once you start taking CPP you no longer have to worry about making contributions. You get what you get from that point.

    I ignored inflation, but note that the benefit increases with inflation.

    It is possible to contribute to your RRSP if you are not working as most people have quite a bit of unused RRSP room.

    But in the case of someone working after they start claiming the CPP, there is no effect on the lack of further contributions to the CPP plan. Remember the benefit is determined based on what you had contributed to the plan up until the time you decide to claim it.

    Does this answer your question? Or did I misinterpret?

  • guest

    hi preet,
    if i work after taking CPP..i undertand i don’t need to contribute to CPP…but then don’t i lose the free additional CPP contribution from employer..

    for 2007 tax year if we assume the client still worked & had an employment income of $43,700

    scenario1 – if he has already taken CPP there are no further contributions to be made either from employer or employee..

    sceanrio 2- if he had deferred taking CPP..he will now
    contribute $1,989.90 but will not the employer make their contribution of an additional $1,989.90 which is essentially free money…i am discussing this free money..

    thanks

  • Preet

    Oh I see. You should argue to your employer that since they were used to spending that $1,989.90 on the Employer’s contribution that is no longer required, perhaps they can send it your way from now on. If they agree, then they experience no difference in their expenses – the destination of the money is the only thing that changes.

    It is totally the call of the employer in this case.

  • Preet

    Excellent point Leon – thank you for adding that! :)

    Preet

    (something funky is happening with my blog software, this comment is supposed to be appearing AFTER Leon’s comment but for some reason it is not)

  • Leon Dykler

    Hi Preet, good blog… Re CPP early or late, if a couple decides to use available funds to live off, thereby leaving larger CPP income for later, one of them may die earlier than planned (it’s always earlier than planned…), and in the meantime they have been using their own funds. The survivor then is left with only one CPP income source and survivor benefits (and possibly life insurance), which may impact the plan. Another reason for taking CPP early…
    Tnx

  • tom

    Two questions??
    Q1.I am thinking of taking the CPP at age 60. I have just retired with a defined benefit plan. Ay 65 it will be reduced by about 800/Month which is supposed to be offset by the CPP at age 65 of the same amount. If I take the early CPP at age 60 I get approx 600 month. Should I wait till age 65?
    Q2.I am working part-time now but only making 20K a year which is below the CPP maximum earnings amount. I am not sure how that reduces my CPP if I wait till 65.In other words could I end up with less than 600 month at age 65 which is what I would get at age 60 because I have stopped contributing at the YMPE level??

  • Preet

    Hi Tom – thanks for your question. Please take the following as generalized food for thought as I can not make any specific recommendations to your situation based on the little information I have – and I would suggest contacting a qualified financial advisor for a personal meeting.

    Q1. Essentially, you need to figure out the break-even point as to WHEN one strategy becomes more desirable than the other. In other words, sometime after you turn 65 if you had waited to take CPP and get the higher amount, the sum total of the CPP cashflows will be greater than taking the CPP at 60. That your penion decreases by 800/month is known and is constant for either choices. The next thing you need to do is figure out if you think you will live long enough to make waiting until 65 to take CPP beneficial.

    Q2. You are indeed correct, you might be decreasing your CPP benefit BUT the calculation does allow you to drop up to 15% of your lower income years for the purposes of determining your benefit.

    You have another option in that you can stop working for two months once you are 60 (so that you are eligible to start collecting CPP), start taking the CPP and then go back to part time work – this will give you the most amount of buffer overall. You will have your income from work, pension and CPP and you could make contributions to your RRSP to offset some taxes.

    Again, make sure to see a qualified, knowledgeable advisor to help you with the projections so that you can decide on what’s best for your individual situation.

    Preet

  • Randy

    Just wanted to point out that for a couple that BOTH qualify for a CPP pension, the maximum "survivor benefit" is the maximum CPP for one person.

    As an example for a couple, if one person gets 700 CPP and the other gets 600 CPP, and one of the partners passes away, the survivor only receives a maximum of 884.58 total.

    Therefore, for 2 people collecting a CPP, it is probably not a good idea to wait to collect as they BOTH have to live past 80 to gain from waiting.

    Good article, as some financial planners have it totally backwards.

    If a person NEEDS the CPP, they should wait until 65.

    If a person DOESN’T NEED the money, the should take it and invest it.

    A person can acquire a nice nest egg of cash to pass on to heirs, or to purchase items from time to time, which would save interest charges and make life easier during the years they can really use it.

    Most 80 year olds, aren’t trotting around the globe.

  • Preet

    Thanks for the info Randy!

  • Leon Dykler

    Hi Preet, I don’t believe anyone has touched on a little known provision of CPP, the Child Rearing Dropout Provision. Basically, it allows someone who has left the workforce temporarily to raise children (dropped out?), to increase the CPP benefit by excluding from the CPP calculation the periods when income either stopped or was lower. The spirit of the rule is basically to ensure that someone’s CPP benefit entitlement is not penalized as a result of raising children.
    The link is at
    http://www1.servicecanada.gc.ca/en/isp/pub/factsheets/chidropout.shtml.

  • Virul Patel

    Hi,

    I just started my job before 6 month in canada. I am migrated permanent resident from india. I have two questions…….

    Can i stop to contribute CPP amount from my salary? From every salary it deducts….

    How can i get back deducted CPP amount, if i leave canada permanent…

    Please reply

    Thanks

  • Dave Cattanach

    I have retired early due to our plant closure but have contributed the maximum into CPP from 1974 to 2007 inclusive. I was 53 in 2007 and was wondering what reduction I would get from my CPP if I started collecting at age 60 assuming I do not go back to work ? Just wondering how that 15% buffer works. Also, if I waited until age 62 would I understand my pension would increase by 12% but would I suffer a further reduction because I have not worked since age 53?

    Dave

  • Dave Cattanach

    I have retired early due to our plant closure but have contributed the maximum into CPP from 1974 to 2007 inclusive. I was 53 in 2007 and was wondering what reduction I would get from my CPP if I started collecting at age 60 assuming I do not go back to work ? Just wondering how that 15% buffer works. Also, if I waited until age 62 would I understand my pension would increase by 12% but would I suffer a further reduction because I have not worked since age 53?

    Dave

  • dlm

    Just found out that you cannot collect EI and CPP at the same time. So early CPP benefits can be deferred until after whatever EI you are entitled to collect

  • David

    Hi Preet,
    I’m sure you are busy but this page is out of date. The rates for early and late withdrawal have changed.
    David Riehm
    Aug, 2012