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.
So 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.)