When Should I Start my CPP Payments?

Let’s start with some of the basics. CPP essentially uses age 65 as the baseline year for calculating payments, although the amount of pension you will receive is based on many factors. While 65 may be the base year, you can start CPP as early as age 60, but there is a cost to doing so. Your CPP payments will be reduced by 0.6% for each month you start your pension before 65, which can mean a total reduction of 36% if you start your pension at age 60. That decrease is permanent for your lifetime. You also have the option of deferring the start of your payments until age 70. By delaying, you increase your pension by 0.7% per month, or a permanent increase of 42% if you wait to start until age 70.

If your CPP pension is permanently reduced by starting it early, what are the reasons that people choose to do so? Some people may have retired before age 65, and their circumstances are such that they simply need the cash flow from CPP. Others might have health issues, resulting in a shortened life expectancy, causing them to want to start their pension early. Some simply want to start their pension as soon as possible, thinking, “a bird in the hand is worth two in the bush.” They would rather know they’ve received some benefit by starting CPP at 60 rather than waiting for another 5 or 10 years.

The advantage of deferring your pension to age 70 is straightforward: larger CPP payments. Over a long enough timeline, those larger payments will translate into more lifetime income. While the prospect of more income would seem like a clear advantage, over 95% of Canadians start their CPP pension sometime between age 60 and 65. This means that the vast majority of Canadians do not defer starting their pension, even when cash flow or health concerns are not the driving factors. But is this the correct decision? A recent study by the Canadian Institute of Actuaries titled “The CPP Take-Up Decision” concludes that far more Canadians should be deferring their CPP to age 70 then actually are.

One of the first points the study made was that when you include inflation, deferring your pension will actually permanently increase your CPP payments by 50% in real terms. The research focused primarily on those who have sufficient savings in the form of an RRSP or RRIF (which they referred to as bridge funds) to compensate for the effect of delaying the start of CPP payments. The researchers reviewed two scenarios. The first involved delaying CPP until age 70 and using the bridge funds to generate the missing income between age 65 and 70 equal to the “age 70 CPP”. The second involved starting CPP at age 65 and self-managing the RRSP savings to top-up their CPP pension over their lifetime to match the age 70 CPP. A few numbers might explain this better; suppose CPP at age 65 was $100 per month, but if deferred to age 70, it would be $150 per month. The first scenario used the bridge funds to create an income of $150 per month between ages 65 and 70. The second scenario started CPP at age 65 for $100 per month and used the bridge funds to add to the pension by $50 per month for the individual’s remaining lifetime.

The study concentrated on the risks of deciding when to start CPP payments and highlighted that the two key risks which most impacted this decision were investment returns and life expectancy. Most people do not adequately evaluate the risk associated with future investment returns versus the secure lifetime income that comes with CPP payments. And they typically assume a shorter lifespan for themselves than probabilities would suggest. “The research shows that given today’s low interest environment and general population longevity expectations, delaying CPP payments is clearly a financially advantageous strategy.”

The study concluded that individuals that start CPP at age 65 would likely deplete their bridge funds by age 80. Typically 80% of female CPP recipients and 75% of male CPP recipients are expected to live longer than that. It should be noted that among the underlying assumptions was a risk-free rate of return of 1%. But the report acknowledges that many Canadians will invest their savings in pursuit of a higher return. Even assuming various higher rates of return, the researchers found that by starting CPP at 65, a typical male had a 73% chance, and a typical female had an 81% chance, of receiving less lifetime income, than if CPP had been deferred until age 70. Even when combining a high investment return assumption with a low longevity assumption, there was only a 49% chance of producing more income by starting CPP at 65.

While the study does show that the probabilities support starting CPP at age 70, it does recognize that not everyone’s situation is the same. Other factors, such as the Old Age Security clawback or being single versus married, can produce different conclusions. All of this analysis supports the need for you to have your own financial plan, unique to your individual needs and circumstances. So whether it’s deciding on when to start CPP or making another important choice, that plan will be an essential part of your ability to make an informed decision.