When Should I Start my CPP Payments?

Q3 | September 2020

Topic: Tax Planning

Brad Weber  CPA, CA, CFP, CIM

September 30, 2020

Image used with permission: iStock/designer491


Print & Share

Print

When Should I Start my CPP Payments?

Q3 | September 2020

The majority of working Canadians will be eligible to collect income from the Canada Pension Plan at some point in their lives. You can start CPP payments as early as age 60, and it’s something you apply for. Since you have the option of when to apply, a typical question is “when should I start collecting CPP?” I think the underlying concern is, “how do I get the most out of CPP?” People are advised in many ways when to start CPP, but a recent study seeks to provide more clarity to the topic.

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.

More Like This...

See another CRM2 blog post that may be of interest to you.

CRM2: The Nexus Approach to our CRM2 Reports

Topic:
CRM2
Excerpt:
With changing securities regulations coming into effect, investment firms are now required to provide individual investors with specific additional in

More Like This...

See another Foundations & Endowments blog post that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

More Like This...

See another Human Interest blog post that may be of interest to you.

The Case for Openness – An Open and Shut Case?

Topic:
Human Interest
Excerpt:
From time immemorial, mankind has been open. Open to new ideas, open to trade, and open to migration – the three critical ingredients for progress.

More Like This...

See another Inside Nexus blog post that may be of interest to you.

Embracing the Golden Years: A Journey of Reflection and Wisdom

Topic:
Human Interest, Inside Nexus
Excerpt:
It was an otherwise slow mid-afternoon trading session on the “old” floor of the Toronto Stock Exchange at 234 Bay St. The dog days of summer had

More Like This...

See another Investments blog post that may be of interest to you.

From Vineyards to Portfolios: Cultivating Long-Term Wealth

Topic:
Investments
Excerpt:
My wife and I have been stymied so far this summer in getting to the Niagara region for our annual weekend of cycling through the vineyards and

More Like This...

See another Pearls of Wisdom blog post that may be of interest to you.

“Work, Work, Work, Work, Work, Work”

Topic:
Pearls of Wisdom
Excerpt:
This has been a busy year. I’ve had lots happening on the home front (a wedding!) and lots going on at the office (too long to list!) Managing work

More Like This...

See another Tax Planning blog post that may be of interest to you.

Saving in my Professional Corporation – It’s a Great Idea!

Topic:
Tax Planning
Excerpt:
The ability for professionals in Canada to incorporate their practice has existed for some time. Doctors, dentists, lawyers, accountants, and other

More Like This...

See another Wealth Planning blog post that may be of interest to you.

Dentists Get Their Financial Check-Up: Nexus attends the 2022 Ontario Dental Conference

Topic:
Wealth Planning
Excerpt:
In early May, we had the opportunity to attend the Ontario Dental Association’s (ODA) Annual Spring Meeting (ASM) in Toronto. Now in its 157th year,

On a Side Note…

See another CRM2 Nexus Notes Quarterly article that may be of interest to you.

No posts found.

On a Side Note…

See another Foundations & Endowments Nexus Notes Quarterly article that may be of interest to you.

Charitable Giving Made Easier

Topic:
Foundations & Endowments
Excerpt:
Giving to charities and supporting our community are important to us at Nexus. We donate a portion of our management fees back to the charities and

On a Side Note…

See another Human Interest Nexus Notes Quarterly article that may be of interest to you.

Worth 1,000 Words

Topic:
Human Interest
Excerpt:
A little humour makes the world a better place.

On a Side Note…

See another Inside Nexus Nexus Notes Quarterly article that may be of interest to you.

Where Have All the Boutiques Gone?

Topic:
Inside Nexus
Excerpt:
Many small, once independently managed, firms have fallen into the clutches of larger organizations such as banks, institutional money managers and

On a Side Note…

See another Investments Nexus Notes Quarterly article that may be of interest to you.

Don’t Worry, Be Happy

Topic:
Investments
Excerpt:
A recent article by David Brooks in The Atlantic magazine argues that, despite the heavy shroud of pessimism that envelopes most of our current

On a Side Note…

See another Pearls of Wisdom Nexus Notes Quarterly article that may be of interest to you.

Pearls of Wisdom

Topic:
Pearls of Wisdom
Excerpt:
Reading is one of the principal occupations in our profession. As we digest a wide range of material, interesting ideas and surprising facts – some

On a Side Note…

See another Tax Planning Nexus Notes Quarterly article that may be of interest to you.

A Nexus Feature on: First Home Savings Accounts (FHSA)

Topic:
Tax Planning
Excerpt:
The FHSA is a registered plan to help Canadians save for their first home and could play a role in either your or your adult child’s overall wealth

On a Side Note…

See another Wealth Planning Nexus Notes Quarterly article that may be of interest to you.

From The Editor: Planning for Long-Term Care

Topic:
Wealth Planning, Living to 100
Excerpt:
As part of our Living to 100 series, Nexus hosted a client event in June featuring guest speaker Karen Henderson, an expert in long-term care planning