Just like you wouldn’tfinance a car purchase without understanding the total cost of borrowing, deciding when to collect Canada Pension Plan (CPP) payments should be done with care.
If you take your pension early, your benefit will be permanently reduced until your death.
If you start taking it later, your benefit is permanently increased. The penalty and bonus are calculated to provide an incentive to delay collecting.
To make this decision, start with calculating the effect of each option. (The following scenarios do not account for income tax or inflation.)
Scenario #1 – Taking CPP at age 65
According to Service Canada’s website, as of October 2014, the average CPP retirement amount per month was $610.57 with the maximum benefit amount being $1,065.
The first step is to contact Service Canada to determine youramounts, and then plan accordingly. For the purposes of comparison, we will use an even figure of $700 per month.
Scenario #2 - Taking CPP at age 60
Assuming the monthly benefit is $700, taking CPP five years early at age 60 would reduce your CPP income by 34.8% in 2015 (60 months early x 0.58% per month penalty). That is $244 less, leaving a payment of $456 each month.
If you start collecting in 2015 at age 60, in the first five years your CPP payments would total $27,360 (60 months x $456).
The question almost everyone wants to know is, “When is the breakeven point if I had waited until age 65?”
At age 65, you would start collecting the full $700, which is $244 more each month, and the $27,360 will be “caught up” in 112 months ($27,360 / $244) or 9.3 years. If you waited until age 65, you would need to collect four months past your 74th birthday to break even.
From that point forward, the person who waited to collect will continue to collect the full $700, while the early collector will receive $456, which is $244 less each month.
Scenario #3 – Taking CPP at age 70
Assuming the monthly benefit is $700, taking CPP at age 70 would increase your income by 42% (60 months late x 0.7% per month bonus). That is, $294 more, increasing the monthly payment to $994.
How would this compare to those who collect at age 60 or 65?
For the 60 year old, they would have collected $54,720 in the first 10 years, and it would take 8.5 years for the 70 year-old to catch-up.
The 65 year-old collecting $700 each month for five years would have received $42,000, and with the premium of $294 each month, it would take nearly 12 years to catch up.
According to the World Health Organization, life expectancy for Canadian men and women is age 80 and 84, respectively. Service Canada knows all of these facts, and is counting on people gambling that they will not be on the high side of the average age of death.
Expressed another way, each person who collects at age 60 and dies at the average age of 82 “saves” the government $22,416 compared to those who wait until age 65.
Bottom Line
Plain and simple, the decision of when to collect CPP should be included in yourfinancial plan.
Unfortunately, the decision is usually made before an analysis is completed since this is one of the most often-discussed topics among those who are approaching retirement or the age of 60. And their decision is typically to collect as soon as possible.
However, it is important to consider at least some of the aforementioned points to help you make the best decision.
Harley McCormick is a financial advisor at Keystone Wealth Management
The information provided on this article is intended for informational purposes only and is not intended to constitute financial, accounting, and legal or tax advice. For information specific to your situation you should consult a professional. Mutual funds provided through FundEX Investments Inc. Research provided by ADVISOR Research Group Jan. 18, 2019.
