When Should You Start Collecting CPP?

The normal age to start drawing from the Canada Pension Plan (CPP) is age 65. You can begin drawing as early as age 60, but there is a penalty for taking CPP early. So this is an important question that should be carefully considered.

In order to answer this question there is another question that needs to be answered first. “Do you need the income in order to live?” If yes, then taking CPP early is a must and should be started as early as possible.

Even if you do not necessarily need the income for day-to-day living, there may be other reasons to start drawing CPP early. It becomes a supplement to current income from employment, pension, RRIF, savings etc. It provides more money to do things while you are younger, such as travel, enjoy hobbies, or assist your children with their finances. If not needed then the extra money could be invested and saved to build a larger estate, or used for other purposes later in life.

Recent changes to the CPP have increased the penalty reduction for those who take CPP early prior to age 65. Under the old rules, if you started CPP early at age 60, it took until age 76 to accumulate the same amount of payments as if you had deferred until age 65. When the new rules have been completely phased in, by 2016, the breakeven point reduces to age 74 for those who take CPP early at age 60.

Let’s put some numbers to these ages. The maximum CPP benefit payable to a person age 65 in 2012 is $986 per month. A person starting CPP at age 60 in 2012 would see a penalty reduction. Under the old rules, the maximum reduction penalty was 30% or 0.5% per month for each month that a person starts CPP prior to age 65. Beginning in 2012 the reduction penalty will be increased by 0.02% per month and increasing by 0.02% each year until 2016. By 2016 the maximum reduction penalty will be 36% for a person starting CPP at age 60. So if a person is eligible for the maximum CPP benefit and ignoring any increases due to inflation, by 2016 the monthly benefit from CPP for a person age 60 will be reduced to $631.

Oh, and by the way, you can defer taking CPP until age 70. This will have the opposite effect and increase your CPP benefit. By 2013 the gross-up rate will increase to 0.7% per month. Using the same maximum benefit figure above and ignoring inflation, the monthly benefit for a person who begins drawing CPP age 70 will increase by 42% to $1,400 per month.

As you can see, there is a lot of math involved. Many people agonize, stress and worry about their decision to take CPP early or not. My view has always been that money in the hand today is always better that money in the hand in the future regardless of the breakeven point.

I guess the absolute and correct answer to this question can be found in your longevity. How long will you live? If you plan to live past age 76 under the old rules or age 74 under the new rules then you will receive more money by deferring the date that you start CPP. But how can you ever know how long you will live?

As with many personal financial planning issues the only answer is “it depends.” Only you can determine your personal goals. If you will have enough income from other sources to provide your desired retirement lifestyle beyond your mortality, then CPP becomes a bonus. Only then can you answer the question of whether or not to begin CPP benefits early.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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