This is a question we are frequently asked by our clients, and it is a complicated one to answer as there are a multitude of variables which contribute to the entire process. The short answer is, as you might expect: it depends.
For many years, it was standard practice to begin collecting your Canadian Pension Plan (CPP) at age 65, with the option of deferring. Now, you can start collecting CPP as early as age 60, or defer collection until as late as age 70.
Early CPP collection
The drawback to collecting CPP early is that the amount you receive will be reduced by 7.2% for each year before the age of 65. This can add up to 36% reduction if you choose to begin collecting at age 60.
This is a hefty amount to lose, especially given this is money that has been deducted from your hard-earned income throughout your life.
Deferred CPP collection
On the flip side, if you defer your withdrawals past the age of 65 then your payments will increase by 8.4% for each year thereafter. This can reach up to a maximum of a 42% increase if you choose to defer all the way until the age of 70.
Looking at an example helps to give a bit more context:
CPP example breakdown
Let’s say you are all set to receive $700/month as a CPP benefit if you begin collecting at age 65, which gives you $8,400/year (this is a pretty standard CPP benefit amount).
If you begin collecting at age 60, you will receive $5,376/year (64%), but if you begin collecting at 70 you could receive $11,928/year (142%). This is why it is especially important to properly plan the timing of your CPP withdrawals!
So, when should you start collecting CPP?
The answer to this question can be very different depending on your personal situation. But to help make it easier, there are a few important factors to consider.
- Financial situation
The main factor is of course your financial situation. If your financial situation is forecast to be fairly comfortable between the ages of 60-70 regardless of whether you begin receiving the CPP benefit or not, then it makes more sense to defer the benefit to receive the larger amount.
Alternatively, if you require the CPP benefit in order to be financially comfortable from age 60-65 then it might be best to collect early.
- Tax implications
It is important to be mindful that your CPP benefit is taxable income, and therefore your tax situation will have a large impact on the amount you receive as well. Looking at your marginal tax rate (the amount you will be taxed on the next dollar you earn) between age 60-65 and 65-70 can help determine if it is sensible to begin collecting early or late.
Reusing our example of a CPP benefit of $8,400/year, if you wanted to begin collecting at 60 but you are in a high tax bracket from 60-65 and your marginal tax rate is 40% then you would lose 40% of your CPP benefit for each year (plus an additional 36% for collecting early, leaving you with $2,016/year).
As you can see, it would make very little sense to begin collecting until you are in a lower tax bracket.
Similar logic can be applied to those in a high tax bracket from age 65-70. These are the situations where it is usually most advantageous to defer collecting until the age of 70 to avoid losing the majority of your CPP benefit to tax while you are still earning a high income.
- Your health
Another important factor to consider is your health, but of course this is much more difficult to accurately predict. Many people would think it foolish to wait all the way until 70 to begin receiving this benefit, but as life expectancies continue to increase in Canada and more people begin to outlive their retirement savings, this option becomes more and more sensible.
Of course, we can only offer so much advice on this topic, but we remind our clients to consider their own personal health when making this decision.
In short, if someone is in poorer health they may see benefit from collecting CPP at 60, whereas someone in better health could see the most ideal situation from collecting at 70. Again it depends on the situation, but those who start collecting at 65 versus 60 will usually begin to see overall benefit (greater total CPP received) from this deferral around the age of 72-73. Those who defer from age 70 versus 65 can begin to see this benefit around age 82.
For taxpayers who pass away before receiving all of their CPP benefits, there are a few different types of survivor benefits available which can allow their spouse or children to continue receiving a portion of their benefits.
The right choice depends on your situation
The decision of when to begin collecting CPP can play an important role in making your retirement years as enjoyable as possible, and there are many factors to consider. Seeking advice from professional financial advisors is always a good idea.
Need help with planning your CPP strategy?
Our free Financial Planning Program is a great tool to help you crunch all of the numbers for income/expenses throughout your retirement, and assist with CPP and other important decisions. Get in touch with us today to receive your free Financial Planning Program.
Get in touch
If you would like further advice on when the ideal time is for your specific situation, visit our website to book a free consultation today. We are always happy to share our expertise on this topic.
I hope you have found this article both informative and helpful. Please feel free to share it with your friends and family.
Until the next time,
Gerry J. Hogenhout, CPA, CGA, CFP, AMP
Founding Principle, Canadian Investment Services