FP Answers: Does it ever make sense to take CPP at age 65?

Posted on by Duane Roberts

Retirement Personal Finance

The math tells you to delay your CPP until age 70, but who lives their life based on the answer to a math question?

If you haven't saved money for retirement or saved very little, it probably makes sense to take CPP early. If you haven’t saved money for retirement or saved very little, it probably makes sense to take CPP early. Photo by Getty Images/iStockphoto

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By Julie Cazzin with Allan Norman

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Q: I am 62 years old and planned to take my Canada Pension Plan (CPP) at age 65. With all the talk about the benefits of delaying until 70, I wonder if it’s still a good decision to take it at age 65? — Mehmet

FP answers. Mehmet, the top three reasons for deferring your CPP payments until age 70 are to protect yourself from rising inflation, poor investment returns, and to provide you with a greater guaranteed income later in life, in case you’ve exhausted your investments.

If you delay your CPP benefits beyond age 65, they will increase in two ways. First, there is a monthly increase of 0.7 percent or an annual return of 8.4 percent. Second, your benefit amount is based on something called annual maximum retirement income (YMPE), which has historically increased in value faster than inflation. This means that you will benefit from the 8.4 percent increase each year, as well as the rising value of the YMPE, which may be more than inflation.

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Here are some common reasons to start CPP at age 65: early expected death; changing tax rates; Guaranteed Income Supplement (GIS) and Old Age Security Recovery (OAS); you need the money now to fund your lifestyle; and/or you expect to achieve a high return on investment.

Most people want to make sure they get some of their contributions back to the CPP. If you are single, your CPP benefit will stop when you die. For married couples, the maximum CPP benefit a person can receive is the maximum CPP benefit based on their normal retirement age of 65. If your spouse is already receiving the maximum CPP benefit, he will not receive any of your CPP benefit.

It is the lack of survivor benefits that causes many people to start CPP benefits at age 65. They have contributed to the CPP all their working lives and want to make sure they get some of their money back. But remember, the CPP is designed to protect you from inflation, poor investment returns, and lack of money if you’re living a long life. If you start CPP at age 65, what else do you need to protect against those things?

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Perhaps you have a pension scheme from your work, or you have saved money for your retirement. Or perhaps the CPP benefit from the age of 65 in combination with OAS will provide you with sufficient income at a later age. Think about the basic income you will need later in life when your investments are used up.

If you have a shorter life expectancy, it is wise to start CPP early. If you are not sure and you are the male partner, with a shorter life expectancy than your female partner, it may make sense that you start at age 65 and your wife at age 70.

If you defer your CPP to age 70, will the bigger CPP benefits push you into a higher tax bracket? What if you also deferred your Registered Retirement Savings Plan (RRSP)/Registered Retirement Income Fund (RRIF) withdrawals for up to 72 years? Now you have two new taxable income streams to manage. What will the tax consequences be?

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Are you in one of those good places where greater taxable income created by greater CPP is going to lower your GIS or OAS? If so, it could be a good reason to pull CPP at age 65.

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I also hear the rationale that people expect high investment returns, but I take it with a grain of salt. Let’s think about this. When you receive your CPP benefit, you lose part of the tax. Are you really investing the full CPP benefit? Even if you do, will your investment return outperform the 8.4 percent guaranteed return leading to an indexed benefit?

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In my experience preparing plans with a two percent inflation rate and a five percent investment return, I normally don’t see an overall benefit in delaying CPP until someone is in their early 80s. If I model returns of less than five percent or higher inflation (to try to demonstrate risk), the benefit of deferring CPP is more apparent.

In most cases, the math says you should delay your CPP until age 70, but who lives their life based on the answer to a math question?

If you haven’t saved any money for retirement or saved very little, it generally makes sense to take CPP early. If you have more than enough money, it probably doesn’t matter what you do.

It is the people who have just enough or almost enough and no pension that really need to think about deferring to 70 years. And if you’ve covered the aforementioned risks, get your CPP early and feel good about your decision.

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Allan Norman, M.Sc., CFP, CIM, RWM, provides certified financial planning services through Atlantis Financial Inc. for a fee only. Allan is also registered as an investment advisor with Aligned Capital Partners Inc. He can be reached at www.atlantisfinancial. ca or alnorman@atlantisfinancial.ca. This comment is intended as a general source of information and is intended for residents of Canada only.

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This post FP Answers: Does it ever make sense to take CPP at age 65?

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