FP Answers: Should I take CPP at age 60 even if I only have a small pension and no other investments?

Posted on by Duane Roberts

Retirement Personal Finance

Ryan is 59 years old and still has a mortgage. Should he now apply for CPP and use that money to pay off his mortgage, or invest?

Most Canadians should start taking CPP at age 70 and then determine what age is best for them based on their situation. Most Canadians should start taking CPP at age 70 and then determine what age is best for them based on their situation. Photo by Getty Images/iStockphoto Files

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By Julie Cazzin, with Janet Gray

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Question: Hi, I am 59 years old and have a full-time job. My annual salary is $70,000. I don’t have a Registered Retirement Savings Plan (RRSP) or other investments, but I do have a small pension from my employer that will pay me about $1,500 a month at age 65. I still have a $200,000 mortgage at 2.4 percent, as well as annual bill payments totaling $22,000. Should I apply for the Canada Pension Plan (CPP) now and use that money to invest or pay off my debt? Or should I wait until I’m 65? — Ryan in Penticton, BC

FP Answers: Your question is one I hear a lot from pre-retirees. CPP is a pension that is financed from employee and employer contributions paid during your working years. The amount you receive at retirement is based on three main criteria: the starting age at which you receive the benefit, how many and for how many years you have contributed to it, and your average income while working. The maximum benefit for 2022 at age 65 is $1,253.59 per month, although the average benefit (as of June 2021) is $619.68.

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Ryan, you can take CPP as early as age 60, but you will get fewer benefits. If you wait until you turn 65, you will receive your full benefit. You can also choose to postpone your benefit until your 70th birthday, which means that you will receive more benefit.

You can receive CPP retirement benefits at age 60 while you continue to work, and your CPP contributions while you work will permanently increase your benefits the following year.

Each month under the age of 65 that you use CPP represents a reduction of 3.6 percent per month (or 7.2 percent per year), for an overall decrease of 36 percent if taken by age 60. For example, instead of receiving the age of 65 monthly maximum of $1253.59, you would receive about $802. That amount is the permanent amount for your life, except for inflation adjustments and any additional contributions if you work until your 65th birthday.

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Now, if you wait until age 70, your 65-year amount will increase by 8.4 percent per year, or 42 percent by age 70. Instead of $1,253.59, your 70-year benefit would be about $1,780. But it is not just waiting for the larger amount. Some people may have a reduced lifespan or have few other sources of income. Not everyone qualifies for the maximum benefits, as it is based on your years of contributions (up to 40) and years of maximum qualified income (which was $61,600 in 2021).

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Ryan, there are some other things to consider. You indicate that you have a pension when you retire. Does your pension include a bridging element up to the age of 65? A bridging benefit is a temporary pension that is intended to fill the financial gap between early retirement and age 65. As a result, you may be able to wait at least up to age 65 to take CPP after the bridging benefit ends.

It’s also important to consider whether from age 60 to age 65 or age 70 you have any other sources of income that you could use that could leave you waiting for a larger CPP benefit at age 70. In your situation, if you take these now, CPP benefits (which are fully taxable) can also put you in a higher tax bracket and you would be doubly hit by having to receive a lower benefit and pay more tax on your total annual income.

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Your 2.4 percent mortgage rate is less than the raise you would earn if you waited to take CPP at a later date. It may be better to grow the CPP at 3.6 percent annually than to pay off 2.4 percent debt.

Before making a final decision, I recommend contracting with Service Canada to get your CPP statement of benefits. It gives you a better idea of ​​your financial situation and future choices. Most Canadians should start taking CPP at age 70 and then determine what age is best for them based on their situation and the factors mentioned above.

—Janet Gray is a certified financial planner and money coach in Ottawa.

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This post FP Answers: Should I take CPP at age 60 even if I only have a small pension and no other investments?

was original published at “https://financialpost.com/personal-finance/retirement/fp-answers-should-i-take-cpp-at-age-60-even-though-i-only-have-a-small-pension-and-no-other-investments”

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