Derek, when should I start taking my CPP payment?
This is probably one of the most common questions I get, and yet one of the most challenging to answer accurately.
For younger readers, the Canada Pension Plan (CPP) may simply seem like a draw off their paycheques, but it’s a critical planning piece for our readers who are nearing retirement. There are factors to be considered and once the decision has been made it is typically permanent, so it is important to plan ahead.
CPP is one of the major components of Canada’s retirement income system. The plan was established in 1965 with the intent of ensuring that every Canadian receives an income in retirement.
Anyone over the age of 18 must contribute a specified portion of their income to this plan. In 2015, the rate is 4.95 per cent, up to a maximum of $2,479.95. If you make less than $3,500 in 2015, you are exempt from making contributions.
The payments you receive from CPP can begin between the ages of 60 and 70. The amount you’ll receive is dependent on how many years you contributed, how much you’ve contributed, and how old you are when you begin receiving payments. The maximum possible monthly payment in 2015 is $1,065 while the average monthly payment in 2014 was $610.57.
The CPP payment will increase if you wait to take it past age 65, or decrease if you decide to take it sooner. Herein lies the dilemma.
You can begin taking payments as early as age 60, but in 2015 this includes a reduction of 0.56 per cent per month before your 65th birthday. If you wait until age 70, you will get an increase of 0.7 per cent for every month after your 65th birthday.
Put another way, if you take your payment at age 60 you will receive nearly 35 per cent less than if you waited until age 65, and you would get 42 per cent more if you wait until age 70. The numbers add up in a hurry, so it’s important to consider a number of factors.
Two factors you need to consider are your other sources of income and the longevity of your family.
If you’re going to need all you can get in retirement there is value in taking the CPP early. Obviously if there are more bills than money, the added boost from the CPP is valuable. However, if you have a pension from your company, notable assets in savings and other sources of income, you may not need to rush the CPP.
Furthermore, since CPP payments are taxable there isn’t much point in taking more income at a high tax bracket. Your situation here is unique and a plan must be considered.
The hardest factor to determine is longevity. The longer you expect to live the more you’ll be able to benefit from waiting on taking the CPP payment.
In a perfect world we’d all know exactly when we’ll pass away and plan accordingly. Since that’s impossible, the best suggestion is to consider your parents and grandparents. If they all lived well into their 90s, you may want to wait on taking the CPP in order to maximize your total payments. But health can change quickly, and no one really knows the answer here.
In terms of age, depending on when you start taking payments your break-even point will be somewhere in your mid 70s or early 80s. More specifically, if you think you’ll live into your 80s, you may consider delaying your payments.
Keep in mind that if you pass away, your estate will receive a maximum one-time payment of $2,500, plus possibly reduced survivor payments to your spouse. This is another discussion in itself, but is another factor to consider.
For many, this discussion becomes the “bird in the hand, is worth two in the bush” analogy, whereby some prefer to take the payments as soon as possible because they want to avoid the unknown factors of waiting. While this is certainly a consideration, any strategy certainly requires discussion.
Finally, some investors choose to take the payments and invest the proceeds, or use the funds to pay down debt before their retirement really begins. This is also a valid concept, so long as there is a strategy that goes with it.
As with any decision involving money and tax, it’s best to review your strategy with a professional. Retirement is a time to enjoy the fruits of your labour, rather than worry about the dollar and cents that the government deposits to your account. As such, be sure to plan ahead.
Wealth Watch is written by Derek Fuchs, a wealth advisor with ScotiaMcLeod in Red Deer. It is provided for informational purposes only. Readers are urged to consult a wealth advisor for help with their personal investment circumstances. Fuchs can be contacted at derek.fuchs@scotiamcleod.com.