When should I start my CPP?
Markus Muhs - Nov 12, 2020
I get this question a lot, more than any other retirement planning question. There’s no clean-cut answer, as everyone’s situation is different. Here are some things to consider.
I originally posted this in 2014 and have regularly updated it with the latest numbers. For 2020, and for Financial Literacy Month, I'm refreshing it again and making it part of a series of new posts on retirement planning this month. If you ever need a refresher or want to refer back to this one, I've made it easily findable via cpp.yegwealth.com.
A Canada Pension Plan Primer
A comprehensive FAQ can be found on the Canada Pension Plan here, but to dispel some myths I encounter over and over again: The CPP is not the same as OAS – contributions do not go to general revenue and future entitlements are not an unfunded government liability. CPP is a fund we all pay into, like any other defined benefit pension plan. No, the baby-boomers will [probably] not drain the fund; the people running the thing are smart enough to plan for demographic “bubbles” in population. Today the fund is still being net contributed into, while in the next few decades we will likely withdraw slightly more than we put in. While OAS is an entitlement paid for by tax dollars, that can be cut or adjusted in the future as necessary, the CPP is funded to the tune of well over $400 billion (2020) and is the largest pension fund in Canada. It is managed quite capably by the CPP Investment Board (CPPIB).
In the past, your annual CPP contributions equaled 4.95% of what you made up to a certain maximum, which was matched by your employer. This is all changing under the new "CPP Enhancement", which I shed some light on in this blog post.
If you contributed the maximum for 40 years you are eligible for a maximum CPP retirement pension at age 65, which currently stands at $1176/mo (2020). This amount is reduced if you start your CPP early (as early as age 60) and increased if you start it later (as late as 70). This is where it gets interesting.
Up until 2011, CPP was adjusted by a simple 0.5% per month, up or down, depending on when you started taking it in relation to your 65th birthday. From 2012 to 2016 the government phased in changes that are intended to incentivize us all to work longer. Since 2016, CPP is now reduced by 0.6% per month for starting it early and increased by 0.7% per month after age 65. Full details here. Assuming you are eligible for maximum CPP by age 60 this means:
- $753/mo if you start at age 60 (a 36% reduction)
- $1176/mo if you start at age 65
- $1670/mo if you start at age 70 (a 42% “bonus”)
Recent changes also allow contributions to your CPP if you have already started it, if you continue to earn an employment income, again probably a topic for a separate blog post.
Once you start CPP it will then only go up (quarterly) by increases in CPI (inflation), so the decision you make in your 60s affects your retirement income for the rest of your life. While there may be other issues involved, primarily this comes down to four main factors:
- Income need
- Your tax situation
- Expected longevity
- What other types of retirement income you have available
Obviously, if you’ve just retired at age 60, have no defined benefit pension through your employer, and limited financial assets to draw on, the decision is a very easy one: start your CPP now. If the amount isn't enough and you're able to keep working, don't retire.
If you have not yet retired, even if you’re working reduced hours, doing contract work, or some other part-time work that puts your total income close to or higher than the cut-off for the lowest federal marginal tax bracket ($48,535 for 2020), you may want to consider deferring CPP until your income is lower (if you expect it to be lower in the future). Taking CPP early makes even less sense if your other income is over $97K (where the third federal tax bracket starts), causing your entire CPP income to be taxed in the high-30s, possibly over 40%.
CPP is taxable income and in a situation where you are still making employment income, deferring CPP can provide a double-whammy benefit of both a higher gross income, as well as losing less to taxation (ie: why would you want an extra $9000/yr taxed at 36% when you're 60, when you potentially could have $14K/yr at 65 taxed at 25%?).
All else aside, say you’re fully retired at age 60 and have other sources of income so you don’t really need your CPP income. You have the financial capacity to save 100% of whatever you receive from CPP and just want to get as much as possible out of it over the long-term.
Your own longevity plays a major role here, thus your decision is a bit of a gamble on life-expectancy. The least risky proposition of course is to start your CPP at 60 because even if you’re a very healthy individual and both your parents lived into their 90s, you can still die at age 70 while scaling Mt. Kilimanjaro. Unfortunately, CPP's really awful death benefits are what make this such a gamble.
How much of a long-term benefit is there to taking CPP at 65 or at 70? To what age do you need to live to in order to see a benefit from a later start? To find out, I did some calculations and illustrated by way of charts:
Chart 1 - Not taking into account investment growth (opportunity cost)
I did not over-complicate things by adjusting for inflation since CPP income is expected to be properly indexed with Canadian CPI anyway, so the above table illustrates gross before-tax (again, for simplicity) accumulation of money from the CPP (after maximum contributions) over the years, with each colored line representing total money accumulated from different starting ages. This chart would be apt if your plan were to simply spend every dollar of income from CPP or put them into a savings account earning 0% interest. Essentially, you're concerned with extracting the greatest total amount of raw dollars from the CPP over your life time.
Where the lines cross:
- Starting at age 60, collecting the $9036/yr reduced amount versus starting at age 65 collecting $14,112/yr, you'd have to make it past age 73 to see the benefit from an age 65 start.
- If you make it past age 81, the accumulation of money when choosing an age 70 start exceeds what could have accumulated after an age 65 start.
- Comparing an age 60 to age 70 start, by age 78 you would have accumulated more after only 9 years of $20K/yr (the bonused maximum for deferring to age 70) than you would have accumulated over 19 years of the reduced amount after an age 60 start.
The above is the pretty simple math of just using the aforementioned monthly amounts at age 60/65/70 and multiplying by numbers of months. Next, it gets a bit more complex.
Chart 2 - 3% real growth factored in
If CPP income is saved up and invested, the time value of money shifts the benefit slightly more in favor of an earlier start. Another way of looking at this is if the deferral of CPP income means that you’ll be taking more out of your RRSP/RRIF or other investments in early retirement—money that otherwise could stay invested—then the above chart is more apt in your situation. Here I’ve assumed a reasonable 5% nominal growth rate, adjusted down to 3% in this example to account for 2% inflation. While there can never be any guarantees, a 3% real growth rate is a reasonable expectation for a well-diversified balanced portfolio over the long-term.
- The age 60 start is now advantageous for 3 years longer, to age 76. If you live past 76 then starting at 65 is more advantageous.
- Starting at age 70 instead of 65 is now only advantageous if you live past age 85.
- The age 60 and age 70 lines cross at around age 81
What this is telling us is that the penalty of a lower monthly payment is made up for slightly by potentially having money invested for longer. It's no longer just about accumulating as many raw dollars as possible.
Chart 3 - 5% real growth factored in
The third example applies a more aggressive nominal growth rate of 7% to the example (inflation adjusted downward to 5%). I use this example only to show that the higher the growth rate you expect in your investments, the more advantageous it makes an early CPP start and the longer you have to live to justify a late CPP start. A 5% real return can only realistically be expected over the long-term from an all-equity portfolio.
The lines are obviously a bit more parabolic now, favoring getting money earlier as opposed to later (allowing it more time to compound).
- Starting at 60 is now advantageous if you live to 78 or less.
- For age 70 deferral to be advantageous you now have to live past age 91.
- The CPP at 60 and CPP at 70 lines cross at age 84.
Your overall retirement income mix - When you should really consider starting your CPP later
This is a new consideration I added for my latest revision of this blog post. Another major consideration when it comes to looking at your overall retirement plan and your various expected income sources in retirement.
Being based in Edmonton and dealing with a largely "mass affluent" client base, I have an inordinately high proportion of clients who work in the public sector and have defined benefit pension plans, which are becoming so increasingly rare in the private sector these days. For such clients, CPP and OAS are just two additional defined incomes to add to the mix, and generally, they have far less saved up and invested in RRSPs than those without defined benefit plans through their employers. Such a person has more capacity for risk with their investments in retirement (because they're not fully dependent on them) and thus may benefit from getting CPP income and investing it sooner.
The average person without a defined benefit plan needs to look at their overall situation and realize that the bulk of their retirement income will come from investments and will be subject to market risk (and inflation!). A major pitfall in their retirement plan is living too long and outliving those assets; CPP and OAS represent their only guaranteed for life incomes. A $20K per annum guaranteed for life CPP income, starting at age 70, fits much better into such a financial plan than an $8868/a income starting at 60. Yes, the risk of getting much less out of CPP if dying early is there, but the risk of living too long supersedes this. Such a person could balance out the missing CPP income from age 60 to 70 by simply drawing more out of their retirement assets during those years, but then be assured of a fairly steady guaranteed income from 70 onward.
According to government stats on when Canadians start CPP, 61% of all new CPP retirement pensions in 2018 were started by people under age 65 (with the lion's share being started right at age 60). Another 31% were started at age 65 and only 7% started post-65. At the same time, average retirement age in Canada is about 64 and only around a third of the retiring age population has a defined benefit pension plan (source). A lot of people are either getting bad advice or just simply aren't putting more thought into when they start their CPP other than "I want money now..."
I’m sure my clients will appreciate me over-complicating the answer to a simple question, but as you can see it's not one answer to fit all circumstances. The way I’d go about using the above information is to ask yourself:
- How long do you expect to live? (consider whether or not your parents are still living or to which age they lived, as well as your grandparents)
- Is CPP income going straight toward supplementing income and will it have no effect on your depletion of investments (use chart 1) OR will it be invested or is it replacing what you’d otherwise take out of your RRIF? (use chart 2).
- Will you receive considerable defined benefit income from an employer sponsored pension plan and are you able to take more risk with your investments? (use chart 3).
- Will your mix of retirement income heavily depend on investment assets or more heavily on other defined benefit plans?
A retirement plan looks at CPP and OAS as part of your overall retirement income, together with other pension income, RRIF income, or income/principal derived from other assets. We do detailed long-term tax projections on your income to determine your ability to meet your retirement goals or what's needed to get you there, as well as running multiple scenarios (such as: what are the net effects of starting CPP at 60 vs 65?).
If you have any other questions, would like to start retirement planning on either a fee for service (fee-only) basis or as part of a comprehensive wealth strategy, head to my Contact page to reach me or submit a question.
Markus Muhs, CFP, CIM
The preceding information is for general information only and does not constitute tax advice. All investors should consult with a qualified tax accountant.