The Surroundup

WHEN SHOULD YOU START TAKING CPP?

  • by Adil Mohammed, CFP®, CIM®, FCSI®
  • October 30, 2024

IS THERE AN OPTIMAL AGE TO TAKE THE CANADA PENSION PLAN?

For many, the answer is yes: the optimal age is to delay CPP to age 70.

 

Before we get into the reasons why, let me say that this isn’t one-size-fits-all. Everyone’s circumstances are different. So if you’ve already started taking CPP and you did so at 65 or even 60, there’s nothing wrong. One of the major factors in determining when to start taking CPP is your life expectancy, and since none of us know that, there is no wrong answer or wrong age. The right age is whatever works best for you and your situation.

With that said, here are the three reasons why delaying CPP may make the most sense.

1. You get more money.

Most people are aware that the standard age you can start CPP is 65. However, you can receive it as early as 60 and as late as 70. By delaying your CPP benefit, your payout will increase 0.7% per month or 8.4% annually. In other words, delaying until age 70 will raise your payment by 42% (read on to find out how this can become 49%!).

Here’s the part most people aren’t aware of:

First, you need to understand how CPP is calculated. Your CPP benefit (i.e. how much CPP you receive) is based on a percentage of this thing called the YMPE (Year’s Maximum Pensionable Earnings; in a moment I’ll explain how it’s calculated). The maximum CPP benefit is about 25% of the YMPE.

So let’s say the YMPE for 2023 was $66,600. In that case, the maximum CPP is about $16,375/year, or $1,364/monthly. How much you’ll receive is based on your actual earnings and CPP contributions history.

The important takeaway is: the higher the YMPE, the higher the potential benefit, given that your benefit is a percentage of the YMPE.

This is where it gets interesting.

The YMPE is indexed to wage growth, meaning the YMPE increases each year based on the growth in average wages.

So if you decide to delay CPP, the YMPE will go up, given that average wages tend to grow.

The CPP benefit, on the other hand, does not increase based on wage growth, but rather is increased by CPI – the Consumer Price Index – also known as inflation.

So let’s assume you decide not to delay CPP and you start receiving it at 65.  Each year, your benefit will increase based on inflation.

The key is that typically, wage growth outpaces inflation by about 1% per year on average.

So, let’s assume inflation is 2% and thus wage growth is 3% per year. This means that if you start receiving your CPP benefit at age 65, it will increase each year by 2%, but if you wait and delay your benefit beyond age 65, you’re not only getting the 0.7% monthly increase, but the value of the YMPE – which is what your future benefit is based on – is increasing by 3%/year.

This can ultimately amount to a 49% increase (!) to your pension benefit by delaying until 70.

2. If you’re in good health, you should assume you’ll live past the breakeven point.

I know what you’re thinking: Deciding to delay your CPP benefit assumes you collect long enough to make up for the years of foregone payments. In other words, it’s based on life expectancy, which is out of your control.

That’s where the concept of the breakeven point becomes important.

For example, a 63-year-old male who delays taking CPP until age 70 – based on a 2% inflation rate and a 5% rate of return – has a breakeven age of 86. This means that if he expects to live past 86, he may be better off taking CPP at age 70.

I know what you’re thinking again: I’m not so sure I’ll make it to 86.

Well according to the actuarial tables, the life expectancy of a male turning 65 in 2025 is about 87, and for a female it is 89, so the odds are technically in your favour.

That’s one of the issues with the breakeven analysis: people hear the breakeven number, underestimate their own longevity, and thus elect to take the benefit earlier.

The other issue is the framing of the analysis. It makes it seem like deferring the benefit is the risky option – like you’re taking a gamble by taking it late. When in fact, the gamble is taking it early and living long.

3. Deferring to age 70 may be the safest decision.

Don’t underestimate the value of a secure, worry-free retirement income that lasts for life and keeps up with inflation.

Not only does it provide predictable financial stability in later years, it also reduces concerns about outliving one’s savings and covering expensive health care costs later in life.

Increased CPP benefits help take the major post-retirement financial risks off the table, such as unpredictable financial markets, enabling people to spend their savings more confidently in retirement.

Ultimately, delaying CPP is essentially the purchase of an inexpensive, inflation-indexed and very secure defined benefit pension.

Summary

In the end, there’s no perfect formula for when you should take CPP.

If you have health issues, or you need the money, or you don’t have other investments to tap into, or your retirement income is already secure – then deferring CPP may not be the best option for you.

But for most, deferring CPP is the optimal decision.

That’s it for this edition of The Surroundup – and always remember, There’s more than one way to wealth®.

Adil Mohammed, CFP®, CIM®, FCSI®
Wealth Advisor
Assante Financial Management Ltd.

Interesting links:

Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits

30th Actuarial Report on the Canada Pension Plan as at 31 December 2018

Rational Reminder Podcast: Optimal Government Pension Claiming

CPP Benefits at 60 vs 65 Calculator

 

The opinions expressed are those of the author and not necessarily those of Assante Financial Management Ltd. This material is provided for general information and the opinions expressed and information provided herein are subject to change without notice. Every effort has been made to compile this material from reliable sources however no warranty can be made as to its accuracy or completeness. Before acting on the information presented, please seek professional financial advice based on your personal circumstances.