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As Canadians get closer to retirement, they are faced with the decision of deciding when they should begin to collect their Canadian Pension Plan (CPP).

If you have worked and made at least one payment into CPP, you will qualify for a CPP retirement pension. The amount of your CPP pension at retirement is based on the number of contributory months you have and your total adjusted pensionable earnings. From that point, there are adjustments which remove certain “drop out” periods, which in general are meant to remove a portion of your contributory months of service where a you have low or zero income such as the years when you were at home with children under 7 years old. The calculation is quite a bit more complicated and if you’re interested, the CRA has a Canadian retirement calculator through My Service Canada Account that can provide a rough estimate of the amount of CPP you will receive at retirement. Please click here to go to the Service Canada calculator which by completing the various questions will result in an calculation that will estimate your monthly CPP payments you will recieve at retirement.

The standard age to receive CPP is 65; however, you can take a permanently reduced CPP retirement pension as early as 60 or a permanently increased amount after age 65. You CPP payment will be adjusted by a certain percentage based on the number of months you begin to collect CPP prior to the age of 65.

Currently, here the basics on how it works:

Let say you’ve estimated that your monthly CPP payment will be $600 ($7,200 annually) if you were to begin collecting payments at age 65. (Lets say you are 59 and wondering when you should begin collecting CPP)

For the 2016 year, the monthly reduction for collecting CPP prior to age 65  is .60% per month. Therefore, the following chart shows the estimated reduction as a percentage and as a dollar amount of your monthly payment as well as the estimated annual reduction over the year. Finally, the last column shows the estimated monthly payment you would receive instead of the $600 monthly payment if you began taking CPP at age 65.

AGE  NUMBER      MONTHS  PRIOR TO AGE  65Estimated reduction(.60% x # months)Estimated reduction in payment per monthEstimated reduction in annual CPP PaymentsEstimated Monthly Payment    received
60     6036%$216$2,592$384
61     4828.8%$173$2,076$427
62     3621.6%$130$1,560$470
63     2414.4%$87$1,044$513
64     127.2%$43$516$557

As you can see, collecting CPP at age 60 comes with a 36% reduction in the monthly amount that would be received. This translates into only collecting $384 per month instead of $600 per month. Remember this is the payment you will collect for the rest of your life, meaning that you would receive $2,592 less per year than if you were to begin to collect at age 65.

Now the opposite occurs if you decide to defer collecting CPP. Your monthly payments would permanently increase; however the increase is .70% per month

 

AGE  NUMBER      MONTHS  AFTER AGE    65Estimated reduction(.60% x # months)Estimated increase in payment per monthEstimated increase in annual CPP PaymentsEstimated Monthly Payment  received
66     128.4%$50$600$650
67     2416.8%$101$1,212$701
68     3625.2%$151$1,812$751
69     4833.6%$202$2,424$802
70     6042%$252$3,024$852

As you can see, if you decided to wait until age 67 to begin collecting CPP your monthly payment would be $701 per month (rather than $600 at age 65) up to $852 per month if you waiting until age 70 to collect.

When deciding what age to take CPP, many people wonder “At what age should I begin to collect CPP so that I will end up receiving the most amount of money over the remaining years of my life?” Now, if you know exactly when you are going to die, than this is a simple calculation. For myself, I don’t know this, so I need to guess. I might consider my family history and how long my parents and grandparents lived, I might consider StatsCan life expectancy, I might consider any ailments that I am developing or that are common in my family, etc. At this point, lets say I narrow it down that I’m pretty sure I have a good chance of living until I’m 75.

Using the example above, if I took out CPP at age 60 with my $384 monthly payments, I would have received 15 years of payments (180 payments) or roughly $69,120 at age 75, which is my estimated time of death. Now if I had taken CPP at age 69 with my $802 monthly payments, I would have received roughly $57,744 ($802 monthly payment x 72 months). As you can see, you would have received a lot more money from CPP having taken it at age 60 rather than age 69. But when you crunch all of the numbers you find out that you would have been best to take it out at roughly age 62, where you would have received $470 payments for 13 years or roughly $73,320.

Now, if instead I think I will live until I’m 90 years old, here is how the numbers break out if I take it at the same ages:

Age 60- $384 per month x 30 years = $138,240

Age 62- $470 per month x 28 years= $157,920

Age 69- $802 per month x 21 years= $202,104

As you can see, if you think you will live until 90, you will receive much more income if you begin collecting CPP at age 69.

Since determining when you will live until is a best guess; there are also many other factors that may impact why someone may decide to withdrawal CPP early or to postpone it. Some of these factors include:

  • Overall Health– Someone who’s health is slowly deteriorating or has a history of family illness may choose to take CPP early so they can have increased income in their remaining healthy years
  • Employment/Unemployment– Some people’s employment or lack there of could be a factor in deciding to take CPP early if they are in need of the additional income
  • Lifestyle– For some, being able to retire before 65 is a major goal and they are willing to leave the workforce early and retire with less savings. They may however still want/need the bump in income from CPP.
  • Investment/Cash in hand- Some people feel that if they have the money sooner they can invest it and grow it. Other people would just rather have the cash in hand in the early years given the uncertainty in guessing when they will die.
  • CPP longevity– another concern of some people is how many years the Canadian Pension Plan will be sustainable and if perhaps it could go away or change in the future.

At the end of the day, it’s worth considering your situation and the potential financial benefits of choosing to take the CPP pension prior to age 65 or postponing until after  age 65.

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Tony Theaker

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The information contained in this article is for general use only and should not be viewed as professional advice. Accounting and tax rules and regulations regularly change and individuals should contact a competent professional to obtain accounting and tax advice based on their specific situation.

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