In previous articles I’ve looked at reasons to delay taking CPP until age 70, along with explanations why you might want to take CPP earlier at age 60. But in this article I’m going to explain why you shouldn’t take CPP at age 65.
The most compelling reason to defer CPP is the increase or enhancement of your benefit – 0.7% for every month you delay past 65. Wait until age 70 and you’ll receive 42% more CPP than if you took it at age 65. Taking CPP early can also be an attractive option for those with a reduced life expectancy or for those who simply need the money right away.
Once you’re close to age 60, Service Canada will mail you an application form, along with an estimate of your CPP benefits. Curious, since this behavioural “nudge” may influence you to take CPP early at a reduced rate, rather than waiting until the standard retirement age of 65.
Finding out the optimal age to take CPP requires a break-even analysis and depends on a number of factors, including how much you’ve contributed and for how many years, plus a guess on how long you’ll live. Also playing a role is your current and future tax bracket, your income needs now versus in the future, plus the impact that taking CPP early has on means-tested benefits such as GIS and OAS.
What’s interesting about the break-even analysis for CPP is that the standard retirement age of 65 is never the optimal age. Let me explain:
Why Not Take CPP At Age 65?
In I post I wrote years ago about taking CPP early or late, Canada Pension Plan expert Doug Runchey shared with me the interesting fact that taking CPP at 65 is never the optimal choice from a payout perspective.
Earlier this year, Aaron Hector, a financial planner at Doherty & Bryant Financial Strategists, expanded on that fact with an interesting analysis on optimal CPP starting ages.
Hector looked at two scenarios; one in which the retiree spends all of his or her CPP benefits, and one in which the retiree invests their CPP and earns a 3% real return after taxes.
What he found was that taking CPP at age 60 was best for those who live only until age 69 (when CPP was spent), or until age 71 (when CPP was invested). Taking CPP at age 70 was optimal for those who live until age 86 and beyond.
As you can see, age 65 is never the optimal starting age to take CPP. That said, you could argue that 65 is the sweet spot between the two extremes of taking CPP early or late.
It’s helpful to know that the normal life expectancy at 60 for a Canadian is 25 years. So, if you don’t have any reason to believe you’ll have a shorter or longer life expectancy then 85 is a good age to use as a benchmark for your own break-even analysis. In this case, the optimal age to take your CPP payments and receive the most money is age 69.
Taking CPP early and investing
There’s a mindset among some retirees that they should take CPP as soon as possible and invest. The idea being that the longer their investments can compound, the better off they’d be versus delaying CPP beyond age 65.
But Hector’s analysis should put a damper on any expectation that taking CPP early and investing will lead to a better outcome. This could be due to overconfidence in one’s investing ability, over over-optimism about the expected rate of return. In any case, as you’ll see below, taking CPP at 60 and investing the entire amount only improves the optimal outcome by two years.
It’s hard to beat a guaranteed 7.2% a year increase in CPP benefits just by delaying your application. There’s also a practical argument against this approach. Is the object of the game to amass the largest bank account before you die? Or is it to spend and enjoy what you worked so hard to earn in retirement?
In my mind, it’s not a rational argument that a retiree will invest every single dollar of CPP benefits. At some point we’re going to spend our money.
Final thoughts on taking CPP at 65
The standard retirement age of 65 is embedded in our society and triggers most Canadians to take their CPP benefits at that age – like a rite of passage for retirement. But what I’ve explained here clearly shows that it’s never optimal to take CPP at age 65, from a purely financial perspective.
If anything, this analysis and research should at least give us pause before automatically applying for CPP at age 65. Look at your family history – are they leading long and healthy lives, or is there a trend of illness or disease? Beyond that, what kind of shape are your finances in today? Where will your retirement income streams come from? Do you fear you’ll outlive your money?
All of these questions should play a role in your decision as to whether to take CPP early, late, or somewhere in-between.