Weekend Reading: When To Take CPP Edition
Last week I previewed Fred Vettese’s completely updated and revised edition of Retirement Income For Life. I’m giving away an extra copy of the book and asked readers to enter to win by sharing when they took (or plan to take) CPP. The results were interesting.
The vast majority of responses were in favour of deferring CPP to age 70 (41%). One quarter of responses favoured taking CPP at age 60. And, nearly one-quarter of responses favoured taking CPP at age 65.
| CPP Start Age | # of Ppl | % of Ppl |
|---|---|---|
| 60 | 62 | 24.9% |
| 61 | 4 | 1.61% |
| 62 | 4 | 1.61% |
| 63 | 4 | 1.61% |
| 64 | 1 | 0.40% |
| 65 | 57 | 22.89% |
| 66 | 4 | 1.61% |
| 67 | 5 | 2.01% |
| 68 | 3 | 1.2% |
| 69 | 3 | 1.2% |
| 70 | 102 | 40.96% |
Deciding when to take CPP is a key consideration of your retirement income plan. What I found interesting about the responses was the rationale or the stories behind these decisions. For instance, there is a lot of misinformation about the Canada Pension Plan: that it is government run (it’s not), that it will become insolvent before you collect benefits (it won’t), and that you could do better investing the money on your own (not likely).
These misconceptions can lead to poor decisions. It’s estimated that just 1% of CPP recipients elect to take their CPP benefits at age 70. Clearly more education is required.
Several of the responses in favour of taking CPP early showed this lack of knowledge or a perceived bias around the CPP program.
Some retired early and took CPP early to “avoid too many zero contribution years.”
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While it’s true that your calculated retirement pension may decrease with each year of zero contributions, the amount of the decrease is typically less than the amount of the increase you’d get by deferring CPP (0.6% per month to age 65 and 0.7% per month to age 70).
CPP expert Doug Runchey uses the example that by waiting you will receive a larger slice of a smaller pie, but you will almost always receive more pie.
One response called CPP a “legal pyramid scheme.”
- All pensions are claims on the earnings of future generations. Indeed, CPP is a contributory pension plan and so the retirement benefits paid today rely on contributions made by workers plus any investment growth in the plan. There is no doubt that pension plans face increasing pressure with longer life expectancy, a shrinking workforce, and lower expected stock and bond returns in the future. But the health of our CPP is reviewed every three years and the latest actuarial report shows the program is sustainable for the next 75 years.
Several responses from retired readers said they took CPP at 60 and “invested the money in their TFSA.”
- I’m a big fan of retirees continuing to use their TFSA to invest. But it’s unlikely your investments will outperform the guaranteed age-adjustment increase that you’d get by deferring CPP (7.2% per year to age 65 and 8.4% per year to age 70). A better reason to take CPP early is if you need the money to meet your spending needs. Voluntarily taking a pay cut and then trying to invest your way to outperformance is a losing proposition.
Finally, one of the most common reasons for taking CPP early is “when someone close to you happens to die early.”
- This experience has an ‘anchoring’ effect, where you don’t want to end up like your friend or relative (who got nothing after years of contributing) and so you decide to take your CPP benefit as soon as possible. Anchoring to an experience like this can be useful if it prompts us to buy life insurance or update our will. But should it be a factor in your decision to take CPP early? I think not. Your own personal health should play a role, yes. But, assuming you are in relatively good health, the chances are far greater that you live a long life. Indeed, a 60-year-old male has a 50% chance of living to age 89, while a 60-year-old female has a 50% chance of living to age 91.
Overall, I was happy to see the number of people who are at least considering delaying their CPP benefits to age 70. One of the best comments was from reader B. Pratt:
“I plan to take my CPP at age 70. That’s the “plan”. As with all plans, there is a need to monitor and adjust as required. So if I need to start earlier than age 70, I will. One cannot be asleep at the wheel during retirement and it is always good to reevaluate plans at least once a year!”
Retirement Income For Life book giveaway
As promised, I’m going to give away a copy of Mr. Vettese’s newly updated Retirement Income For Life. Many thanks to everyone who took the time to leave such thoughtful comments and share your strategy around when to take CPP.
There were a total of 220 entries into the contest. I used a random number generator to select the winner.
Congratulations to Gin, who commented on October 31 at 2:35 p.m. I will reach out to Gin by email and arrange to send out the book.
Promo of the Week
My friend Barry Choi and I have started a Facebook page called Personal Finance Canada – a private group but an open forum to discuss to discuss money topics and ask your burning questions about personal finance, investing, retirement planning, credit card hacks, travel tips, and more.
Barry and I will moderate the group and answer questions. But we plan to invite other experts to answer questions and post on topics of interest.
So, join the Personal Finance Canada page, invite your friends, say hello, and ask us your burning questions related to personal finance. We’d love to hear from you.
Weekend Reading:
Speaking of Barry Choi, he explained a new perk offered by Air Canada called a Buddy Pass. Think of it like WestJet’s companion voucher, where the second traveller can fly for free, plus fees & taxes.
Our friends at Credit Card Genius introduce the new BMO Eclipse Visa Cards – offering 5x points on everyday spending.
RateSpy.com reports that variable interest mortgage rates have smashed the prime minus 1 barrier. The variable rate to beat is now 1.29%.
Half of Canadian investors aren’t even aware they are paying fees. Larry Bates shares some simple steps that will help investors make more informed decisions.
Steadyhand’s Tom Bradley explains why investors should spend less time trying to avoid the dips and more time preparing for them:
“Being a successful investor is less about being good at reading the economy, timing the market, or picking individual stocks, and a whole lot about dealing with the inevitable dips that lie ahead.”
My Own Advisor blogger Mark Seed shares his financial independence plan. Mark enlisted the help of fee-for-service advisor and PlanEasy.ca founder Owen Winkelmolen to help him map out his early and semi-retirement options. Great stuff!
PWL Capital’s Justin Bender shares the best ETF pairs for tax-loss selling:
Justin’s video tutorial pairs nicely with this post by Dan Bortolotti on finding ETF pairs for tax-loss selling.
What does the stock market do around election day? Of Dollars and Data blogger Nick Maggiulli explains.
Gen Y Money explains the ins and outs of life insurance in Canada – and could it be a bad investment?
Finally, these seven business owners share lessons they’ve learned through success and hardship during the pandemic.
Have a great weekend, everyone!
Good analysis of when to take CPP. I’ve found it almost impossible to get people to understand the value of delaying. But the message is getting out.
Thanks Michael. It really has only been seven years since Canadians could defer CPP past 65 and get a 0.7% enhancement (prior to a phase-in period between 2011 and 2013, the enhancement was just 0.5%). The good work done by experts like Fred Vettese and Doug Runchey have gone a long way to educate Canadians about the benefits of deferring CPP.
I occasionally wonder if the rules changed, and we could defer CPP until age 90, would people start recommending that’s when you should start! I haven’t calculated how many multiples this would be of starting at age 65.
There has to be a sweet spot; is it really at age 70? Just a thought.
Hi Bob,
The sweet spot for taking CPP varies by income level. For minimum wage workers, it’s 60. For me, it would be at about 80, assuming the payments kept rising when delaying the start.
By delaying and therefore increasing the amount rec’d are you not just increasing the potential for OAP clawback?
Hi Rob, you have to run the numbers to be sure, but the idea is that you replace deferred CPP income with additional RRSP withdrawals. This strategy tends to melt down the RRSP faster, which means smaller minimum mandatory withdrawals. You could also defer OAS to age 70 and deplete your RRSP at an even faster rate. Even better if you don’t spend all of that income and keep saving inside your TFSA.
It’s true that those who are up against OAS clawbacks have to delicately balance their CPP and OAS benefits with their investment withdrawals. It can be tricky.
Thanks Robb for compiling the responses into percentages. Interesting data indeed! I was surprised you referred to some things as “misinformation”. The CPP is a government mandated contributory employee and employer social insurance program and the CPP Investment Board is a Government of Canada crown corporation with an arms-length relationship. While perhaps technically correct to say it is not run by the government it is most certainly a government entity and program. Though I agree CPP is highly unlikely to become insolvent, there are no guarantees that something won’t change with the CPP over the years and decades that impact how much benefit people receive in the future. As far as people believing they can do as well as or better than CPP investing the money on their own a more useful comment for people would have included caveats about risk tolerance and investment vehicles. Additionally I expect some people may be curious, or possibly even confused, about your keenness to commute a pension like you did last year yet being a big fan of waiting until 70 for CPP benefits. Thanks again for summarizing the survey of responses.
I like your CPP analysis Robb. One argument for taking CPP early I have often seen is if you are in poor health. Taking it early may make sense in this case.
An argument I haven’t ever seen is to take your CPP as soon as you can because, by the time you hit the break-even point, you likely won’t need that much money anyway. My DB pension plan allows me to take an “advance” on my CPP at 55. My break-even point where I will start to lose is 74. While I am in reasonably good health, I still don’t see needing the money at 74.
I mentioned the breakeven point in my initial response as being an important factor in decision-making. I am still a few years from retiring at 58/59 and am currently collecting survivor benefits so the calculation for my benefits is more complicated. My estimated breakeven age is 82 (perhaps 80). As I also have a widow’s DBP what is more important is that we maximize my (new) husband’s benefits in case I pass first.
Hi Paul, thanks for your comment. When I said that CPP is not run by the government, I meant the investments themselves. There are enough people out there who think the government of the day can simply raid the CPP piggy bank at will, which is not the case.
Similarly, some people believe that CPP somehow won’t be there for them in retirement. It’s a mistake not to include CPP benefits in your retirement income calculations. This belief could lead people to take CPP early, thinking they should take the money now just in case it somehow becomes insolvent.
As for investing, yes I could have elaborated on my point that it is unlikely investors could beat the guaranteed age-adjusted increase they’d get from deferring CPP. First of all you’re making an active bet that you could invest that money and achieve higher returns. Even in an all-equity position, with no behavioural error at all, there is no guarantee that your portfolio could achieve returns of 7.2% – 8.4% in a 5-10 year period. Most investors at age 60 or 65 are not invested 100% in equities, and so that pulls down the expected returns even further.
Finally, on my own decision to commute my pension, I went into great detail discussing the thinking that went into my decision: https://boomerandecho.com/my-pension-decision-deferred-pension-or-commuted-value/
There were some very unique circumstances that tilted the decision in favour of commuting.
Again, I’m not saying taking CPP at 60 is wrong. There are some valid reasons to do so. But there are also a lot of poorly thought-out reasons to take CPP early and that’s what I was trying to communicate.
I disagree waiting until 70. Take it at 65 during your healthier years. If you are wealthy enough to delay it until 70, yiu may find that so much of OAS will be clawed back later with your income going much higher. We don’t know tax consequences at age 70 either. You can bet the marginal rates will be higher.
In a nutshell, if you can afford to delay CPP, you probably don’t need to delay. Enjoy it now.
Hi Steve, deferring CPP to age 70 doesn’t mean you can’t spend more money in your 60s. This is a common misunderstanding. The strategy goes like this:
If I defer CPP from 65 to 70, I simply withdraw more money from my investments (ideally my RRSP) to replace that income from 65 to 70. I get to spend the same amount of money as I would have if I took CPP at 65.
At 70 and beyond, I get more money because my CPP deferral enhances my retirement benefits by 42%.
So, I spend the same amount of money by withdrawing from my RRSP from ages 65 to 70. During that time I transfer the risk from my own investments to a guaranteed for life, indexed to inflation pension.
Yes and you lose the tax free compounding of interest dividends or growth on your RRSP investments that you withdrew. Plus your estate now has less money. Id like to make another important point. Your CPP is not earning 7.2% return per year while you wait. You die, there is no asset for the estate. The CPP zero asset is still a zero and has earned nothing.
If you cannot earn 5-7% in your RRSP, then you should be asking why. I’ve never had a problem growing at least that much.
Hi Steve, it’s misleading to say that an investor can consistently earn 5-7% per year. Perhaps that has been true over certain periods of time, but the future is unknowable and stock returns have an uneven distribution. 2020 is a perfect example. My 100% equity portfolio is up just 1.12% on the year.
You’re right that if you have the goal of preserving your estate then this strategy is not ideal. Deferring CPP to 70 is about maximizing your own retirement spending and protecting against longevity risk.
Robb its also misleading to say that by deferring COP, they are earning a 7.2% return. No they are not. There is nplo equity growing. Its simply a payout that rises 7.2% .
Better to hold your RRSPs and RIFs that is actual equity that can grow if you choose to say that.
Its great you point out to the unknowing people that CPP payout can increase. But there is no asset that grows.
My portfolio earns on average 4.5% in dividends across all registered and no registered accounts. I spend the dividends. Not the equity. Mine has grown nicely as I was 25 % in the Utility and Renewable space. I’ve bern fortunate to make that call. No way I’m cashing that to defer CPP. CPP should be used no later than she 65 to preserve as much investment capital we have.
Exactly. Take it in your 60’s, the earlier the better. You won’t be spending that windfall as heartily 10 years later. This is the factor that the number crunchers all miss. Your aptitude for spending decrease while the nest egg gets bigger. It does little for you to collect big cheques when you have lost your appetite for spending. Some talk about a “break even age”. Suppose you break even at 77. Look around and see how many people that age need the money more at that point. Probably < 5%.
In addition, after 70 you have a lot of taxation coming if you have a large RRSP. The last thing you want is turning over to tax money you could have spent earlier at a lower rate.
I agree. Take it in your 60’s, the earlier the better. You won’t be spending that windfall as heartily 10 years later. This is the factor that the number crunchers all miss. Your aptitude for spending decrease while the nest egg gets bigger. which makes no sense.
It does little for you to collect big cheques when you have lost your appetite for spending. Some talk about a “break even age”. Suppose you break even at 77. Look around and see how many people that age need the money more at that point. Probably < 5%.
In addition, after 70 you have a lot of taxation coming if you have a large RRSP. The last thing you want is turning over to tax money you could have spent earlier at a lower rate.
I would love to see some number crunching where the CPP is taken early to “avoid too many zero contribution years.” plus “investing the money in a TFSA.” to see whether that combination would be preferable to waiting to 70. My math skills are way too rudimentary to pull that off, but I would love to see a CPP calculator incorporate both scenarios.
I would love to see some number crunching where the CPP is taken early to “avoid too many zero contribution years.” plus “investing the money in a TFSA.” to see whether that combination would be preferable to waiting to 70. My math skills are way too rudimentary to pull that off, but I would love to see a CPP calculator incorporate both scenarios.
Hi Dutchie, I haven’t seen a calculator like that but I suspect that the retiree would be worse off by taking CPP early and investing. One important note is that CPP is taxable income and so you won’t be able to invest the full amount unless it’s in an RRSP. You also need to take investment fees into account and consider how much will you need to earn to beat the guaranteed 7.2% return that comes with delaying CPP by a year.
Dutchie, I did the calculations and then had them checked by a fee-only financial planner. I will only have 20 years worth of contributions.
Both the planner and I came to the same conclusion, and that is by taking our CPP at age 60, keeping our equivalent value investments intact, the breakeven point for our net worth will be in my mid-80s. So, only when I reach age 85 would I start to see a benefit in delaying starting CPP beyond age 60. We used 2% inflation and 5% portfolio growth.
Thanks Rob Wen. Interesting!
I would love to see a discussion anywhere that in fact would relate to a self employed individual who contributes both portions of CPP, that is the workers and the owners share. These people are also able to control the amount of contributions as they determine the amount they withdraw in the form of dividends and or wages.
Hi Don, you bring up an interesting point that I don’t see discussed very often. I’ve wrestled with this decision myself as I left the public sector to run my online business full time. Do I pay myself dividends or a salary?
The only case studies I’ve seen on the topic are for wealthy people, with unhelpful advice such as, “pay yourself a salary up to the RRSP maximum and the top-up with dividends as needed.” That’s great for people who pay themselves $150k a year or more, but for the rest of us the decision is more complicated.
I’m a sole proprietor and take out all company net earnings as an owner’s draw and pay the employee and employer CPP contributions based on this amount that I claim on my tax return. I don’t earn enough to max out. I wish there was an option to top up for us lower earners!
I am interested to see why a widow would wait to reach 70 yrs of age to receive CPP when already receiving survivors CPP. There is a monthly maximum that can be achieved by taking CPP early. Waiting to 70 seem to lose money.
I am too interested on the math of someone receiving the survivors CPP and then takes CPP early (like 65) as I read, most but NOT ALL of the survivors CPP is lost at that point. Also if CPP is defered to 70, does the survivor CPP continue fully until then?
Sylvie and Denis, I highly recommend reading anything by Doug Runchey on this matter – and even contacting him directly for a personalized pension calculation (he does charge a small fee).
Here’s a good article he wrote on CPP survivor benefits and he addresses your question in the comments: https://retirehappy.ca/cpp-survivor-benefits/
I plan on waiting until I am 70 because I have other sources of income and .7%/month extra is a good rate of return. Of course it would be an easy decision to make if you knew how long you were going to live but you don’t. You could take it too early and have regrets if you run out of money. I don’t think you would ever regret waiting to take it. If my health fails sooner than I planned I don’t ever imagine laying on my death bed saying “gee, I wish I would have taken CPP earlier”.
Hi Daniel, exactly my thinking as well. As Fred Vettese says, if you die early you’ll have bigger problems to consider – like not breathing!
Rob please run the numbers of putting early cpp into a Tfsa in a stock like Fortis at a 3.8 div yield and a capital appreciation and at 70 I think you will be ahead and little risk . Thanks
Hi Jeff, I don’t need to run the numbers to tell you that taking CPP early and investing it in a single stock is a bad idea. Individual stocks are incredibly risky, whether they pay dividends or not.
I need to decide in a few years and am leaning to 70 and taking the same amount out of my RRSP until then. With parents well into their 80’s chances are me too. Tough decision as the stock market on average returns 8%.
Although we’re not supposed to time the market, I’d point out that the conventional wisdom is that the market is quite overvalued. So, that 8% return may not (or may) pan out for the next number of years.
FWIW, I’m in a similar position w.r.t. retirement timeline and parent longevity, and I’m 99% sold on delaying CPP to 70. Personally, I very much like the idea of converting risk (stock market returns) to certainty (guaranteed, inflation indexed payout).
Small point – it’s not correct to say that “The vast majority of responses were in favour of deferring CPP to age 70 (41%).” In fact, a small or perhaps significant majority of respondents (59%) were in favour of taking CPP prior to age 70. You would be safe in claiming that “the largest segment of respondents by far” were in favour of deferring to age 70. Hope that helps. It can never hurt us to be precise in our language.
I think your survey results are skewed by the fact that your subscribers probably have much higher financial literacy skills than the average person. Most people I discuss this with have already taken CPP at 60 or plan to, which I think in most cases is a mistake. It may be better to look at the year over year increase. Waiting one year until age 61 is an increase is a 7.2% based on the age 65 amount but is an 11.25% increase over the amount you would get if taken at 60.
Hi Dave, you’re right that the survey has a selection bias in that personal finance blog readers have a higher degree of financial literacy than most people, and long-time Boomer & Echo readers will have seen me write about deferring CPP many times.
Still, education helps – as evidenced by the number of commenters who said they planned to take CPP early until they read about the benefits of deferring on this blog and others.
This is just a general comment to those who wanted to see data on taking CPP early and investing versus deferring CPP to age 70. An excellent research paper was published earlier this year by Dr. Bonnie-Jeanne MacDonald – Director of Financial Security Research, National Institute on Ageing, Ryerson University.
The study compared two options: The first was deferring CPP from 65 to 70 and using RRSP/RRIF drawdowns to bridge the gap, and the second was taking CPP at 65 and self managing the RRSP/RRIF investments to achieve the same annual net income throughout retirement.
One interesting finding was that higher investment returns and low longevity expectations CAN decrease the attractiveness of deferring CPP payments. However, “this extreme scenario results in a male with low longevity still facing a 51% probability of not achieving the same income as he would have had through delayed CPP payments.”
The entire study is worth a read, but for a quick skim make sure to read the executive summary as well as the data on page 26: https://www.cia-ica.ca/docs/default-source/research/2020/rp220114e.pdf
Hi Robb,
The Measure of a Plan website has a fantastic CPP and OAS Excel tool that will surely help with the deferral decision. Here is a the link to the tool https://themeasureofaplan.com/canadian-retirement-benefits-calculator-cpp-and-oas/.
I plan to wait until I am 70 to take CPP. I have a question though. On the Service Canada website they estimate what your payment will be. As I am now 67 and haven’t been contributing for 4 years, do you know how accurate the estimates are? There is the caveat that your actual payment will be determined when you actually apply.
I bought the book after enjoying the first edition so much.
We have done extensive calculations of what CPP would like for us at various ages. I am older than my husband and expect (based on family history) to be around at 100. My husband will likely die much earlier (based on his family history). He was originally thinking of waiting until 70 as he thought this would leave me with a higher income when he passed away. This is not necessarily the case as there is a maximum for the remaining spouse made up of their CPP and a top up from the deceased spouse which can total no greater than a single person maximum. We recalculated taking the maximum into account and we get the greatest amount over his lifetime and the maximum for me after he passes, if I take CPP at 68 and he takes it at 66. If you are thinking about when to take your CPP and you are married and will likely remain married, it makes a lot of sense to look at the puzzle as a couple rather than 2 individuals. I spent in excess of 20 hours to determine what was best for us, but would highly recommend speaking with a professional if you don’t have the necessary abitlity with numbers to do your own calculations. I invested the time myself as I was unable to find a professional who completely understood CPP.
Thanks for the mention Robb, and also for crunching the numbers of when to take CPP. A little early for me to think about but definitely something important to analyze.
I think in my case, I may be deferring to 70 assuming that I’m still in good health (my mother was 65 when she passed and only got her CPP for 10 months so in her case, it was best for her to take it earlier).
A compromise is to wait a year and see how much one spends and then take it later. It won’t have a big impact for sure.
I will have multiple sources of taxable income (RRSP, RDSP, CPP and OAS) when I retire so it’ll be interesting to see how much of an impact taking CPP later will be as RDSP will be fixed income and won’t be able to change too much there although I’ll be able to adjust taxable/non-taxable ratio. So I could opt to take most of taxable portion starting in 60s and then end up with bulk of non-taxable income by the time I take CPP to manage my taxes.
So many scenarios and I think this is one of those situations that I need to reevaluate every 5 years to determine if I’m on track or not.
I took my CPP at 62. It was after a lot of painstaking analysis of when was the best time. In the end, I finally realised that it makes little difference in the calculations. Throw the same amount in your savings and it will likely do as well as the government increases. If not, the difference will be negligible.
The increase with age is a chimera for most people. It is easier for younger people to look googly-eyed at the bigger dollars and be impressed. Don’t be!
The bottom line is that for most people your need for money drops faster than the increases offered. You can burn $10,00 extra per year a 60, but find it hard to spend half that at 70. You will travel less, take fewer course, start fewer expensive hobbies, and go to fewer shows when you are 70. There is little logic in hanging on to your pennies when you need them only to rake in money later that you haven’t the inclination to use.
You don’t want to be sitting on piles of unusable money in your 70’s wishing you’d had a little more to spend in our 60’s.