The Canada Pension Plan (CPP) is a cornerstone of retirement income for Canadians, offering flexible options to start benefits as early as 60 or delay them until age 70. Deciding when to begin receiving CPP can significantly impact your financial security during retirement, so it’s essential to understand the trade-offs of early versus delayed benefits.
Reasons to Take CPP at Age 60
Sometimes, starting CPP early makes practical sense, even with reduced monthly payments. Let’s explore why some opt for this route.
Immediate Financial Necessity
Life often throws curveballs. Job loss, unexpected health issues, or insufficient savings can create financial pressure. For many, CPP at 60 provides a lifeline.
While taking CPP early results in a 36% reduction in benefits, it could still mean receiving about $10,480.13 annually instead of the maximum $16,375.20 at age 65. This income stream can be a critical resource for meeting essential expenses, especially if other savings are unavailable.
Reduced Life Expectancy
Health and life expectancy play a major role in the decision to take CPP early. If health concerns or family history suggest a shorter lifespan, starting CPP at 60 could maximize the total benefits you receive.
The break-even point—where delaying CPP starts to result in higher lifetime payouts—occurs around age 69 for early applicants. If there’s doubt about living beyond that age, starting early may make financial sense. However, consulting a financial advisor is advisable.
Career and Contribution Gaps
If you’ve retired early or experienced gaps in CPP contributions, taking CPP at 60 might not be as disadvantageous as it seems. CPP benefits are calculated based on your top 35 earning years. Those who stop contributing after 55 or switch to dividend income as business owners may still achieve near-maximum payouts if they had strong earnings earlier in life.
Reasons to Delay CPP
Delaying CPP to enhance retirement income is often the preferred strategy for those who can afford it. Here’s why waiting could pay off.
Financial Optimization
Delaying CPP boosts your monthly payment by 7.2% annually after age 65, resulting in a 42% increase by age 70. This guaranteed, inflation-protected increment is hard to match with traditional investments and ensures more robust income during later years.
For example, someone eligible for $16,375.20 annually at 65 could see their benefit grow to nearly $23,258.78 annually if they wait until 70. This higher income is particularly valuable as healthcare and other costs typically rise in older age.
Investment Considerations
Some individuals may consider taking CPP early to invest the money. While this might appear appealing, achieving returns that consistently outperform CPP’s guaranteed increases can be risky. Taxes, investment fees, and market volatility can quickly erode potential gains, making delaying CPP the safer bet for most.
Long-Term Sustainability
Concerns about CPP’s longevity are largely unfounded. The Canada Pension Plan Investment Board (CPPIB) ensures the program’s sustainability for at least 75 years, thanks to sound management and actuarial oversight. Delaying CPP doesn’t risk missing out; it positions you for stronger long-term income.
The decision of when to start receiving CPP benefits is personal and depends on your financial situation, health, and retirement goals. Starting early can provide immediate relief, while delaying offers greater income security. Speak with a financial advisor to weigh the pros and cons for your unique circumstances.
FAQs
What is the benefit of delaying CPP?
Delaying CPP boosts monthly payments by 7.2% per year after 65.
Why take CPP early at 60?
It provides income sooner, helpful for financial needs or shorter life expectancy.
Does taking CPP early reduce payments?
Yes, payments are reduced by up to 36% if taken at 60 instead of 65.
What factors influence CPP timing?
Health, life expectancy, financial needs, and retirement plans.
Is CPP financially sustainable?
Yes, CPP is sustainable for at least 75 years under current management.
