Many Canadians, especially those nearing retirement age, have the same question: when should I start taking CPP (Canada Pension Plan)? As with many things in finance, the answer is: it depends on your unique circumstances and in this case, the various types of retirement income you expect to receive.
The first step towards determining when to begin taking CPP is logging on to your CRA account and finding out the amount of pension benefit you are entitled to. In the most simplistic terms, this taxable amount is based on contributions made by you, your spouse, and employer(s) throughout your working career and will vary from person to person.
Canadians are eligible to begin taking CPP at the age of 60 however, this doesn’t necessarily mean all Canadians should. For every month prior to the age of 65 an individual collects CPP, there is an automatic reduction in benefits of 0.6%. Essentially, the earlier someone begins taking CPP, the smaller the monthly amounts they will be entitled to over the lifetime of the benefit. Consider the following example:
A 30-year-old man in 2020 with a gross annual income of $50,000 has an annual retirement income goal of $31,000 and a life expectancy of 85. The difference between starting to take CPP at 60, 65, and 70 are as follows:
- 60: $5,349 annually or $445.75 monthly = $133,725 total over 25 years
- 65: $8,358 annually or $696.50 monthly = $167,160 total over 20 years
- 70: $11,868 annually or $989.00 monthly = $178,020 total over 15 years
Shorter life expectancies in the past contributed to the common belief that people should begin taking CPP as soon as they were eligible so as to get the maximum return on their lifetime of contributions. The example above demonstrates how this sentiment isn’t necessarily accurate, especially with Canadians living longer and potentially spending more years in some type of long-term care.
Once you know the monthly benefit amount you expect to receive, you need to then consider what other sources will make up your retirement income – Old Age Security (OAS), personal savings, employer pension plans, rental income and even part-time employment.
While CPP is based on salary and years in the work force, OAS is determined by the number of years spent as a Canadian resident. The maximum pension amount available (must have an annual income below $128,137) is $613.53 monthly. Other benefits available include Guaranteed Income Supplement (GIS), Allowance, and Allowance for the Survivor. An advisor can help you proactively plan for different scenarios in which taking these benefits might be necessary. The earlier you begin planning for retirement, the better equipped you will be to handle the expected and unexpected later in life.
Knowing generally what your income will look like in retirement – between CPP, OAS, savings, etc. – will help you determine your expected tax bracket. It may seem obvious, but this especially matters when withdrawing from registered savings accounts because the higher your tax bracket, the more tax you will have to pay to do so.
For individuals with robust retirement savings, it might make sense to delay taking CPP or OAS so they occupy a lower tax bracket and can avoid paying taxes unnecessarily. Conversely, it might make sense for those with more modest savings to begin taking pension benefits earlier.
Personal retirement savings are often held in an RRSP until the time comes to withdraw or convert the account to a Retirement Income Fund (RIF) and begin taking a regular income. This conversion can be done anytime but must occur by the end of the calendar year when you turn 71. Without a clear retirement plan/timeline, it can be all too easy to accidentally miss important deadlines and opportunities to maximize benefits.
There is no set formula for determining when to begin taking CPP but there are several complex factors to consider. The best way to approach the question of when to start taking CPP – and avoid potential consequences like incurring unforeseen taxes – is to consult an advisor with a comprehensive knowledge of estate and retirement planning. Everyone’s situation is unique and ever changing and the solutions to their financial needs must be also. If you have questions about the Canada Pension Plan or need help with retirement and estate planning, connect with us.