When it comes to the decision of when to start Canada Pension Plan (CPP) benefits, actuarial studies show that many are better off delaying benefits since the break-even age* commonly falls below our average life expectancy. Living beyond the break-even age means that waiting will yield a larger total lifetime payment. Recall that starting CPP before age 65 (as early as age 60) decreases payments by 0.6 percent per month; yet, delaying CPP beyond 65 (up to age 70) increases payments by 0.7 percent per month, to as much as 42 percent.
Of course, it’s not just expected longevity that should influence the decision. Factors such as the need for income, the impact on income-tested benefits and others may be considerations. And now, as more Canadians continue to work past age 65, another factor that should be accounted for is how retiring early — or late — can affect CPP benefits.
Consider the situation in which an individual works past age 65 and also delays CPP benefits. This can lead to a potentially greater benefit. CPP benefits are generally calculated using the best 40 years of income, usually between ages 18 and 65. Since lower-earning years tend to be at younger ages when first starting a career, if you extend your working years past age 65, you may be adding higher-earning years to the calculation and increasing the benefit. The good news? It doesn’t work the other way: Any low-earnings years due to employment past the age of 65 will have no effect on the benefit calculation.1
Conversely, if you retire before 65 but wait to take benefits, the zero-earnings years have the potential to negatively affect your CPP benefit. For example, retiring at age 60 and waiting to collect CPP at age 65 can potentially add five zero-earning years to the calculation of the benefit.
Regrets, We’ve Had a Few…
Indeed, Frank Sinatra’s words may be a fitting reminder to carefully consider the decision. Since most Canadians opt for early benefits, there has been a recent increase in media coverage discussing reasons to consider a delay. Here are some perspectives from those who wished they had waited:2
A potential reduction of survivor benefits — A widow receiving CPP survivor benefits from her deceased spouse was unaware that the decision to begin her CPP might jeopardize the maximum entitlement. She didn’t consider that survivor benefits would change at age 65, or the impact of deferring her own CPP benefits until after the age of 65.
Leaving more for beneficiaries — Since he wasn’t in need of funds, one man wishes he waited after realizing how much more he could have left for his beneficiaries. One study suggests that taking CPP at age 60 instead of 70 could forgo $100,000 worth of lifetime benefits.3
Inflation indexing — Living on a fixed income in retirement is difficult, especially as inflation has increased the cost of living. One retiree recognizes that had she waited, she would have had a larger benefit that, after indexing for inflation, would have been even greater.
A return to the workforce — One man started CPP at age 60 and retired at age 63, but then decided to go back to work. He regrets starting early due to the taxes paid on the CPP after returning to work.
*The age at which the total benefits received by delaying CPP payments exceed the total benefits received by starting CPP payments earlier. 1. https://www.theglobeandmail.com/investing/personal-finance/article-retiring-early-or-late-heres-how-your-cpp-benefits-could-be-affected/; 2. https://www.theglobeandmail.com/investing/globe-advisor/advisor-news/article-these-canadians-wish-they-had-waited-to-take-their-cpp-benefits-heres/; 3. https://www.theglobeandmail.com/investing/personal-finance/article-taking-cpp-early-can-cost-you-100000-and-limit-your-long-term/
CPP Timing Tool: This tool may help to calculate and decide whether you should start collecting CPP earlier or consider deferring payments until later: https://www.theglobeandmail.com/investing/personal-finance/tools/cpp-benefits/
