Should You Take CPP Early?

Throughout my years as an Investment Advisor, I have had many conversations about the Canada Pension Plan (CPP) and Old Age Security (OAS) benefits with people. When to start receiving your benefits is a decision the majority of us will have to make at some point, and it’s possibly one of the most important choices you will make regarding your overall retirement income. It’s also one of the areas I feel clients have found the most value in the advice and perspective I’ve provided, as I find people seem to underestimate the importance of it and the amount they’ll receive from it.

What is the Canada Pension Plan?

One of the more popular schools of thought is to start receiving your benefits as soon as you become eligible, starting CPP at age 60 and OAS at 65. I’ve occasionally heard people talk about joining the ‘brown envelope club’ once they turn 60, and I always encourage them to discuss when to start taking CPP with a qualified Investment Advisor or Financial Planner, rather than just starting to take it because they’ve hit a milestone birthday. It can certainly be tempting to start getting that extra money as soon as you are entitled to it, especially as most of us know someone who unfortunately passed away in their 50’s or early 60’s, and you want to make sure you at least get something out of the plan after having paid into it for a few decades. Some people also are concerned the plan is going to run out of money or the government is going to spend it all, while others intend to invest the money until they actually need it. While some of these concerns are more valid than others (ie. passing away early), an important financial decision should not be made just on these worries.

How Safe is Your CPP Retirement Benefit?

As for the money running out, or the government taking it, both are highly unlikely. The Canada Pension Plan operates at an arm’s length from federal and provincial governments, and contributions are kept separate from general government accounts. Rules governing the plan specify that benefits paid out must come from contributions from employers and workers, not from the pool of assets managed by the CPP Investment Board. As of the most recent sustainability review of the CPP (completed December 2019), it was reaffirmed to be sustainable for the next 75 years. For the plan to be sustainable for this period, its investments would require averaging slightly less than 4% annual return, while its actual average returns over the past 10 years (as of March 31 2021) were just above 9%. Those returns are not only after costs and expenses, but inflation as well, which means it would be hard to match the performance of the investments of the CPP Investment Board if someone took the benefit early and invested it themselves, especially if they don’t have much tolerance for investment risk.

Assuming you reach your 60th birthday, life expectancy is approximately another 20 years for males and 25 years for females, according to Statistics Canada. So, if you reach the point of becoming eligible for CPP, odds are good that you’ll be able to collect CPP benefits for another two decades or longer. If you know you have a health condition that may significantly shorten your life expectancy, or family longevity isn’t favorable, then this can certainly outweigh all other factors.

Taking it Out at 60, 65 and 70

If you have a reasonable chance of living into your 80’s (or 90’s), then it becomes important to understand the reductions to the benefit if you take it before age 65, and the increases to it if you defer it past age 65. For every year you start receiving CPP before age 65, your benefit decreases 7.2%, to a maximum reduction of 36% if you start receiving it at age 60. Another way of looking at it is you will get more than a 50% increase to your benefit if you start receiving it at age 65 instead of at age 60. If you defer starting the CPP benefit past age 65, you will receive an 8.4% increase per year, up to a maximum of a 42% increase to your standard (age 65) benefit if you defer it until age 70. When comparing starting the benefit at age 70 versus at age 60, you end up receiving more than double the benefit at age 70 than you would have received starting at age 60. Based on maximum 2021 CPP benefits, someone who starts receiving CPP at age 60 would receive $770.40/month, someone starting at age 65 would receive $1203.75/month, and someone starting at age 70 would receive $1709.33/month (all amounts before tax). While only around 5% of CPP recipients will receive the maximum benefit, many will receive 80-90% of it, which should still mean receiving $600-$1500 per month, depending on when they start receiving the benefit.

How Does OAS Fit in?

With OAS, age 65 is the earliest it can be taken, so there are no deductions for taking it before you turn 65. However, there is a 7.2% increase per year that it is taken after age 65, to a maximum increase of 36% if taken starting at age 70. The OAS benefit for most people will also likely be less than their CPP benefit (2021 maximum monthly benefit is $615.37 for someone aged 65), so there isn’t as big of a range of possible benefit payments as there is with CPP.

To help clients better understand how the benefits change based on the age they start receiving it at, I developed my own visual aid that shows both the monthly dollar amounts they might receive based on the age they start receiving the benefits at, as well as the percentage decrease or increase for taking it early or deferring it, for both CPP and OAS. It is based on maximum benefits for both CPP and OAS and I update it annually, and it has been one of items clients have most often asked me for a copy of, which I’ve been happy to provide to them.

An underappreciated, but highly valuable, feature of both benefits is how they are linked to inflation. While the Consumer Price Index (CPI) is not a perfect measure of inflation, it does give a reasonable reference for inflation, which both CPP and OAS payments are increased annually by. When planning for 20-30 years of income in retirement, you get to see the staggering impact inflation makes on how much you need to have saved to maintain your spending power over that length of time. Having a portion of your income indexed to inflation is very powerful for meeting your long-term goals, and having a larger benefit to start with means the total benefit grows faster than starting with a smaller benefit.

With both benefits, once you start receiving them, there is no putting them ‘on hold’, and you lock in the amount you’ll receive for the rest of your life (aside from the annual inflation increase, and possible supplemental benefit if you’re still working and contributing to CPP while you’re collecting it). This is where planning ahead is so critical, as you can’t go back and change your mind once you’ve started receiving the benefits.

Aside from what your actual benefits will be depending on when you start receiving them, the other biggest factor people should be considering is how taking CPP and OAS integrates into their retirement income strategy, and how might it affect the taxes they’ll have to pay as they start living off RRSPs and/or RRIFs. This is particularly important for someone who will have a decent pension when they retire, and who also has a significant amount of registered investments (RRSPs, RRIFs, LIRAs, etc). Once the CPP and OAS benefits have started, they are counted as taxable income, and will use up room in the lower tax brackets, which may lead to paying higher rates of income tax as you draw down your registered investments in retirement. RRSP accounts were created as a tax deferral strategy, and a crucial part of the strategy is withdrawing the money in a lower tax bracket than you were in when you made the contributions. As much as we all love paying income tax (sarcasm), most Canadians would probably rather not pay CRA an extra 5.5% tax on their RRSPs, which they could end up doing if RRSP/RRIF withdrawals put their taxable income above ~$49,000 (for 2021). This is precisely where working with an Investment Advisor (like myself) for at least a few years before retiring or starting to collect CPP or OAS can benefit you by helping to come up with a plan of when to start taking CPP and OAS, and when and how much money to start drawing from retirement savings. These items together can minimize the amount of taxes you pay as you draw out your retirement savings, as well as maximizing the amount you will receive from CPP and OAS, and can help you build an inflation-adjusted retirement income stream that will last the rest of your life.

Given that everyone’s circumstances are unique, there is no one answer that applies universally to everyone. While there are obvious mathematical advantages to deferring either or both CPP and OAS, sometimes deferring both to age 70 isn’t the optimal decision. Thankfully, Investment Advisors and Financial Planners have access to software that can quickly compare different scenarios and help confirm the ideal age to start receiving your benefits. At the end of the day, it will be your decision to make, but it is an important decision and one that you should make with the benefit of advice from an expert.

- Dennis Rubeniuk, Investment Advisor, Mutual Funds

Dennis Rubeniuk is an Investment Advisor (Mutual Funds) at Endeavour Wealth Management with iA Private Wealth Inc, an award-winning office as recognized by the Carson Group. Together with his partners he provides comprehensive wealth management planning for business owners, professionals and individual families.

This information has been prepared by Dennis Rubeniuk who is an Investment Advisor (Mutual Funds) for iA Private Wealth Inc. and does not necessarily reflect the opinion of iA Private Wealth. The information contained in this newsletter comes from sources we believe reliable, but we cannot guarantee its accuracy or reliability. The opinions expressed are based on an analysis and interpretation dating from the date of publication and are subject to change without notice. Furthermore, they do not constitute an offer or solicitation to buy or sell any of the securities mentioned. The information contained herein may not apply to all types of investors. The Investment Advisor can open accounts only in the provinces in which they are registered.