The Canada Pension Plan (CPP) is a cornerstone of retirement income for many Canadians. Generally, individuals can begin receiving CPP payments at age 65, with the option to delay until age 70 for larger monthly benefits. Alternatively, payments can begin as early as age 60, though this comes with reduced amounts. When to start receiving CPP is a pivotal decision, with significant implications for long-term financial security and lifestyle during retirement.
While opting to take CPP at age 60 results in a 36% reduction in benefits compared to waiting until 65, it may make sense for some based on personal circumstances, financial needs, and health considerations. In this article, we explore the reasons why taking CPP at 60 might be a sensible choice, and compare it with the benefits of delaying CPP to age 70.
Reasons to Take CPP at Age 60
Immediate Financial Necessity
For many approaching retirement, unforeseen life events such as job loss or health issues can create immediate financial demands. In these cases, accessing CPP at 60 provides a crucial income stream when other savings may fall short. While early withdrawal results in lower monthly payments, receiving CPP at age 60—about $10,480.13 annually—can still significantly help with living expenses. This income can be especially valuable in the absence of employment income.
Reduced Life Expectancy
For individuals facing health challenges or with a family history of shorter life expectancy, taking CPP early can make sense. The “break-even point” analysis indicates that if an individual does not live past age 69, starting CPP at 60 could provide more financial benefit than waiting. Considering that the average 60-year-old Canadian may live another 25 years, this decision should be carefully considered in light of one’s health and circumstances, and ideally discussed with a financial advisor.
Career and Contribution Gaps
Some individuals experience gaps in their CPP contributions due to early retirement or a shift to self-employment. Business owners who take dividend income rather than a salary, for example, may not contribute to CPP during those years. CPP is calculated based on the top 35 years of earnings. If an individual starts taking CPP at age 60, the benefit is calculated using the best 35 years, which could result in a relatively high benefit despite fewer contribution years, especially for those who worked full-time until age 55.
Reasons to Delay CPP
Financial Optimization
Delaying CPP until age 70 increases the monthly benefit, with a guaranteed 7.2% increase per year. This is a significant return, particularly for those expecting to live into their late 80s or 90s. The longer one waits to collect CPP, the larger the monthly payments will be, providing a stronger financial cushion in later retirement years.
Investment Considerations
While taking CPP early and investing the funds might seem attractive, it carries risks. Achieving an investment return that outpaces the guaranteed increase from delaying CPP can be difficult, especially when factoring in taxes and investment fees. For many, the guaranteed growth in CPP payments from deferring is a safer and more reliable strategy for long-term financial security.
Long-Term Sustainability
Many Canadians are concerned about the future viability of CPP. However, the Canada Pension Plan Investment Board (CPPIB) is independent and has been shown to be sustainable for at least the next 75 years based on conservative projections. Therefore, concerns about CPP running out are generally unfounded.
Hedge Against Longevity Risk
Delaying CPP is an effective strategy to safeguard against the risk of outliving one’s savings. With life expectancies rising, ensuring that you have a larger monthly pension can help protect your financial well-being in the later years of retirement. Additionally, CPP benefits are indexed to inflation, providing a level of protection against rising costs of living.
Final Thoughts
The decision to begin receiving CPP benefits should be based on a combination of personal factors, including health, financial needs, and retirement goals. For some, taking CPP early offers immediate financial relief, especially in the face of health challenges or gaps in employment income. For others, waiting until age 70 can provide a larger and more secure income over the long term.
Before making a decision, it’s essential to carefully evaluate your situation and consider consulting a financial advisor. This can help ensure you make the most informed choice for your unique circumstances, balancing short-term needs with long-term financial security.
