Should you defer your Canada Pension Plan to age 65 or 70?
Readers of this blog will know I’m many years away from full-on retirement – so I have tons of time to consider when to take our Canada Pension Plan (CPP) benefit.
Should you defer your Canada Pension Plan to age 65 or 70?
If you’re nearing retirement age including age 60 you might be wondering how to effectively take your Canada Pension Plan benefit this year.
This post will absolutely help you.
Seeking some income for life? Thank you CPP!
In Fredrick Vettese’s latest book entitled Retirement Income for Life (a book I will giveaway from this site in a future post), Vettese mentioned an often overlooked strategy to increase secured, retirement income: defer to your Canada Pension Plan benefit.
(It is at this point you may recall when it comes to our Canada Pension Plan, to qualify for it, current rules dictate you must be over the age of 60. CPP is a contributory plan. That means your income stream from CPP depends on how much you put into the plan (to a maximum contribution amount) AND how long you’ve contributed to the plan. This makes CPP very different from another government benefit, Old Age Security (OAS). Payments from OAS come from general tax revenues.)
About us and our savings plans
My wife and I are saving for retirement beyond workplace pensions, using primarily Registered Retirement Savings Plans (RRSPs) and Tax Free Savings Accounts (TFSAs). I’ve often thought about drawing down our RRSPs before taking my workplace pension. We will likely do this. Further still, I’m thinking that drawing down the RRSP assets to $0 might be a great strategy before taking any CPP income payments.
Is deferring CPP until age 65 smart? What about deferring CPP to age 70?
What are the pros and cons of deferring CPP income until some or all RRSP assets are exhausted?
I have my own ideas based on our financial plan but I wanted to talk to an expert. I reached out again to Doug Runchey, a pension specialist who has more than 30 years of experience working with both CPP and OAS programs.
In our latest discussion on CPP, I asked him a few questions about deferring CPP income and in what cases this generally applies.
Doug, welcome back. Great to chat again!
Thanks for having me back again. I always appreciate the opportunity to share my knowledge about the CPP and OAS programs, and I don’t mind the opportunity to plug my business either.
In our previous post together, you highlighted how to get the maximum income amount from CPP based on YMPE (Year’s Maximum Pensionable Earnings) and number of total contributory years. But there is another strategy – deferring CPP until after age 60, 65 or even up to age 70. Is this true?
Yes, the common (or perhaps former) practice seemed to be to take it as soon as possible (bird in the hand people), but there is a growing trend for deferral due to the increase of 0.6% per month between age 60 and 65 and the increase of 0.7% per month between age 65 and 70 (two in the bush people). One of the reasons for an increase in the number of people deferring is probably the decrease in the number of people that have defined pension plans, especially fully indexed ones.
What is the income impact of a bigger Canada Pension Plan benefit? Say, taking CPP at age 65 or even when you’re forced to at age 70?
Looking at just the total benefit payout in 2018 dollars and ignoring factors such as inflation and net present value, the impact of the “age-adjustment factors” for someone who is eligible for a maximum CPP retirement at any age could best be analyzed using the attached table:
Great analysis and handy table for all.
OK, so based on our last case study together about when to take CPP, we know very few people have the necessary 39 years of maximum earnings in order to receive a maximum CPP retirement pension, but many people can expect to receive about 80% of maximum. Should they even consider deferring CPP at all?
Mark, I don’t espouse always taking your CPP either early or late. My main concern is that people truly understand what their CPP choices are, and how these choices might interact with other income streams to create their overall retirement financial strategy.
Reasons to defer Canada Pension Plan?
In my mind, the main reasons why someone might plan to take their CPP and OAS as early as possible, include:
- you need the money to live on now (probably the biggest reason)!
- you have good reason to believe that you have a shorter-than-average life expectancy;
- you already have a good reliable defined benefit pension with full indexing and the CPP and OAS are “gravy”;
- you want to delay spending any savings for as long as possible, in order to maximize the amount of money in your estate – you plan to leave a legacy.
- you are a “bird in hand” investor so you take Canada Pension Plan money now while you can.
Whereas the main reasons for taking your CPP and OAS as late as possible, include:
- you don’t necessarily need the money to live on now;
- you have good reason to believe that you have a longer-than-average life expectancy;
- you don’t have a defined benefit pension with full indexing, and the CPP and OAS are integral to your inflation-protected, fixed-income financial well-being;
- you are concerned about market risk to your savings portfolio;
- you aren’t concerned about leaving a large estate – so you use up some or all personal assets before age 70 by taking your government benefits.
What about CPP Survivorship? Does it matter for ages 65 vs. 70?
Delaying CPP to age 70 can be very attractive since it can provide a higher payment for your life, significantly reduce longevity risk, inflation rate risk, and investment risk – shifting that risk to the government.
But, simply put, delaying CPP does not offer survivorship benefits.
Unfortunately, the CPP survivor benefit is based on the “calculated amount” that would have been received at age 65. This means that even if the deceased delayed CPP to age 70, or even started CPP at age 60, there no impact on the survivor benefit.
Should you defer your Canada Pension Plan to age 65 or 70 Summary
Thanks Doug. The way I see it, in deferring Canada Pension Plan benefits until later in retirement, including up to age 70, you are benefiting in two major ways:
- You are basically transferring longevity risk to the government.
- You are transferring a portion of your investment risk to the government.
You are benefiting from 1 and 2 above without any additional money management fees as well. These reasons are significant advantages for singles or couples who are entering retirement and thanks to some diligent savings, have solid RRSP assets to draw down before taping inflation-protected government benefits.
These singles and couples can decide to use up the tax liability that is their RRSP investments, first, drawing those assets down in their 60s, and then into their 70s and beyond – rely on a combination of maximum, government benefits; workplace pensions without worry of early withdrawal penalties; use any tax-free income built up over the years (thanks TFSAs!), and spend tax-efficient income from non-registered investments, and more.
I want to thank Doug for his insights into this post. I look forward to posting more articles about CPP (and OAS) with Doug to help soon-to-be retirees in the future.
Doug Runchey is a fan of My Own Advisor and a pension specialist who has more than 30 years of experience working with both CPP and OAS programs. Doug contributes to many Canadian financial forums and writes pension-related articles for many financial blogs. He runs DR Pensions Consulting (no affiliation) and is committed to helping people understand the government pension puzzle.