Should you defer your Canada Pension Plan to age 65 or 70?

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.  (You can refer to my most recent post about when to take Canada Pension Plan here).  That doesn’t mean others are in the same boat.

You might be wondering how to effectively take your Canada Pension Plan benefit this year.  This post will help.

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:

Should you take CPP at 65 or 70 – CPP retirement pension breakeven calcs_2018 master

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.

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.

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 reliable defined 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 taking government benefits.

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:

  1. You are basically transferring longevity risk to the government.
  2. 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.

Mark Seed is the founder, editor and owner of My Own Advisor. As my own DIY financial advisor, I've grown our portfolio to over $500,000 - but there's more work to do! Our next big goal is to own a $1 million investment portfolio for an early retirement. Come follow my saving and investing journey by subscribing to my site. Delivered by Subscribe Here to My Own Advisor

49 Responses to "Should you defer your Canada Pension Plan to age 65 or 70?"

  1. I’m new to your page, trying to educate myself in all this. I’m 55 years, came to Canada 14 years ago. As self-employed and a single Mom of four I did not contribute to CPP like everyone else nor having any kind of saving for my retirement. My question is can I start to contribute to CPP now and until the age of 70. I’m in good health and I plan to work until then, which is almost 15 years. And how much is maximum $$ should I contribute to making up for lost time, or there is a limit. Thank you in advance for your time and effort, I appreciated.

    Reply
    1. Hi Lobna – If you are declaring your self-employed income on your tax return, you should already have been paying CPP for the past 14 years. CPP contributions for the self-employed is 9.9% of your net earnings, up to a maximum of $5,187.60 if your earnings are $55,900 or above. Each year of max earnings/contributions produces a retirement pension of approx. $29 per month at age 65 or approx. $41 per month at age 70.

      Reply
    2. Hi Lobna,

      Thanks for reading and being a fan. I’ll let Doug tackle this, specific issue, but my thinking is you need to pay into CPP even with self-employed income.
      With few exceptions, workers in Canada who make over $3,500 a year contribute to the CPP, with the exception of Quebec residents, there is a provincial plan for that.

      Self-employed people are no exception to this; they pay the full CPP amount whereas an employed worker pays half with the employer also paying half.

      All taxpayers have their own CPP accounts, based on contributions made since the age of 18.

      Reply
  2. A topic I’m keenly interested in as we approach the years we will be eligible for early CPP.

    I believe my thinking is similar to yours Mark in regards to CPP, delaying reyling on RRSPs earlier, and then drawing a combination of CPP/OAS, registered, unregistered and finally TFSA. My thinking has not changed from this as our initial plan and in practice we have been withdrawing sizable RRSPs & LIF since beginning retirement nearly 4 years ago.

    We have more work to do before making a decision on CPP timing but am leaning towards at least age 65. All 5 of Doug’s points on delaying apply to us, and none of the reasons for going early. Having some options seems like a fortunate place to be, but we are cognizant lots of things can change over time.

    Reply
    1. That’s where my head is, as you know: kill off RRSPs, then non-reg, then save tax-free dividend income “until the end” (TFSAs).

      We have almost 20-years to worry about this, but to be honest, I think as long as we work until age 50-55 to kill off debt and realize our $1 M portfolio goal – I think our game plan is to defer CPP and OAS and reduce the tax-liability (RRSPs) in the meantime.

      As you say though, things can always change. I wasn’t planning on moving 3 months ago!!

      Reply
    2. That’s similar to our plan. We will most likely retire before 60 but not likely to take CPP at 60. we will draw RRSP first while continue to max TFSA every year. One strategy I am considering is borrowing from our HELOC for investing so that we can use interest to write off RRSP withdrawl. If market crushes before our retirement, I will borrow HELOC at that time. Hopefully by 70 we will have $0 RRSP and can live off combination of CPP, OAS and dividends/interests from our non-registered accounts and TFSA. We will continue to transfer money from non-registered accounts to TFSAs after that.

      Still quite some time until our retirement. We will see what happens to this plan.

      Reply
      1. I like your idea May – re: “Hopefully by 70 we will have $0 RRSP and can live off combination of CPP, OAS and dividends/interests from our non-registered accounts and TFSA.”

        Add in a small DB workplace pension at age 65 for me (maybe worth ~ $25k per year in present dollars?) and that’s exactly where my wife and I want to be.

        Well done. We have something to aspire to, to catch up to folks like you!

        Reply
  3. I will be taking my CPP early because I will need the money. A fully funded retiree can afford to wait but I will need that money to live on. I plan to try and save some of it in to my TFSA every year but I will be a low income retiree so I plan on taking what I can get when I can get it.

    Maybe I should work longer and save longer and delay my retirement but I live very simply and I don’t plan to travel so I am prepared to live on less for as long as I have and I know I will be very happy. I was hoping for freedom 55 but it looks like I have to tough it out until freedom 57.

    Reply
      1. I cannot guarantee a better return than that but I will actually need most of the money to live on and I will be saving some in to my TFSA for large future expenses like dentures(?) or whatever else senior me may need.

        Reply
    1. Nothing wrong with that Beth – taking it sooner than later. This post was only to highlight some options for folks that might not know the benefits of deferral.

      “I plan to try and save some of it in to my TFSA every year” – that’s smart if you can – as you know.

      It’s really a balance isn’t it? Delay retirement vs. living for today. There is no right answer for everyone. Even retirement at age 57 is rather great these days!!

      Reply
      1. My work is often disheartening and has recently become soul crushing. I might even try some other sort of work after I leave my current job but I am calculating in a small amount of CPP starting one month after my 60th birthday to help me pay the basic expenses of life.

        I am calculating a small amount of CPP because I had years as a stay at home mom and years as a very low income earner so I know my CPP will not be large.

        Reply
        1. Geez…”soul crushing” doesn’t sound good. Maybe you don’t need to retire but you need a new job? I think you if can work, enjoy work, why not do some sort of semi-retirement? Thoughts?

          I’d love to be able to work part-time in my 50s if my wife and I can get our financial act together!

          Reply
          1. I would have to take a big pay cut if I left my current position but I am prepared to do it. Luckily I could pay my bills and live simply on a part time minimum wage job but I would not be able to save any more.

            Big decisions in my near future.

  4. If you are a working widow(er), and collecting a survivors pension, you should seriously consider taking your CPP pension at age 60.

    At present, the total CPP pension and Survivors Pension cannot equal more than the maximum pension (today is 1134.17/month).

    If you are working at 60, you continue to contribute to CPP (mandatory until 65yrs). If you earn $55,000 plus, you will have maximized your CPP contributions, and will receive an additional $25/month the following year. 2nd year ($50/month), 3rd year ($75/month), ect… These are approximate amounts and are separate from your CPP/Survivors pension.

    These additional “post retirement” benefits are not included your maximum benefits. I was 60 when my wife died. My total Survivors Pension and CPP were calculated at $1016/month (a very complex formula). A difference of $110/month for my maximum at age 65.

    Each year I continue to work, I receive an additional $25/month, in addition to the annual inflation rate. If I continue to work to age 65, I will almost reach my maximum amount, but with 4.5 years of CPP/SURVIVORS benefits (btw…rolled into RSP) of $50,000 plus.

    My suggestion of course, is do the math and if confused – speak to a financial advisor. Mine is a no-brainer.

    Reply
    1. Hi Mike – My only caution to your suggestion, is that if you do take your CPP at age 60 and receive the “combined CPP retirement/survivor’s pension” of $1,016 at age 60 plus five years worth of the additional post-retirement benefits (PRBs), your survivor’s pension will be recalculated at age 65 which always results in a reduction in your combined pension from age 65 onwards, usually in the neighbourhood of about $100 per month. Were you aware of that, and does that change your thought of it being a no-brainer?

      Because of these combined benefit rules, delaying your CPP until age 70 is often a very good choice for those receiving a survivor’s pension,

      As you suggest, know what your choices are. Read this article for more details: https://retirehappy.ca/cpp-survivor-benefits/

      Reply
      1. Thanks for bringing that out Doug. I was aware of that, but again as you know, it is a complex formula.

        Still, with the post retirement benefits contribution, the reassessment CPP benefits at age 65 will almost offset each other.

        Even with a $100 net difference at 65, at $50,000 payments upfront (rolled into RSP), it will take about 500 months (give or take) or about 40 years to break even (again approximate).

        Regardless…does anyone know where they will be in 40 years, being that one will be 105yrs old?

        I know I don’t.

        Reply
    2. Great comment Mike but I’m not convinced taking CPP at 60, survivor’s pension or otherwise, is always a slam-dunk at age 60. I’ll let Doug respond because he has more experience than me on this.

      I’m very sorry for your loss (wife) but in continuing to work, you are certainly growing your government-backed, inflation-protected, fixed income.

      Reply
  5. I’m going to ask for three estimates (for ages 60, 61 and 62) when I hit 59 to see which is the “best” for me. Every time I think I understand CPP I realize I don’t. Between drop out provisions, YMPE, AYMP, YAMPE, and YBE I want to rip my hair out.

    Reply
  6. Just a side note for those who are self employed. Pay your spouse a salary and contribute the max for her as well, so she will qualify for cpp when you both retire.

    Reply
  7. Just a side note for those who are self employed. Don’t pay your wife a salary – and save/ invest the 9.9% you would have had to pay the CRA. Have your company pay your wife in dividends. (less tax). This way – you also leave your wife open for her to collect the GIS. (the GIS will replace the lost CPP income)

    Reply
  8. Thanks Mark for bringing Doug back again. I always learn something new from your interviews with him. Doug’s a straight talkin’ kinda guy. I’m always up for supporting a fellow Van Islander. I’ve used Doug’s services in the past & I plan to again.
    I just turned 64 this week & I’ve been thinking long & hard about the decision as to when I should start taking my CPP. I’m into my 5th yr of retirement and my Bridge payment from my non-indexed Define Benefit Pension(DBP) will end next Jan but my OAS will kick in at that time. My OAS will make up about 2/3rds of my lost Bridge. I’ve been withdrawing my RRSP’s each yr from my investments & purchasing PMs to wait out the next market/asset correction. I live comfortably on my DBP (Single…kids grown up…no longer asking me for $$) (I’m spending my 5th winter in New Zealand) (I travel around North America during our summers).
    My worry is inflation slowly eating away at my DBP with rent increases (gave the house to ex for the benefit of the kids that was 23yrs ago, they were young) & possible in-home care expenses in my later years. So I’m wanting to add as much inflation protection to my income as possible. Therefore maximizing my CPP by deferring until 70 seems best for my situation. Plus feeling confident that I will live until at least 100 (parents in there eary 80s still cutting and splitting their own firewood). My Dr seems to agree with me. So short of going back to work (I love sleeping in) I think deferal is my best options. Thoughts, comments, questions??

    Reply
    1. Congrats on year #5 in retirement. I hope to get there eventually!

      It seems to me if you can withdraw from your RRSP, and take any pension income, to meet your income needs, then I think it makes full sense to delay CPP and OAS. Of course, if you need the money, then you have to take them when you need them.

      If you can live comfortably without it, I would definitely think about delays to both programs if you have no intention to leave a legacy.

      If your parents are in their 80s “still cutting and splitting their own firewood” – that’s great. We should all be so lucky in life.

      Reply
  9. Hi LA ED – Thanks for the endorsement! If inflation is one of your major concerns, then deferring your CPP is definitely wise, especially after age 65 with the 8.4% increase for every full year of deferral beyond age 65. If you could afford to defer OAS it also increases, but only at a rate of 7.2% per year.

    Reply
  10. Thanks Doug. Yes I had considered that as well but that would mean eating the whole loss of my Bridge and spending some of my emergency savings each of the 5 yrs and I’m not comfortable with that so I’ll compromise. Good thought for those who can though.
    As an aside I noticed that you are up at 7:30am to reply to my comment and you are retired.
    See, I had to wake up early to go to school since 6yrs old & then for the next 40yrs after college to go to work. I want to wake up naturally at 10am each morning for the next 36 yrs. Hahaha You are probably quite happy to wake up early. I always resented it. Each to his own I guess. Thanks Doug for all the great work you are doing for all of your fellow Canadians.
    Enjoy your day. I’m going to sleep now. 🙂 Cheers Mate.

    Reply
  11. Although everyone’s situation is different – and – All of us have different income streams and ideas on how much is needed to retire. The Self-Employed is best to take the CPP at age 60 and collect the GIS & OAS at 65. Why give up $10K yearly in GIS? Forget about paying the max into the CPP. The idea is – to take that 9.9% and invest it yourself! The GIS will replace the CPP anyways!
    ** We do not know when we are going to die – so take the CPP at 60! In fact with the early CPP and OAS at 65 – coupled with the GIS – the Gov will pay you over 30K yearly. Use that towards your fixed income portion for your portfolio. (all nicely indexed for you).
    * WORST: For couples – one of you dies and you lose 40% of the CPP and all the OAS of your partners. But if you instead invested the 9.9% (that you control) – you would not lose any of it! (no haircuts!).

    Reply
  12. IMO: if you do not control your retirement – well – then – your retirement is not going to be a smooth one. Because, neither of us control the CPP, GIS or OAS programs (rules change by gov) – it should not be banked on – relied on -for more than 25% of your retirement income. (and even that’s high).
    As for your work pensions – you do not control them – either. Ask the Sears employees that have 25 years of service how their retiring. The only real way of retiring properly – is if you control YOUR MONEY! (not the Gov or past Employers). Most pension plans have managers, fees, support staff (the list goes on) that sucks your $$$ just to operate. So much waste in most of these plans.
    ** While others continue to pay into the CPP and their employers pension plays – I have decided years ago – to invest my own money and control my own money and decide who to leave my money to – when I die. Most pension plans come to an end when both husband & wife die. (your money now goes to support others – you do not know or care about). Rather than your kids, grand-kids etc.
    ***** A good question is: What would you rather have One Million in a diversified portfolio with OAS & GIS or Collect CPP, OAS & employers pension? (all that get cut when one dies and completely ends when both dies).

    Reply
    1. “Why give up $10K yearly in GIS?”

      Pride and the self-satisfaction that I don’t have to rely on the goodwill of fellow taxpayers to support me. Something our fathers might have taught us.

      Reply
      1. “Pride and the self-satisfaction that I don’t have to rely on the goodwill of fellow taxpayers to support me. Something our fathers might have taught us.”

        Then I guess you won’t be collecting OAS?

        Reply
        1. “Then I guess you won’t be collecting OAS?”

          Ya, I’ve heard that response lots. Especially from people with a deficit in morals and ethics. Having said that, it’s a good chance I’ll have it clawed back.

          Reply
    2. “As for your work pensions – you do not control them – either.”

      True to some extent. It depends on your pension Mike. Not all pensions are the same. I would think federal government pensions and Ontario teacher pensions are safe. Private sector, not so much.

      There is nothing wrong with trying to control your money to best extent possible – agreed.

      Reply
      1. Hey Mark. I agree – but these pensions – cost millions to administer! (your dues go towards the cost of managing these plans). And.. if you do not like mutual fund management fees — you certainly will not like these pension plan management fees!

        Reply
          1. A DB plan by definition pays a defined benefit. I would think that the admin costs are not really relevant to what one is entitled to in the end. For that matter, what the plan earns is also not that important as the employer makes up for any shortfall to provide for the earned pension benefit. I would not trade mine for anything.

          2. Yes, I’m personally not worried about my gov’t backed DB plan. I am fortunate to earn about $25k or more at age 65 now; indexed to 75% of inflation.

            If work continues to have me – that amount will also go up over time.

            My wife has a defined contribution plan as well although no defined benefit obviously so she has fees to pay. I put her in as many indexed mutual funds as possible. I hope her portfolio will be $300k at the time of retirement. Who knows. Those DC pension plans have high-fee products unfortunately – nothing I can do other than to lobby our plan administrator which I’ve had no success with.

            I would not trade any DB pension earned or accrued for anything either. Especially one that has some inflation-protection.

            The way I see it, $25k per year, inflation-protected is likely worth about $400-500k now. That’s a sizeable amount of money for any individual to save for retirement, let alone have in their 40s like I do. I’m VERY lucky.

          3. Indeed you’re very fortunate with an indexed DB pension, and along with your wife’s DC pension asset (under your future management) you’ll enjoy an excellent stream of retirement income. Combine your growing personal investment portfolio, and future govt pension and you’re golden!

            The way I see it paying some reasonable amount of fees for professional management of these pensions is a nice problem to have. Most Canadians (60%) have no work pension at all, and plenty of these aren’t doing well looking after their own financial future. At least organized work pensions can give people a simple solution for at least part of their retirement needs, much like CPP does. Fees are a consideration but in the whole scheme of things would be a silly reason to avoid work pensions that have matching programs (almost all).

            I don’t aspire to programs like the GIS although it has value for low income people and is income tested. We couldn’t remotely qualify for it unless we were somehow able to game the system, something I would never consider.

          4. After checking my statement recently, my DB pension for contributions made until the end of 2017, the pension should be $27k per year at age 65 (indexed with inflation to 75% of CPI). It will be more (if I continue working) but regardless, it might be less if I take the early withdrawal (i.e., before age 65). I don’t intend to do that. RRSP withdrawals, dividend income, other will need to cover the delta between any early retirement and drawing on my DB pension. That’s my plan – defer stable, fixed income, for as long as I can to minimize investment risk, longevity risk, and of course ensure predictable income.

            I am very fortunate to have that DB pension for sure…I don’t take it for granted.

            My wife’s DC pension is not worth as much, but I suspect it should be valued at $300k in a few years. I invest in the lowest-cost products available in that plan for her, but the choices are very, very slim on that. $300k in a LIRA should churn out at least $20,000 safely with 5% growth for about 20 years. Then the money is gone. That income would be replaced by the aforementioned delayed CPP and OAS to maximize government benefits – say age 65 or 70 for her. (Current thinking.)

            All this to say…fees are just part of the cost of investing regarding pensions but I will gladly take paying these fees associated with our DB and DC pensions over not having either at all.

          5. “should be $27k per year at age 65 (indexed with inflation to 75% of CPP. It will be more (if I continue working)”

            A very nice place to be!

            On your wife’s DC pension when you take it over can up to 50% of it be rolled into RRSP before age 55 or does it need to be rolled into a LIRA and then withdrawals available only after that age through a RRIF or LIF? Just asking re timing of the cash flow plan you mentioned.

          6. No, I can use the provision to roll that 50% into RRSP vs. LIRA. I/we might do that. I won’t touch that cash until age 55. We need to work and stay busy until then but I could see part-time work in our 50s if possible.

  13. Some very good points! But disagree with waiting to age 70 to collect CPP! My main concern with my self-managed portfolio is – what happens when I am older and no-longer able to manage it myself. (or i get ill).
    I have a son that could – but what happens if he dies before me or is not able to manage my affairs. This is a worry for me – as i have read about family members that had POAs- that mismanaged (or stole) funds. This to me – is a major risk! Any ideas?
    So in this case – I wish I had a DB pension plan (so the fixed income flows & is managed for me).

    Reply
    1. Mike, this is yet another reason to defer CPP and/or OAS and/or buy an annuity with say 25% or so of your assets in your 70s – if you can.

      As you get older, you may or may not be able to (let alone want to) manage your money. Shifting this responsibility to others might be a great idea accordingly. You can limit the risks associated with POAs, etc., if you shift this risk. I’m not saying you HAVE to, rather, it’s an option.

      Cheers 🙂

      Reply

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