When to take your Canada Pension Plan benefit
Readers of this blog will know I’m many years away from full-on retirement. This means I’ve got a couple of decades to worry about when to take my Canada Pension Plan (CPP) and what that means as part of our retirement income. (That doesn’t mean I don’t think about the possibilities, including when to draw down my RRSP before taking any workplace pension.)
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.
Back to CPP, I don’t pretend to know all the rules nor ways to optimize the benefits of this government program so I enlisted some help for today’s post. Enter Doug Runchey, CPP guru and pension specialist who has more than 30 years of experience working with both CPP and OAS programs.
I reached out to Doug to ask him some basic questions about CPP and what that program typically means for most Canadians.
Thanks for the chat Doug, welcome to the site!
Thanks for the invitation, Mark. As you mentioned, I’ve spent most of my adult life working with the CPP and OAS programs, and I welcome this opportunity to share my knowledge with your readers.
Doug, some individuals struggle with the CPP income formula, what they would need to contribute to the plan and for how long – to get the maximum income amount. Can you outline that formula for readers?
It’s a complicated answer, and it’s about to get significantly more complicated under the “enhanced CPP” changes that start in 2019. For now, I’ll give you the simple answer for someone who wants to start their CPP at age 65 and who never took time away from work due to raising children or being disabled.
For this group of people, a CPP retirement pension is based on their best 39 years of earnings. For CPP purposes, “best” means in proportion to the Year’s Maximum Pensionable Earnings (YMPE). The YMPE was $5,000 when the CPP began in 1966; it’s $55,300 for 2017.
So here’s the basics: in order to receive the maximum CPP retirement pension of $1,114.17 for 2017, you would need to have 39 years of earnings at or above the YMPE between ages 18 and 65.
If you have fewer than 39 years of maximum earnings, to estimate the amount of your CPP retirement pension at age 65, you can simply total your best 39 years (in terms of a percentage of YMPE), divide by 39, and multiply by $1,114.17.
Ok, so people need to think about their contributions “into the pie” for 39 years. How much should Canadians expect to receive on average? Can you discuss the averages for today’s retirees and retirees that might be about 10 years from now?
Based on my experience, very few people have the necessary 39 years of maximum earnings in order to receive a maximum CPP retirement pension, but many people receive 80 to 90% of the maximum.
Let’s walk through an example.
Sally is an RN at the local hospital. Sally currently earns $75,000 per year. She has been making over $55,000 per year for the last 20 years. She plans on working another 10 years and then retiring at age 60. How much might Sally earn from CPP at age 60? (We’ll assume Sally’s income rises about 2% per year for the next 10 years.)
Because Sally plans to take her CPP at age 60, the amount of her retirement pension will be based on her best 35 years. (It’s actually 35 years and 2 months, but I’m trying to keep things simple.) Also, because she’s taking her CPP at age 60, her maximum CPP is only $713.07 (64% of the age-65 maximum of $1,114.17).
This is a good time to remind you that CPP can be drawn as early as age 60 but benefits are reduced 0.60% for each month before age 65. Conversely, you can take CPP as late as age 70 and benefits are increased 0.70% for each month after age 65.
Because of Sally’s good salary over her career, her 30 years of earnings above the Year’s Maximum Pensionable Earnings (YMPE) guarantee her at least 85.7% (30/35) of the maximum age-60 amount, or $611.10 monthly.
If Sally worked part-time while she was attending university learning to be a nurse, she could also include her best five years of those earnings. If they total the equivalent of two more years of maximum earnings, that would increase her CPP to 91.4% (32/35) of the maximum age-60 amount, or $651.75.
If Sally waited until age 65 to take her CPP, she would receive 82.05% (32/39) of the age-65 maximum of $1,114.17, or $914.18 monthly. Check out this file for Sally’s calculations: CPP retirement pension breakeven calcs_Sally Example – My Own Advisor November 2017.
Great details Doug. Many near-retirees struggle with when to take CPP. Age 60 or 65 or 70 or anywhere in between. What general guidance can you offer Canadians on that? Is there a break even point?
The problem I have with most break even calculations is that they often consider only the age-adjustment factor and don’t account for the reduction that may occur if someone waits until age 65 to start their CPP but have no earnings after age 60. (I refer to this as waiting to receive a larger slice of a smaller “pie” you mentioned above.)
Another problem with most break even calculations is that they compare only one choice against another, and they don’t show the progression of choices available or quantify the benefit of one choice over the other.
To address this what I prefer is to do actual calculations from ages 60 through 70, the range you could take CPP, and compare the cumulative payouts. The attached chart illustrates what Sally’s choices would look like, showing that her best choice is taking her CPP at:
- Age 60 if she doesn’t live past age 72 (shaded boxes);
- Age 61 if she lives past age 72 but not past age 75 (shaded boxes);
- Age 62 if she lives past age 75 but not past age 77 (shaded boxes);
- Age 63 if she lives past age 77 but not past age 80 (shaded boxes);
- Age 67 if she lives past age 80 but not past age 81 (shaded boxes);
- Age 68 if she lives past age 81 but not past age 83 (shaded boxes);
- Age 69 if she lives past age 83 but not past age 85 (shaded boxes);
- Age 70 if she lives past age 85 (more shaded boxes).
Here is a good summary for your readers Mark, for one:
- If you believe your genes are good, and you have a strong chance to live beyond age 85, then depending if you need the cash it may be beneficial to defer CPP until age 70. This is only if you can afford to defer the income until age 70.
- If not, if you can’t afford to defer and you need the money of course then take CPP when you can at age 60.
Two, and what usually comes up in these calculations, Sally’s choosing to take her CPP at age 64, 65, or even 66 are not her “best” choices.
Great analysis. Say someone is over the age 60 and still wants to work. Should they delay taking CPP? What considerations should go into this answer?
I believe the factors that someone in this situation should consider are:
- If I delay taking my CPP and continue working, my future earnings and CPP contributions may increase my CPP. How does that compare to the lower CPP plus post-retirement benefits (PRBs) that I will receive if I do take my CPP and continue working?
- What is the impact of adding to my taxable income if I take my CPP while still working?
- If I’m receiving a CPP survivor’s pension, how do the “combined benefit” rules impact my choices?
- Will I be eligible for any Guaranteed Income Supplement (GIS) once I’m over age 65 and stop working?
- Will I be subject to the “OAS clawback” once I’m over age 65?
- What are my other income streams after I retire, and are any of them indexed to inflation?
- And of course, how long do I expect to live?
Lots of things to think about Doug. Finally, what little known fact or facts should Canadians know about the CPP?
Everyone should understand that the estimates on the CPP statement of contributions (SOC) “pretend” that you’re age 65 on the date that it’s printed, which has the same impact as projecting your current lifetime average earnings through until age 65. If your actual future earnings will be higher or lower than your current lifetime average, your future CPP retirement pension amount will be higher or lower accordingly.
Everyone who’s receiving a CPP survivor’s pension should be aware that the “combined benefit” rules are not as simple as saying that they are subject to the maximum CPP retirement pension. The actual calculations are much more complex than that, and they always result in less than simply adding the two numbers together.
Everyone who has been separated or divorced should be aware that CPP credit-splitting often reduces one spouse’s CPP by more than it increases the other spouse’s CPP, especially if the lower-income spouse claims the child-rearing dropout.
Mark: Thanks for this detailed post Doug, covering some Canada Pension Plan 101 and then some. I look forward to more articles about CPP (and OAS) with you again here on my site to help soon-to-be retirees.
My thoughts – when to take CPP?
1.Given those that delay CPP past age 65 are rewarded for their decision (in the form of an increased pension by 0.7% per month for every month that you collect CPP benefits after your 65th birthday) I think it makes great sense to delay CPP until at least age 65 if you consider these factors:
- You don’t need the money – you can live off other assets before age 65, AND
- You have a life expectancy of at least age 75
Electing to take CPP early (age 60) essentially means you’re taking the “bird in cash” approach and you’re comfortable with lower payments over time.
If you start CPP at age 60, in the example above, then about age 72 is your breakeven point. You could have delayed your benefits to age 65 but earned the same accumulated benefits due to the higher income earned after age 65.
Going further still, if you expect to live past age 84 or 85, based on this example and as a general rule of thumb, that’s the breakeven age to delay CPP until age 70 vs. age 65.
2.Assuming your retirement cashflow is not dependent on CPP, given CPP is taxable income, ensure some of your registered/tax-deferred assets are spent to avoid any OAS clawbacks that may occur when CPP income is higher, assuming you take it later.
By doing this, you are essentially transferring some investment risk from you to the government, with inflation-protection built-in.
Again, thanks very much Doug for your expertise! I hope to have you back on the site again soon!
Doug Runchey is 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.
Stay tuned as always for more articles on this theme and anything personal finance related really – on this site for free – for the good reader.
Got any questions for Doug about CPP? What are your thoughts or experiences about taking CPP at a certain age?