I am turning 60 next year and wondering if I should take my CPP early along with the penalties or should I wait a few years and then take my CPP with fewer penalties? That is the question that is faced by many people every year. The common theme that I hear is “Take it Now”. From close friends to financial advisers, they all seem to agree. Don’t wait to take your CPP you could be dead early and miss out entirely. But what about the economics of taking it early?
I decided to do a few calculations and this is what I came up with. If you have suggestions or disagree with this approach, please leave a comment with details in the comment field. This is a pretty common decision that many people are faced with. There are lots of ideas about what to do regarding taking your CPP earlier than age 65. Comments and ideas are very welcome.
When Should I Take My CPP – at 60?
Canadians have always been able to collect their CPP before turning 65 (the earliest you can start is age 60), although there is a penalty that depends on when you start receiving the benefit. As a rule, the pension is reduced by 0.5% for each month prior to turning 65. If you start at 60, for example, you will reduce your benefit by 30%, making it considerably less than if you wait until 65.
That’s the dilemma I faced myself as I approach turning 60 and I am considering the pros and cons. As it turns out the math is pretty simple. I assumed that I would start taking my CPP at 60, and would live for 15 years after that. With a 30% penalty, my income from CPP would be a total of $133k excluding any increases from indexation. If I wait until 65, there will not be any penalty when I begin collecting. But I will only collect for 10 years under this assumption. The total is $108k. So obviously I am further ahead if I only collect for 15 years. The breakeven point appears to be 17 years and if I live longer then the delay scenario begins to pull ahead.
Government Changing the Laws
Another factor to keep in mind particularly this year is the federal government’s announcement last spring that it is bringing in legislation designed to improve the system’s fairness. The legislation was passed in December and the government will be phasing in changes between 2011 and 2016.
Starting in 2012, the penalty to take the CPP early will be 0.6% instead of .5% a month for each month before turning 65. This move bumps the penalty up to 36% if you start at age 60.
As well, starting in 2011, the government is phasing in new rules if you delay the benefit after turning 65. The so-called “late pension augmentation” will be increased to 0.7% a month, from 0.5%, for each month after age 65 until age 70. This means you can collect an additional 42%, versus 30% under the old rules, assuming you wait until 70.
In addition, starting in 2012, you will no longer have to stop working or earn significantly less, to start receiving the benefit.
If your genes suggest that you may live well into your 90’s, then you might consider taking the risk of delaying collection of your CPP, however in my case no one has lived past 80 years of age, so I am taking mine early and the math bears out this decision. If your health is not great, this may be another reason to begin collecting early.
No More Contributions to CPP
There is another major advantage in that once you start receiving the CPP, you no longer have to contribute to the plan. This means a saving of $2,100 a year, assuming you are earning up to $46,300 in employment income. Over five years this adds up to $10,500 in total savings and if you are self-employed, the saving is doubled, to $21,000, because self-employed individuals also have to pay the employer’s share of CPP contributions.
Starting in 2012, if you start collecting before 65, you must continue contributing to the CPP. Once you reach 65, you can still make voluntary contributions to the CPP. Both of which will increase your CPP retirement benefit.
These are some of the factors that need to be considered in this decision. Mine is pretty simple, but readers should take into account the following:
- Current health
- Life expectancy
- How long you will work
- Tax consequences and impacts of other income
- Government plans to phase in changes to the CPP plan
Comments and suggestions are welcome.