By Barbara Knoblach, PhD, CFP®
The calendar has flipped, and we have a new year ahead. Bring on 2020.
The kids are back at school; homework, lessons and sports practice have begun to fill the family calendar again. Summer holidays and backyard BBQs are on the horizon but may not feel that way given the dark days, rain (and snow) across most parts of Canada.
It’s a time to look toward to new challenges at work, plans for the New Year, and yes, summer vacations. Because, really, what is all our hard work for, if not, at least in part, to afford time with friends and family?
In fact, as you ease into a busier winter schedule, it’s a great opportunity to pause and remember why you work hard, and to recommit to your life goals—including your important retirement goals. Who doesn’t dream of the day when all four seasons are theirs to shape and enjoy?
But retirement looks very different to everyone, and one of the most important things to consider when planning yours, is the optimal time to apply for Canada Pension Plan (CPP) benefits. All it takes is a bit of calculated foresight, to make the decision that will best suit your circumstances.
Here’s a look at some basics:
Canada Pension Plan benefits can be drawn as early as age 60 (reduced 0.6% for each month before 65) or as late as age 70 (increased 0.7% for each month after 65).
The average life expectancy for Canadians is age 80 for men and 84 for women. Statistics Canada predicts a continued rise in life expectancy of roughly two years over the next 15 years.
Things to consider:
Contemplating your mortality may feel uncomfortable, but it should not be ignored. Your health and whether longevity is a family trait, are things to consider when making your decision regarding CPP.
If you take your CPP starting at age 60, your breakeven point with someone who waits until age 65 is when you both turn 74. Confused? Let me put it another way – I will use an example to illustrate my point.
If Mary takes her CPP at 60 and Brenda takes hers at 65, Mary’s monthly CPP payment will be 36% lower than Brenda’s, but she will collect five years longer. They will be 74 when Brenda pulls ahead of Mary for overall amount collected.
CPP Breakeven Point Chart
Working and collecting CPP
If you believe good genes are on your side and there is a strong chance you’ll be collecting CPP into your 80s, it may be beneficial to wait until age 70, but only if you can afford to do so. How much cash flow you have from other sources is as important a consideration as your health. If you are living on a restricted income, it may be better to take CPP sooner and enjoy an improved quality of life while you are best able to appreciate it.
Even if you don’t retire at age 60, you are eligible to collect CPP. But you and your employer will still be required to make CPP contributions until age 65. If you are still working between ages 65 and 70, you are no longer required to contribute if you are collecting CPP, though you may choose to, thereby increasing your CPP benefits.
CPP benefit entitlements
It’s also important to understand how much CPP benefit you are entitled to before you decide the optimum time to collect.
As of 2020 the maximum benefit is $1,175.83 per month, but you might not qualify for the maximum. It all depends on how much you contributed over the course of your working life. According to the Government of Canada website, the average amount new beneficiaries received at age 65 was $672.87 in 2019. If you would like to know how much you can expect to receive, you can request a Statement of Contributions through your Service Canada account.
CPP is part of a bigger plan
Ultimately the decision on when to apply for CPP should be part of a broader retirement plan. It’s important to develop as clear a snapshot of your retirement income and expenses as possible. Do you plan to travel or are you likely to be more of a homebody? Will you be joining a golf club, or buying season tickets for your city’s sports team or theatre company? Do you foresee downsizing your home? If not, will you be mortgage free? What about vehicles? Will you and your partner downsize to one vehicle? Are there health concerns that may need accommodating? Will you want assistance, such as cleaning services and lawn care, to help maintain your home? The questions you need to consider are as varied and numerous as are retirement lifestyles.
Once you have a clearer picture of your possible expenses, you can stack those against your projected income sources. Aside from investment portfolio (RSPs, pensions, non-registered investments, stocks, and TFSAs), OAS, and CPP, perhaps you intend to work part-time as a consultant in your past profession, or step out into something completely new.
It’s essential to determine if there is a gap between the money you will need and the money you will have.
The sooner you discover that gap, the sooner you can start finding ways to close it. If that sounds overwhelming, there is no need to do this on your own. A money coach can help you create a retirement plan that supports the future you desire. Contact one of our Money Coaches and get started today.
This post first appeared in 2016. It has been updated with current data and republished.
NOTE: The author is not able to address questions regarding an individual’s specific financial situation. If you have a technical question regarding your CPP, please contact Service Canada. If you would like to discuss your retirement planning needs, we encourage you to book a free, initial consultation with one of our Money Coaches.