The Fear Of Missing Out (FOMO) is alive and well in Canada. It’s why we check our phones for emails and texts every minute, sign up for store sale notifications, and pile into speculative investments, driving them to baffling heights. And if there’s one thing we know, it’s that decisions made out of fear are rarely good decisions.
But perhaps the most widespread and surprising example of FOMO is the age at which Canadians choose to start receiving retirement payments from the Canada Pension Plan (CPP).
A Bit of Background
We can choose to start receiving CPP as early as age 60 or as late as age 70. While the “normal” retirement age is 65, there are significant penalties to taking CPP earlier and even more enticing benefits to waiting to take it later.
For each month that we choose to take CPP early, we give up 0.6% of the pension value. This translates to a penalty of 7.2% for each year before age 65 we take it, or a 36% reduction if we opt to take it at age 60.
Conversely, for each month after age 65 that we choose to postpone receiving payments, we get 0.7% in increased pension payments. This works out to 8.4% per year, or a healthy 42% increase if we can hold out until age 70.
So What Does That Mean in Reality?
If, instead of taking CPP at age 60, you wait until age 70, you’ll get 2.2 times as much! Moreover, since CPP benefits are indexed to wage inflation, the actual difference is closer to 2.5 times. Even holding off for just 1 year by starting at age 61 instead of 60 gives you more than 11% more income – for life! Pretty sweet, eh?
But here’s where that pesky FOMO comes in: according to a comprehensive report by Bonnie-Jeanne MacDonald at the National Institute of Ageing at Ryerson University, fewer than 1% of Canadians choose to delay CPP benefits to age 70 to maximize their benefit. Even more surprising, more than 95% take CPP at age 65 or earlier!
And according to the report, that decision could cost the average Canadian more than $100,000 in secure lifetime income, a concept it refers to as “Lifetime Loss”. Depending on an individual’s CPP entitlement and longevity, their Lifetime Loss could be almost $300,000! OUCH!
In discussions with my clients, the question of when to start taking CPP benefits ALWAYS comes up, as it should. While there are many factors that go into the decision, the fear of dying as a young retiree and leaving oodles of CPP money on the table is probably the main argument people make for cashing in early.
It’s a funny thing. On one hand, retirees worry about living too long and running out of money or having their savings devalued by inflation. On the other, when it comes to CPP, retirees worry about dying early and leaving unclaimed CPP money on the table.
Of course, both of these things (dying early or having a long life) can’t happen to one person, and you can’t optimize for both scenarios. You have to decide which you want to prepare for. I’d argue you should focus on the more likely scenario, which is a long – and hopefully happy – retirement!
Arguments in Favour of Waiting
- Collectively, we’re living longer.
On average, a male who makes it to age 65 can expect to live almost 20 years, a female over 22 years. With good health and good luck, you could be looking at 30 years or more in retirement. While we’ve all heard tragic stories of people who pass away shortly after retirement, in reality, 93% of 60-year-olds will live past age 70, with more than half living past age 86. Unless you have a known serious health condition, the odds are that 60-year-old you is looking at two decades or more of retirement for which to plan! - Inflation is a thing.
Prices go up… and up… and up. Over the course of a multi-decade retirement, the purchasing power of your savings can drop significantly. CPP payments are indexed to inflation, meaning that as prices go up (broadly speaking), your payments go up too. It’s hard to find a guaranteed income stream that will match that! If you start with larger CPP payments by holding off until age 70, those larger payments benefit from inflation adjustments. - You’re getting an AMAZING deal with the CPP vs. retail annuities.
Traditional defined-benefit employer pensions are becoming rarer than handshakes in a COVID hot zone. An annuity is a way of creating your own “pension” from your savings, but attempting to match the inflation-adjusted increased payments you get by delaying your CPP by going to an insurance company will cost you a LOT more. According to the report, 71% more on average for men, and 94% more for women. - Pay less in tax when the end does come.
Most Canadians try to make their RRSPs/RRIFs last right through retirement and plan their retirement savings drawdown accordingly. This is fine if you know exactly when you’re going to pass on. You can plan things precisely and, as the saying goes, bounce the cheque to the undertaker. (Seriously though, don’t do this. They’re hardworking folks.)But we don’t know exactly how long we’ll live, right? So chances are you’ll either run out of savings (if you live “too long”), or leave a good chunk of money for the government to tax (if you pass on earlier than planned). Upon the death of the second spouse, any remaining RRIF balance is taken as income and taxed accordingly, which could result in a hefty tax bill on larger accounts.
Talk about leaving money on the table, or rather, to the Canada Revenue Agency (CRA)!
If instead, you spend more of your retirement savings earlier in retirement to postpone the start of your CPP retirement pension, there will be less remaining to tax when you pass on, and you’ll also guarantee yourself a higher inflation-adjusted stream of income that lasts, well, as long as you do.
A Few Reasons to Take CPP Early
While the case for delaying the start of a CPP retirement pension is strong, there are a few situations where it might make sense to “cash in” early. These include a lack of alternate income sources to “bridge” you to the start of a delayed CPP, health issues that severely impact longevity, potential clawback of income-tested benefits like GIS and OAS, and those whose entitlements may be affected by continuing to work or receiving a survivor’s benefit. If you’re nearing retirement, work with a qualified financial planner to develop a comprehensive retirement plan that will guide you through such considerations.
Read about how we’ve helped people just like you figure out their retirement planning options, feel empowered and ready for the future.
For the rest, don’t let FOMO keep you from the benefits of a fantastic but greatly underutilized option when it comes to your CPP retirement pension. I may never make it to the ranks of the wealthiest 1%, but I fully intended to join the enlightened 1% when it comes to taking my CPP at age 70.
NOTE: The stats and figures used in this article originated from a report published by the FP Canada Research Foundation written by Bonnie-Jeanne MacDonald, PhD, FCIA, FSA. You can access the report here: “Get the Most from the Canada & Quebec Pension Plans by Delaying Benefits“
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.
Thank You
Does this still apply with the new CPP changes they just announced ?
Thanks for your question Mary.
The most recent 2021 Federal Budget proposed enhancements to Old Age Security (OAS) payments, however CPP was not affected.
However if you are referring to the Enhanced CPP which is currently being phased in, then the benefit of waiting will be even greater than what the report discusses for those who continue to work and make contributions to CPP due to the larger payments they will have earned. So yes, it remains true that waiting until 70 to collect your CPP is the way to go if you can!
Really 70 OMG I am 62 and I plan to retire at 63, wait two years, and voila. My friend was about to retire she was 64 and she passed away. Money is not everything. I am planning to go and live in Mexico.
If you planning to live here maybe is best to wait until 70 is very boring to stay at home in this country.
Thanks for your comment Carmen.
It’s unfortunate that your friend did not make it to retirement, but that doesn’t mean you won’t get there and live for many decades to come. In fact more than half of those who reach 60 make it to age 86. That means most of us will greatly benefit from a bigger stream of worry-free CPP income for life by waiting as long as we can (but no later than age 70!) to start receiving payments.
But as you said, money isn’t everything. If you are able to live a happy and fulfilling retirement on less income, that’s great, as long as it’s a conscious decision that fits with your needs and goals.
Don’t you have to continue to work and contribute to CPP if you want to delay taking it?? This is what I am being told by my advisor. I continued to work only just a little after 65 but with covid I stopped what little work I was doing and now am being told I must start taking my CPP. Is this true. ? I currently live on Old age security and the Guaranteed Income Supplement and live in subsidized housing
I look forward to hearing from you
Thanks for your question Rose.
In general, one does not have to continue to work and contribute to CPP in order to delay receiving a CPP retirement pension. For example, a person could stop working at 65 but delay taking their CPP until age 70 to receive a “boosted” benefit.
You mentioned you are living in subsidized housing. I’m not familiar with the rules of various housing programs, but since the rent subsidy is usually geared to income, it’s possible there is a requirement to “take” all sources of income available to you, which I suppose could include your CPP if you are eligible for it. I’d suggest checking the rules governing your housing subsidy to see if there is any such requirement.
Retired a bit early at 56, should I still wait until 70 to claim CPP ?
Hi Joan,
Congratulations on your early retirement!
Regarding what you “should” do with respect to claiming your CPP retirement benefit, it’s impossible to properly advise you without knowing a lot more about your circumstances, current and future income needs, work and earnings history, health, other sources of retirement income, etc.
It’s important that you work with a financial planner or Money Coach to really dig into the particulars of your unique situation to come up with a comprehensive retirement income plan, of which CPP and when is the best time to claim it will be one important component.
If I retired at age 61 for example and had 36 years where I paid the max annually into CPP, would it still benefit me to defer collection of Cpp to 70. Will not working and contributing between 62 and 65 adversely affect my cpp benefit ?
Thanks for your question Wendy.
While I can’t speak to the specifics of your particular situation, in general there is still a substantial benefit to deferring collection until age 70.
In the case of waiting until 70 to begin CPP payments, periods of low or no income between ages 18 and 70 will reduce CPP benefits, but are mitigated by provisions (such as the “general drop-out provision”, “child-rearing provisions”, and disabilities, as applicable) and would have a modest impact if one had many decades of maximum contributions.
In contrast, the generous 42% boost to CPP payments, plus the annual inflation adjustment, would more than compensate for a few years of low contributions.
I suggest you work with your financial planner to determine the impact in your specific circumstance.
The article does not mention all the payments you forego by waiting to collect your C.P.P.
If you wait until age 70, you have an increased pension, but it takes quit a number of years to get back the forgone payments. I have an Excel spreadsheet that calculated various scenarios and my “magic year” to collect my C.P.P. was 62.5 years of age.
In that scenario I would not see an overall loss in C.P.P. payments until age 82. I would rather have my C.P.P. payments when I’m still alive and young enough to enjoy them. Based on actuarial tables the Government wants you to wait as long as possible to collect C.P.P.
Thanks for your comment Andrew.
The report on which the article is based does take into account the effect of payments received when CPP is taken early (say at age 60) vs payments that start years later but are significantly larger. Even taking this into account, the benefits of waiting are massive! Besides the actuarial adjustment, there is also the effect of annual increases in the CPP payments based on wages, which further boosts the advantage of delaying CPP.
The report also notes that based on statistics regarding Canadians’ retirement savings, most Canadians have enough set aside (median savings of about $90,000 according to a 2016 survey) to enable them to delay CPP for a few years while still maintaining the same lifestyle. To do this, they would use more of their personal savings earlier in retirement, and then lean on a significantly boosted CPP in later years to provide for their more basic needs for the rest of their lives. So, if one has modest retirement savings, holding off on CPP payments does not mean sacrificing your lifestyle during your early retirement years in the slightest!
You mentioned age 82 in your calculations, which I interpret as your estimate of your longevity. While health and longevity varies from person to person, statistically speaking a 60-year old retiree has an excellent chance of living past age 82, and a better than 50% chance of living past age 86. If you’re playing the odds, they are certainly in favour of delaying CPP as long as possible to get the most benefit.
Thank you for this fantastic article, .. I’m with you in that I think I will be in the 1% camp. The best scenario for me personally is to wait until I’m 70, only because I feel i can work until I’m 70 (or beyond-I have to!) Retirement is really a fantasy for me. I will need the 42 % lift when I’m 70 + and will be happy to take it then. Meantime i will work as much as i can!
Thank you K! That sounds like an excellent strategy to maximize your eventual retirement! Best wishes to you!
I retired at age 57, and am receiving my superannuation which includes a bridge benefit until age 65. As I am no longer working and paying in to CPP, will it be beneficial for me to hold off until age 70 to apply for CPP or do I have to apply by age 65?
Thanks for your question Monica.
If your plan was to collect your employer pension and bridge benefit and wait until age 65 before starting your CPP retirement pension, then yes, you would certainly benefit by waiting until age 70 before starting your CPP payments. You are not required to apply at age 65. Of course, you will need to “bridge” the period between age 65 and 70 with your own savings since your employer bridge benefit will end, but then you will enjoy a substantially higher CPP pension from age 70.
On the other hand, if your plan was to start taking CPP sometime before age 65, then deciding to postpone it until age 65 or 70 could affect your CPP benefit in multiple ways, some beneficial and some possibly detrimental, depending on your work history and the CPP dropout provisions.
I recommend discussing the details of your situation with your financial planner who can work out the options available to you and the associated implications in the context of a full retirement plan.
Actuarily if you want to take all CPP invested in the first place – 62 is the age to start taking CPP.
Kimberly
Hi
I have been told that if you collect CPP at age 60 by age 72 you will start “ losing money” every month? So if you expect to live past age 72 it would be better to delay CPP till age 65 or later ( if you can)?
Thanks for your question Barb.
What you’re referring to is a “break even age” calculation, the age at which the sum of lower CPP payments which begin earlier (as early as age 60) start to fall behind the sum of higher CPP payments which begin at a later date. This so-called break even age will vary depending on the CPP start ages being compared, and the assumptions regarding inflation and how the CPP payments are used.
But despite the fact that the “break even age” will vary, you are correct that the total amount you’ll receive from taking CPP early will start to fall behind with even a fairly short retirement, and statistically most of us will live well into our 80s.
The other thing you’ve identified is delaying CPP “if you can”. This is where a detailed retirement plan can really help, to lay out the retirement income options and choices available to you to help you find what’s best in your circumstances.
Thanks for the article. If you stop working at 55 and have no contributions beyond 55, the best 35 years are used for the final CPP calc, but at age 65 the best 39 years would be used. The advantage of waiting until 65 or later would be less in this case correct?
Thanks for your question Rick.
What you are referring to is the CPP general dropout provision, which allows 17% of the CPP contributory period (age 18 to 65) to be eliminated from the calculation of one’s CPP benefits to effectively cancel the effect of a few low-earning years. If one starts receiving CPP earlier than age 65, the CPP contributory period is shorter which could improve the base CPP benefits calculation. This is very much dependent on an individual’s work and earnings history.
Even if a shorter contributory period used in the CPP calculation helped raise base CPP benefits modestly, the penalty of starting CPP payments at 60 instead of at 65 would more than offset this benefit, and the very substantial benefit of holding off payments until age 70 is unaffected.
I’m 61.5, and was considering applying for CPP at 62.5.
I am working, now.
At 62.5, I know was a 15% decrement on my eligible CPP payments rather than 36% for taking it at 60.
I too, considered I would make up the (15%) difference with my own savings.
I have no debt, and my partner works and has dental and health benefits for us both for at least 5-8 more years.
Personal philosophy regarding “retirement”, has changed, over the years, do to the economic realities over ones working life with marginalized pensions and competitive, insecure income opportunities for the current workers in NA.
I too, would like to keep busy, healthy and have some hobbies. I would likely to possibly work part time doing something I really like, and not, when I decide too.
My retirement income scenario has changed to use my personal savings to bridge 2 years, to 65.
I will work until 63, and then, not apply for CPP, until 65 making up 15%, or more, if I had taken it at 62.5, indexed.
I too, would apply for OAS, at 65 too, and cut back my personal “bridging” savings contributions by the CPP/OAS pension amounts while then supplementing 10% above my original level of bridge income before my pensions were taken.
I will draw then 4-5% of my personal savings instead of 10% of my 350K personal savings. Plus, work part time and/or garner odd jobs for “other income”, review expenses to help make up the 10% over the pensions. I would expect to then have about 35-40K a year of income before tax.
Would you consider this second approach a better sustainable approach to both retirement and security until 85?
Hi David,
Thanks for your question. It’s great that you are thinking through the details of your retirement income in light of your anticipated income needs and possible sources of income, including CPP, especially if you are within a few years of retirement.
While your thought process is good, if I’m understanding what you wrote correctly, I noticed a few mistakes in the numbers you mentioned. It’s important to get the details right, as they can have a BIG impact on the sustainability of your retirement. I would suggest working with an advice-only planner to hammer out the details of your retirement plan so you know you have taken the many variables into account, of which CPP is only one.
Fortunately, our CPP payments will last as long as we do, so that’s one piece we don’t have to worry about when it comes to our longevity!
I was wondering about delaying OAS until later. It seems to be a no brainer to delay it for at least a year since I believe you can apply for it a year late and catch up with the payments. Also your estate can apply for it a year later if you die and I have heard it may even be tax free? To me this makes even more sense than delaying CPP up until age 66.
Hi Donald,
Thanks for your question.
With regards to delaying OAS, keep in mind that the amount of the OAS payment is based on your entitlement at age 65 and an adjustment (increase) based on the effective date of the start of payments if you choose to delay payments. For OAS, the boost for delaying receipt of payments is 0.6% per month, while for CPP the boost is 0.7% per month.
So, if you choose to wait a year, but then request that your payments be effective as of a year earlier (i.e. to “catch up” on past payments from when you turned 65), you would not be any farther ahead… the payment amounts would be calculated as if you started receiving them at age 65, and you would have given up a year of having the money in your hands.
My thought was that if you delayed for the year but suddenly your health changed within your 65th year you could still request payments from when you turned 65. With CPP you could only request to start payments. I also read somewhere that your estate could request a years OAS if you died past 65 without collecting.
Yes, one could request retroactive payments for up to 11 months with OAS, but the same is also true with CPP, as long as the retroactive months requested cover a period that one was 65+. There are no retroactive CPP retirement pension payments for months before age 65.
Excellent reading on this site glad I happened on it. With respect to this topic, is the delay taken into account when the spouses survivor benefit kicks in? I know max OAS limits before claw back are adjusted if delayed to 70 but i have found no info on CPP. So when I pass my spouse’s monthly payment taken at 65 would be topped up to the defined limit. If we delay her to 70 her payment would exceed today’s defined max and get’s no survivor benefit of my 40 years contributing.
Thanks for your comment and question Tim.
When a spouse passes away, the surviving spouse’s CPP payments would not go down, but as you noted the payments to the survivor *may* also not go up, depending on the circumstances.
In the scenario you posed, if your wife took CPP at 65 and you passed away, CPP payments to her would be topped up by 60% of your CPP to the usual maximum payment.
However if your wife delayed her CPP payments until age 70 and as a result she received more than the usual maximum, she would continue receiving those higher inflation-adjusted payments for the rest of her life, so even without a top-up she would have higher lifetime income by waiting.
How would this work if you are already collecting a survivor’s benefit? If the combined benefit is at maximum or close to maximum, wouldn’t it make sense to start collecting as early as possible?
Hello, I am planning on working to age 70 and deferring my CPP. Currently I am age 63 and if I was to retire at 65, I’d be entitled to $900 … $300 less than the maximum benefit of $1,203 (2021). I was wondering if I continue to work, and contribute to CPP, will those additional premiums I’ve paid from 65-70 help to increase my monthly benefit once I do retire at 70 — over and above the enhanced benefit I’d receive as a result of deferring to 70? I’m trying to play catch up for the years I didn’t have a very high income and bump up my monthly benefit up as high as I can from now until age 70, if this is even possible.
Hello
I retired at 57, 5 years ago. I contributed to my CPP from the age of 18 to 57. I called Service Canada -CPP to get figures on how much my CPP payments would be if I took them this year, and alternatively if I waited every year forward until 70. I was surprised that the my CPP payments were lower than I expected by waiting. The CPP payments did not increase at 0.7% per month!
I am wondering why. Is it because of the new CPP regime and the timing of my retirement/end of my CPP payments?