A recent study out of Ryerson University1 looked at the benefits of delaying when you take your CPP. Over the last decade, less than 1% of Canadians have chosen to delay taking their benefits until age 70. Canadians have most commonly taken their CPP benefits as soon as they are eligible, at age 60. There is a major need to understand the far-reaching financial effects that can occur from taking CPP earlier. Typically, it has been encouraged to always take CPP as early as possible, but with historically low-interest rates, longer life expectancies, and enhancements to the CPP being phased in from 2019 to 2023, knowing when to claim CPP is now even more important.
Penalty of early claiming
Retiring does not mean that you must take CPP, but rather that you can collect your CPP benefit anytime between the ages of 60 and 70. There is a sizable financial disadvantage of collecting your CPP benefit early, with a 0.6% monthly reduction in the benefit payout before age 65, up to 36% at age 60. There is a further ‘penalty’ to taking the benefits prior to age 65, which is due to the increase in national wage growth year over year. If the average wage was to increase by 1% each year beyond inflation, the reduction in benefits would be closer to 39% not 36%. In addition, if one was to delay collecting their CPP benefit, it would increase from 42% (0.7% monthly) to almost 45%.
Lifetime income loss
When looking at the appropriate time to collect your CPP benefit, Canadians need to look at the lifetime loss rather than the immediate impact. Using the median CPP income, (75% of the maximum), a 60 year old would expect to collect $6,773 annually, where as a 70 year old would expect $16,726 annually. Using the median life expectancy, a woman that collects at age 60 would expect the benefit for 28.5 years (for a total of $193,000); for a man that collects at age 60, it would be a total of $170,400 over 25.9 years. If CPP was delayed to age 70, a woman would collect it for 18.5 years (for a total of $309,400), and a man would collect for 15.9 years (for a total of $265,900). This calculates to a loss of $90,500 for a man and $116,400 for a woman in their respective life time income if the CPP benefit is taken at age 60 versus age 70.
Most can afford to delay
Many Canadians can afford to delay taking their CPP benefit without affecting their standard of living by either continuing to work or using their retirement savings to bridge the gap. Looking at statistics from 2009, more than half of Canadians who took CPP at age 60 could have used their savings to delay their CPP by one year. Further to that, 38% could have delayed 5 years and 27% could have delayed 10 years. If your goal in retirement is to increase the security of your lifetime income, then using your savings to bridge the gap is less risky than you would think. It would be more advantageous for an individual to bridge the CPP gap versus trying to stretch out the withdrawals from your savings for the full duration of retirement. The risk factors associated with investing in the market can be amplified with downturns, as we saw in 2008-2009, December 2018 and with the Covid-19 global pandemic. There is a financial incentive to taking a portion of your retirement savings to bridge the gap in CPP benefits for the security of guaranteed income for life.
Perfect storm
Retirement is becoming more difficult for many Canadians, as there is a perfect storm happening with fewer workplace pensions and historically low-interest rates. Combined with the rising cost of living, an increase in life expectancy and decreases in family size, retiring Canadians must now prepare for longer time horizons with health care expenses. Having a secure source of income and the added confidence that you will not outlive your income can ensure your financial success in retirement. Talk to your financial planner today about your retirement plan and the best course specifically for you.
- Bonnie-Jeanne MacDonald (December 2020). Get the most from the Canadian & Quebec pension plans by delaying benefits. National Institute of Ageing, Ryerson University
