The Canada Pension Plan (CPP) provides millions of Canadians with additional retirement income. You can start collecting CPP as early as age 60 or defer until age 70.
As a recap, every month you take CPP before the age of 65 results in a 0.60 per cent reduction in pension entitlement. Taking it when you turn 60 means you would receive 36 per cent less than at age 65. If you elect to take it later, the government rewards you with an additional 0.70 per cent per month, up to an increase of 42 per cent if you wait until age 70.
According to canada.gov.ca website, the maximum amount an individual can currently receive at age 65 is $1,203. This amount is continuously adjusted to the cost of living.
The case for taking early:
1. You are no longer working and aren’t accruing CPP benefits. For example, if you retire at 55, that means between 55 and 65, you will have essentially 10 years of $0 income, which could drop your overall CPP benefit.
2. You are working and in a low tax bracket. Taking CPP early could help with paying down debts before retirement, topping up your tax-free savings account (TFSA) for future use or enhancing your lifestyle while still working.
3. You want extra income in early retirement. Generally, the breakeven age for drawing CPP at age 60 versus 65 is 12 years, meaning deferring CPP comes ahead at around age 77. Most retirees seem to prefer extra income in their early retirement years to help fund trips and active lifestyles.
4. You have health issues. CPP survivorship rules may provide partial benefits to your spouse, but if they already have full CPP, then there is no survivorship benefit outside the $2,500 death benefit.
5. You have RSP or TFSA room. If you are working and have RSP room, you might be able to offset some of the tax burden by drawing CPP early and contributing it to your RSP. Keep in mind, RSPs are taxed upon withdrawal. If you save your CPP to your TFSA, you will have already paid tax on your CPP and can invest it as you'd like and never pay taxes on it again. Some investors use this to begin a travel or emergency fund.
The case for deferring:
1. You are working and in a higher tax bracket. For example, you earn $100,000 a year in salary. Currently, your combined provincial and federal tax rate is 38.3 per cent. This means taking CPP at age 60 would result in a 36 per cent reduction of the current $1,203 amount, followed by another 38 per cent tax hit, leaving you with $475 after tax. By contrast, if you retire at 65 with a $60,000 pension, income split with your spouse and wind up in the 20 per cent tax bracket, you'd net $962 from the same CPP benefit, which is more than double.
3. You have a bridge benefit on your pension that ends at age 65.
3. You are 64 or older and near the OAS clawback threshold, which currently begins at $79,845. Deferring CPP may make sense if you can lower your income in future years.
4. You are receiving government assistance. If you or your partner are receiving government benefits, such as guarantee income supplement or the allowance, drawing CPP early could potentially impact your entitlement.
5. You are a risk-adverse investor. Investments would need to earn 7.2 per cent a year to offset taking CPP earlier than 65. In today's environment, that can be a challenge and could result in taking on more risk than you are comfortable. Drawing down low risk RSPs and leaving CPP for a later date could make sense.
These are just some factors that may impact your decision to draw CPP. As always, please consult your tax advisor to see how this relates to your personal situation.
While we can provide the numbers and financial reasoning behind when to draw benefits such as Canada Pension Plan, what is often more important is enjoying retirement and fulfilling bucket lists.
Until next time, Invest Well. Live Well.
Written by Keith Davis. This document was prepared by Eric Davis, vice-president, portfolio manager and investment advisor, and Keith Davis, investment advisor, for informational purposes only and is subject to change. The contents of this document are not endorsed by TD Wealth Private Investment Advice, a division of TD Waterhouse Canada Inc.-Member of the Canadian Investor Protection Fund. All insurance products and services are offered by life licensed advisors of TD Waterhouse Insurance Services Inc., a member of TD Bank Group. For more information, call 250-314-5124 or email Keith.firstname.lastname@example.org.