- Pillar 1 (or leg one of the stool) is comprised of federal government programs – Canada Pension Plan (CPP), Old Age Security (OAS) and Guaranteed Income Supplement (GIS).
- Pillar 2 is comprised of personal savings – Registered Retirement Savings Plans (RRSPs), Tax Free Savings Account (TFSAs), and other non-registered savings accounts, as well as home and vacation property equity, equity in businesses and farms, inheritances and other wealth transfers, and the like.
- Pillar 3 is comprised of workplace pensions for those of us in Canada fortunate to work for employers that provide one – for example, our very own Co-operative Superannuation Society Pension Plan!
We like the stool metaphor for retirement income at CSS because it conveys the notion that you need to look at all three legs when trying to balance your retirement plan. Tinkering with one leg without considering the other two may leave your retirement income plan unbalanced.
Back to the CPP question
CPP is a significant part of the first leg of the retirement income three-legged stool. As we previously reported, CPP in its current form is designed to provide a basic retirement income up to a maximum of 25% of the Year’s Maximum Pensionable Earnings (YMPE) 1.
The full CPP retirement benefit is received if it is taken at age 65. However, it can be taken as early as age 60 with a permanent reduction in benefits or can be taken as late as age 70 with a permanent increase in benefits. This choice, and the ensuing permanent reduction or increase in benefits, contributes to the complexity in determining when it would be best to take CPP.
There are a number of considerations that may lead to a decision to delay taking CPP until sometime after turning 65 or to take it earlier than age 65. A few of the key considerations are provided below.
1 YMPE is $55,900 in 2018
Life expectancy
Sure, it can be a bit of a grim undertaking to consider your own mortality, but when it comes to the question of when to start CPP, it’s in your financial best interest to do so. For example, if you believe you will live longer than the average life expectancy, you may benefit from delaying the start of CPP. For each month you delay receipt of CPP, the benefit rises by 0.7% (or 8.4% for each year delayed). If you waited until age 70 to start CPP, for example, your monthly benefit would be 42% higher than if you started CPP at age 65. Alternatively, you may have reason to believe (e.g., family history) that your life expectancy is less than average in which case you may decide to take CPP early.
Keep in mind that life expectancy in Canada has improved considerably over the past five or six decades. In 1956, life expectancy was approximately 68 years for males and 73 for females; in 2005 it was 78 for males and almost 83 for females. For children born in 2031, current projections suggest life expectancies of about 82 for males and 86 for females.2
Need some help estimating your life expectancy? Try our Life Expectancy calculator.
2 Source: Statistics Canada. Accessed January 12, 2018.
Three stages of retirement
In your retirement planning and research, you may have encountered the concept of the three stages of retirement called the “go-go years,” the “slow-go years” and the “no-go years.” This concept may be a helpful one when thinking about when to start CPP. If you plan to be active in your early years and think you’d need the extra cash early CPP payments will provide to support your activities in your go-go years, then you may decide that reduced CPP payments fit your retirement plan.
Alternatively, you may feel that you’ll want the larger CPP payments available by deferring the start of CPP payments to help offset anticipated increased spending needs in your no-go years. The key consideration is to think about what you anticipate your retirement years looking like so that you can plan your financial resources, like CPP, to best support the retirement you envision.
Tax considerations
Don’t forget about taxes… How long do you plan to work? If you plan to continue working between 60 and 65, taking CPP prior to age 65 may mean that you are paying tax at a higher rate on your CPP benefits than otherwise would be the case if you didn’t start CPP payments until you stop working.
Another consideration is what, if any, impact starting CPP will have on your Old Age Security (OAS) payments? If you are currently funding your retirement expenses without the use of CPP, would the addition of CPP payments cause a clawback of OAS benefits? If so, you might consider deferring the start of CPP benefits.
How's your cash flow?
If you are not yet 65 and find yourself in a financial situation where you don’t have a lot of other sources of monthly income, you may need to consider starting CPP early out of necessity. Most CSS members will have their CSS pension available to draw on, but for members who started working in the co-op sector late and who don’t have a pension from previous employers and who were not able to otherwise save for retirement through their working years, this situation could apply.
Breakeven and maximum payment analysis
For the spreadsheet junkies reading this article, you might find performing a breakeven analysis useful to find the age to which you need to live, all else being equal, where it doesn’t matter if you took the early CPP payment or waited until age 65. For example, you’d find that you need to live to almost 74 if you started CPP at age 60 to “break even.” In the breakeven example below, we’ve used the 2018 maximum CPP payment amount.3
(Click to enlarge image)