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1/26/2018

​When is the best time to start CPP payments?


One question our Pension Plan Consultants have been receiving more frequently from members is “when should I start CPP?” The increased frequency of this question recently has a lot to do with the demographics of our membership – we have a significant proportion of our membership, the “baby boomers,” quickly approaching retirement age so questions like this one are top of mind for many of our members.


So, when should you start CPP?

Well, the short answer is…it depends. Like many other aspects of retirement planning, there is no one simple answer that applies to all people. The fact that we have the flexibility to choose when to take CPP is a valuable design element of the federal CPP program, but it also means we have to do a bit of work to determine how we want to take advantage of that flexibility to suit our own individual needs.  

The following information is provided to help you in thinking about and planning for when you will start CPP so that your decision supports and optimizes your overall retirement plan. Don’t have a plan? Contact our office to speak with one of our Pension Plan Consultants – they are here to help you develop a comprehensive and objective retirement plan suited to your individual circumstance (free of charge, by the way, to CSS members).


​CPP is changing

The CPP program is being enhanced and we will begin to see changes in the program starting in January 2019 (click here for more details), primarily in gradually increasing contribution rates for employees and employers. However, the full impact of the enhancement to the CPP program benefits will not be fully realized for many years to come. The information in this article is relevant for members who are approaching retirement age and anticipate needing to make a decision about when to start CPP over the next few years.


The big picture

If you’ve attended one of CSS’ Retirement Income Options (RIO) workshops, or otherwise engaged in retirement planning, you’ve no doubt become aware of the concept of the overall Canadian retirement system being composed of three pillars or you’ve perhaps seen the various sources of retirement income depicted as a three-legged stool.


  1. 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).

  2. 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.

  3. 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

L
ife 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.

T
ax 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.

B
reakeven 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)


If you were interested in determining to what age you need to live in order to receive your maximum possible CPP payout for each of the starting ages between 60 and 70, you could use a table like the one below which shows, curiously, that taking CPP at 65 never appears to be the optimal choice (note that only a partial table is shown - not all ages are displayed - here to allow us to more easily zero in on the example presented below):


(Click to enlarge image)

​3  Source: https://www.canada.ca/en/services/benefits/publicpensions/cpp/cpp-benefit/amount.html. Accessed January 13, 2018.


In this case, our base case of starting at age 65 uses the monthly payment of $641.63 which is the latest available (October 2017) average CPP payment for new CPP recipients as reported on the Government of Canada website. Using the average payment rather than the maximum payment amount does not change the CPP optimization timelines above, just the total payout amounts. We’ve used the average CPP payment here rather than the maximum CPP payment to highlight for members that it is not common for CPP recipients to receive the maximum, so this is another reason why completing a retirement plan now may save some surprises (and heartburn!) at retirement time.  

Back to the optimization table…let’s look at a particular row in the table to help you understand what is being illustrated. By way of example, if you believe you will live to age 80, then looking at the row above labelled “Age 80,” you will see the maximum CPP payment analysis suggests you should consider starting CPP at age 67 because the highest payout on row “Age 80” (i.e., $116,910.02 highlighted in light green) intersects with the Starting Age column “67.”

Caution: This analysis only considers CPP, not the balance of your other sources of retirement income or your overall retirement plan. We’ve done this simply to illustrate that the “when to start CPP” question is not a simple one to answer. We do not recommend you look at the CPP question in isolation – it should be considered as part of your overall retirement income planning. 

Where do I go from here?

For the seemingly simple question “when should I start CPP?” there is an awful lot to consider to get to the answer! It is very important to recognize that there isn’t a one-size-fits-all answer that applies to all retirees. We’re fortunate to have choice in when we can start CPP; it provides flexibility in how we incorporate CPP into our retirement plan. But, it means we have to determine how best to use that flexibility to optimize our own personal retirement outcome. 

One of the benefits of being a member of CSS is access to accredited and experienced retirement planners (our Pension Plan Consultants) at no fee. Give us a call and let us help you through the CPP question and any other questions you may have about your retirement planning. Better yet, let one of our planners help you put together a comprehensive retirement plan that is tailored to your individual retirement objectives.