Retire Me - Episode 3 - When Should I Take CPP?

Welcome to Episode 3 of Retire Me! Thank you for listening!

This week on the show we discuss Canada Pension Plan and when retirees should consider taking the benefit.

Detailed show notes and links that we referred to in the podcast are listed below.

Today:

discuss some basics about Canada Pension Plan
default age is age 65 but, you can take it as early as age 60 and as late as age 70
Describe who may want to take early
Describe who may want to take late
How I advise clients when deciding when to take CPP

Background on CPP:

Managed by the Canada Pension Plan investment Board (CPPIB)
established in 1997, set up to separate the duties of managing CPP pension from the governments hands, and put into the hands of an independent entity
today manages over $392 Billion of working Canadians benefits
Who contributes to CPP
if you work and earn over $3500 per year, you make contributions to CPP
your contributions is 5.25% of your pre-tax income between $3500/year, capped at income of $57,800
Maximum annual contribution to CPP in 2020 is $2,898 for employees
Employee contribution is maxed by your employer dollar for dollar
Self employed need to make entire contribution (both halves) ($5,796 total)

What can you expect

measures contributions years between 18-65 to determine benefit
allowed to “drop out” 8 low or no income years from your calculation
Under the Child Rearing Drop Out Rule, you can have additional years dropped out for when you were earning low or no income and taking care of your kids who were under 7 years of age
Maximum CPP is $1,175.83 for a 65 year old pensioner with 100% CPP benefit
But you can draw out early:
Apply at Age 60 - benefit is reduced by 0.6% for every month before your 65th birthday you apply, or 36% if you apply at 60
- ie $1000 benefit at age 65 would be roughly $640.00 at age 60
Apply at Age 70 - benefit is increased by 0.7% for every month after your 65th birthday that you apply, or an additional 42% if you apply at age 70
- ie. $1000 benefit at age 65 would be roughly $1,420.00 at age 70
taking at age 70 represents over 2x increase in the CPP annuity
but, you would be going without the CPP benefit for the 10 years leading up to age 70
So the question for retirees is - when is the right time to take CPP!!??

Who should consider deferring CPP

Who should take early (ie. age 60)

couples who need the income
in the above example, if someone wanted to simply defer from age 65 to age 70, they would be foregoing $1000/mth for 5 years. For a couple it would be $2000/mth
$2000/mth * 5 years = $120,000 of savings to bridge that gap
couples with low life expectancy (both partners)
many years of low or no contributions - you’d be adding 5 more years of low or no earnings to the calculation
people who are working into their 60’s and already at the max CPP
Recommend getting a check of benefits at age 60

My biases - what I tell clients

Defer if healthy and if you have money
Assume prosperity and long life - bird in hand argument
Increase guaranteed income streams late in life
spend more aggressively and invest more conservatively in the near term
Best annuity money can buy - inflation adjusted and the income stream improves by at least 8.4%/yr you defer
Can be emotionally challenging - spending vs saving and mortality
Consider a hybrid approach - OAS at 65 and CPP at 70

Next week - constructing a portfolio for retirement

Resources Used in this Podcast:

The information in this material is not intended as investment, tax, or legal advice. Please consult your advisor or tax professionals.