5 Reasons to Draw on Your CPP Early

Dorota Haskins, Chartered Professional Accountant |

Winnipeg Chartered Professional Accountant

Did you know that you can draw on your CPP early?

Retirement is something that seems so far away and out of reach but you don’t need to wait to reap those benefits until age 65. While many may want to hold off to get “more” later, it doesn’t always make sense to do so.

Canada Pension Plan benefits can be drawn as early as age 60 or as late as age 70. If you take the CPP retirement pension early, it is reduced by 0.6% for each month you receive it before age 65 (7.2% per year). When you receive your CPP retirement pension at the age of 60, you will get 36% less than if you had taken it at 65. By taking your pension later, your monthly payment amount will increase by 0.7% for each month after age 65 that you delay receiving it up to age 70 (8.4% per year).

Assuming you qualify for the maximum CPP at age 65, taking CPP at age 60 would give you $726 per month. By the time you reach age 65, you will have collected $43,500 of income over 5 years. Alternatively, if you wait until age 65 to collect a higher monthly amount, it will take you until age 74 to make up the $43,500 you left on the table. In other words, the CPP breakeven point is age 74 for 2018.

The benefit of waiting to draw on your CPP until age 70 is that you can get up to 42% more. However, no one really knows when their time is up or how healthy they will be later in life. So, deciding on when to take your CPP needs to be based on multiple factors.

Factors to consider on when to apply for your CPP retirement pension

1) Cash Flow

Are you in need of cash now? If so, it makes sense to take early CPP and take advantage of the income earlier in life. If you don’t necessarily need the money now, you can still draw on your CPP and invest it for the future.

In most cases, a 60-year-old has higher expenses than an 80-year-old, and most of those expenses relate to enjoying life. Having a higher monthly CPP as an 80-year-old is great, but you won’t necessarily have the ability or desire to spend more money. The value of one dollar is worth more to a young and healthy person than it is to an older or unhealthy person.

2) Life expectancy

How long do you think you will live? Family history is the best predictor of your life expectancy. The average life expectancy for Canadians is age 80 for men and 84 for women. Statistics Canada predicts a continued rise in life expectancy of roughly two years over the next 15 years. The big risk of deferring CPP is that you die shortly after receiving your pension.

3) Taxable Income

The CPP is considered taxable income. Will the added income from drawing on your CPP early push you into a different tax bracket? If so, it may affect your Old Age Security (OAS) by pushing you into the OAS clawback zone. For those with taxable income between $75k and $120k, every extra dollar of income reduces your OAS by 15 cents. Income below this zone isn’t affected. 

4) Stability of the CPP

The CPP legislation may change at any time in the future, perhaps to increase the minimum age at which the pension can be taken. Your confidence level on the stability of the CPP should be a factor to consider when deciding on when to draw on your CPP. 

5) Other Pension Plans

Do you have other pension plans that can balance off your CPP? If you are taking another pension plan early, it may be better to defer your CPP past age 60. Use that time of deferring CPP to draw down money from your RRSP/RRIF when your income is otherwise quite low. 

Should you choose to draw on your CPP early, you should apply for your benefits 6 months before you would like it to start. Service Canada indicates that it takes about 8 weeks to receive your first payment, from the time that they receive your application.

Starting in 2019, the CPP will be gradually enhanced. Up until 2019, the CPP replaced one-quarter of your average work earnings. In 2019, the CPP will begin to grow to replace one-third of your average work earnings. 

CPP pension benefits will increase based on how much and for how long you contribute to the enhanced CPP. Those entering the workforce in 2019 will reap full benefits of the enhanced CPP provided they continue to contribute for 40+ years.

Final Thoughts

Ultimately the decision on when to apply for CPP should be part of a larger retirement plan. It’s important to develop a clear snapshot of your retirement income and expenses.

  • Will you travel or are you likely to be more of a homebody?
  • Are you planning on joining a golf club or buying season tickets for your city’s sports team?
  • Do you foresee downsizing your home? Will you be mortgage free?
  • Will you be a one-vehicle household?
  • Are there health concerns that may need accommodating?
  • Will you want assistance, such as cleaning services and lawn care, to help maintain your home?

The questions you need to consider are as varied and numerous as are retirement lifestyles.

Once you have a clearer picture of your possible expenses, you can stack those against your projected income sources. It’s essential to determine if there is a gap between the money you will need and the money you will have. The sooner you discover that gap, the sooner you can start finding ways to close it.

If that sounds overwhelming, there is no need to do this on your own. Financial decisions are often emotional. You can analyze the numbers to death, but you can’t ignore your comfort level – and that is what will ultimately be YOUR right decision.

A financial advisor or money coach can help you create a plan that supports the future you desire. Contact me to get started on a retirement plan for you today.