Determining When to Take CPP

The Canada Pension Plan -CPP- is one of the 3 government programs available to Canadians to live in retirement. It’s currently aiming to replace 25% of employment income. It will increase to 50% over the next 40 years.

Since 2019, both employees and employers are required to contribute additional amounts each year to the CPP program. Currently, the maximum pensionable earnings subject to CPP are capped at $ 66 600.

Starting in 2024, the contributions will be based on a tiered income. A second threshold of pensionable earnings will be introduced. The exact amount isn’t known yet. People earning beyond the first level of pensionable earnings will have to contribute on their next level of income.

This leaves a lot of us wondering when we should apply for CPP. Let’s take a look at this very fine and important question and attempt to provide some pointers.

Some Basics

In Canada, the legal retirement age is 65. This is the age that people can receive their full CPP. The amount depends on how much a person has contributed to the plan and for how long.

The maximum monthly CPP amount is $ 1 306.57 at the time of writing. In order to receive it, one needs to have contributed the maximum CPP amounts each year for 40 years.

Very few people are in this position. The average monthly amount received at the time of writing is $ 720.00.

It is possible to apply for CPP at 60. However, if you do so, you’ll receive 36% less than if you had applied at 65. It’s also possible to apply for CPP at 70, in which case, you’ll receive 42% more than if you had applied at 65.

Does it mean we should all wait to turn 70 to apply for CPP? Not necessarily.

A Lot of Other Factors to Consider

Beyond the monthly amount you could receive, you also need to look at your personal circumstances.

• Health: how healthy are you? What about your immediate family, i.e. parents and grandparents? Did they live a long life or were they plagued by poor health at a young age? What about other relatives? Did your great-great-grandmother live to 100? If you’re in poor health, applying for the CPP disability benefit could be a better option than the CPP pension.
• Life expectancy: this is directly related to the above point. At the time of writing, the life expectancy of a woman in Canada is around 84. For a man, it’s around 82. If you think you will live longer than this, it may be best to wait 65 or more before taking CPP.
• Current income: are you still working? If yes, do you want to stop soon? If not, it probably doesn’t make much sense to apply for CPP. On the other hand, if you’re unemployed you may not have a choice but to apply for CPP. It’s also common to have a spike in income right before retiring. For example, receiving a substantial bonus, or proceeds from the sale of a business. You may want to wait before applying for CPP to avoid paying extra taxes.
• Family status: are you married or do you have a partner? Is your partner still working or already receiving CPP? Are you widowed? Then you may be eligible for the CPP survivor benefits.
• Retirement savings: do you have RRSPs, or TFSAs dedicated to retirement? How much do you have in these accounts? Can you use them and delay CPP or do you need both to live?
• Employer pension: Are you one of the luckiest 40% of Canadians with an employer pension? This is a financial game-changer.

Understanding Your CPP Break-even Age

Waiting until age 70 to receive CPP produces a larger monthly benefit than applying at 65 or earlier.

But putting things off only makes sense if you think you’ll collect long enough to make up for what are years of foregone payments.

Someone applying for CPP at the age of 60 will receive a lower amount, but will receive it for much longer than someone applying at 65 or 70.

Conversely, someone applying for CPP at 70 will receive a higher amount, but for a shorter period of time.

This is where longevity and the concept of a “break-even” age come in.

There will be an age when you’ll receive the same amount of money whether you apply for CPP at 60, 65 or 70.

For most people comparing applying for CPP at 60 or at 65, the break-even age is 74 or 75.

The break-even age is however much higher when comparing applying at 60 or at 70, or at 65 and at 70. For example, my own break-even age was 79 when comparing applying at 60 or 70. It was 84 when comparing applying at 65 or at 70.

With an expected life of 84 years, delaying CPP to 70 isn’t worth it for me.

Here are a couple of calculators to help you determine your break-even age.

Final Word

Unfortunately, there is no one-size fits all when it comes to taking CPP. In fact choosing when to take CPP is far from a simple decision. There are a lot of factors to consider such as health or marital status, as well as the CPP break-even age.

Ultimately, you’re the only one who can decide when to take CPP.

Despite the financial incentive of the Federal Government to delay CPP past 65, only 10% of applicants choose to do so. It seems like the trend is still “sooner than later” when it comes to CPP.