Continuing from the last blog covering the Canada Pension Plan (CPP), let’s discuss the reduction and enhancement for early or late start dates.
First the basics:
- For each month you start your CPP BEFORE age 65, your scheduled benefit will be reduced by 0.6% per month (or 7.2% per year), up to a maximum reduction of 36% if you start at age 60
- For each month you start your CPP AFTER age 65, your scheduled benefit will be increased by 0.7% per month (or 8.4% per year), up to a maximum increase of 42% at age 70
Our last blog outlined some of the common reasons why someone may want to consider starting early or late when it comes to their CPP benefits. One of the common questions around a start date is the “breakeven” age. The breakeven age can be defined as the age when there is a crossover of benefits comparing two different start dates. There are several articles and calculators on the web that discuss this, I like the Globe & Mail calculator CPP at 60 vs 65 Calculator – The Globe and Mail but there are others that offer similar comparisons.
Here is an example of the breakeven calculation (as set out in the link above):
Assumptions…current age of 50, life expectancy of age 90, inflation rate of 3% and a benefit of 75% of the maximum CPP. Under those assumptions, you would start with a CPP benefit of $10,563 at age 60 as opposed to a CPP benefit of $19,134 at age 65 (after inflation is factored in).
The cross point of the two starting ages is age 72. Prior to age 72, you are “ahead” since you collected for the extra 5 years. However, after age 72, you fall behind on the total amount received, if you start at age 65. In other words, the cumulative benefit you will receive will outpace the person who started at age 60 and that age 65 advantage only increases over time.
There is no perfect answer to when to start CPP benefits as there are many factors to consider:
- How long do I expect to live?
- What savings do I have for retirement and what is the mix of those savings between RRSPs, TFSAs and non-registered investments?
- If I’m married or living in a common law relationship, what is my spouse’s income make up?
- As a couple who files their returns together there is the ability to split pension income on the annual tax return…does taking CPP early or late enhance or reduce the benefits of pension splitting?
- Am I going to be subject to OAS clawback and is that made worse be delaying my CPP to get a larger benefit?
Watch for future blogs on OAS and the claw back along with other planning related topics. In the meantime, if you have any questions, please reach us at aurora@harbourfrontwealth.com or 416-737-1133.
Until then, happy planning!
Reinaldo
