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  • Eric Watchorn

Wealth Management

When should I start receiving my CPP?

People often ask: “When should I start my Canada Pension Plan ("CPP") retirement benefits?” Unfortunately, the answer is not necessarily black and white. Between government rules on CPP withdrawals and the many nuances of an individual’s life, planning when to start receiving CPP can get complicated quickly.

While the program actually gives you a fair bit of control over when and how much CPP you receive, that control can leave your head spinning.

________________ According to Jason Claydon and most of the general understanding, the regular age to start receiving CPP retirement benefits is 65, and the amount you receive is based on your contribution history to the CPP program.

You can actually receive a Statement of Contributions from the government by logging into your My Service Canada account or requesting a copy by mail. This statement provides an estimate of your retirement benefit. You can start receiving CPP benefits as early as age 60 or as late as age 70. The benefit is reduced by 0.6% for each month (7.2% per year) that you start receiving CPP prior to age 65. The maximum reduction is 36%, which happens if you start receiving CPP at age 60. Conversely, if you delay the benefit past age 65, you receive an increase of 0.7% for each month you delay (8.4% per year). This can reach a maximum of a 42% increase in the benefit if you wait until you are 70.

Is there a formula that calculates when to start receiving CPP?

There are actuarial calculations to help you determine when to start CPP. For example, if two people have the exact same financial situation, one person starts receiving CPP at age 60, and the other person starts at age 65—it would take the individual starting at age 65 until at least age 74 to catch up in the total amount of benefits received. Various factors affect this “breakeven” age. I should note that many people disregard the actuarial calculations and take CPP early or at 65 simply because they feel a “bird in the hand is worth two in the bush” when it comes to guessing their mortality. In any case, it’s not just health that should guide your decision on when to start receiving CPP benefits. It’s also important to review your overall financial situation, other sources of retirement income, and your tax situation.

When to receive CPP: An example

Let’s look at John and Jane Smith as an example. They are small business owners, both 62 years old, and want to retire at age 63 with $72,000 per year ($6,000/month) of after-tax income. They have saved $1.2m in their RRSPs, have $80,000 in each of their TFSAs, and have a $750,000 investment account in their holding corporation. Jane is also receiving a $20,000/yr pension from a previous employer. They have had some past health issues but consider themselves relatively healthy. However, John has a family history of premature death—both his parents died in their late 60s. Jane’s parents both lived into their late 80s. They are no longer contributing to their RRSPs but want to know if they should continue to let their RRSPs grow and delay withdrawals to the calendar year in which they turn 72 or if they should start withdrawals earlier when they retire at age 63. They are concerned about taxes and the significant tax liability on their RRSPs, which could leave their estate with a hefty tax bill.

Options for John and Jane

John and Jane could defer CPP benefits to age 70 and instead replace that income by starting withdrawals from their RRSPs at age 63. They could each withdraw funds each year to help meet their retirement income objective while staying within the lower tax brackets. They might even consider additional RRSP withdrawal amounts (within the lower tax brackets) to fund their annual TFSA contributions in retirement. By deferring their CPP past age 63, they would receive annual increases to their CPP benefits, as noted above.

What John and Jane did

John and Jane decided to defer their CPP benefits and will start RRSP withdrawals at age 63. They realize there is an opportunity cost of starting RRSP withdrawals earlier and not continuing to maximize their future growth, but managing the tax liability on their RRSPs through tax-efficient withdrawals at lower tax rates is important to them. Essentially, they want to pay a little more in taxes now to help reduce taxes later on. They made this decision as part of a comprehensive financial plan to address their entire financial situation, including their other assets. This included gradually withdrawing assets from their corporation in retirement. They are financially independent with the amount of savings they have accumulated for their retirement. This factored into their decision to defer CPP, and they will review their decision on an annual basis. They will also have to make a decision in three years when they turn age 65 on whether they want to start or defer Old Age Security (OAS) benefits. OAS benefits are eligible to be received at age 65, and similar to CPP benefits, OAS benefits can be deferred past age 65 at an annual increase of 7.2% up to age 70. The answer to when to take CPP benefits (and Old Age Security for that matter) is not a clear black-and-white answer. It is good to know our financial priorities and preferences as well as the various options available to you.

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