The best time for seniors to start taking their Canada Pension Plan depends on individual circumstances.andreswd/iStockPhoto / Getty Images
Sign up for the Globe Advisor weekly newsletter for professional financial advisors on our sign-up page. Get exclusive investment industry news and insights, the week’s top headlines, and what you and your clients need to know. For more from Globe Advisor, visit our homepage.
This is the first article in a new series, Planning for the CPP, in which Globe Advisor explores the decisions behind the timing of when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
When the Canada Pension Plan (CPP) was introduced in 1966, it was in response to concerns that too many Canadians were retiring poor. Almost six decades later, and following a handful of reforms and updates, the CPP – or the Quebec Pension Plan (QPP) for those in Quebec – remains a cornerstone of most Canadians’ retirement portfolios.
A tough decision for many Canadians is when to start taking their CPP benefits to optimize the money they contributed during their working years. Research, including an informal Globe and Mail survey conducted in November, shows the most popular age is 60 – the earliest possible.
Of the 946 people who responded to the survey, 34 per cent took their CPP benefits at the age of 60, 19 per cent at 65 and 16 per cent at 70. The number of people who took it at ages other than 60, 65 and 70 ranged from 4 per cent to 8 per cent. The early-taker results were roughly in line with Statistics Canada data provided to the Globe showing that, as of September, 2023, almost 40 per cent of Canadians born between 1940 and 1950 started taking their CPP benefits at 60.
The early CPP take-up is happening despite traditional advice that Canadians wait longer – to 70 if possible – to receive a higher payout. According to the CPP legislation, someone who starts taking the pension before 65 will see their payments decrease by 0.6 per cent each month (or 7.2 per cent annually), up to a maximum reduction of 36 per cent at 60.
However, someone who starts taking the CPP after 65 will see their payments increase by 0.7 per cent each month (or 8.4 per cent per year), up to a maximum increase of 42 per cent at the age of 70. (There’s no financial benefit to waiting beyond 70.)
The average Canadian who takes the CPP at 60, instead of waiting until 70, can lose more than $100,000 of “secure, worry-free retirement income that lasts for life and keeps up with inflation,” notes a 2020 report from Toronto Metropolitan University’s National Institute on Ageing and the FP Canada Research Foundation. It shows less than 1 per cent of Canadians wait until 70 to take their CPP.
CPP timing tactics
It’s human nature for Canadians to take their CPP benefits as soon as possible, according to behavioural economists. That’s because people tend to focus more on the present when making decisions, a human trait known as present bias.
Still, there are other nuances behind the decision of when to take the CPP.
In the Globe survey, participants were asked to expand on why they took their CPP benefits when they did. The responses were wide-ranging for those who took it at 60: Some needed the money to cover living expenses. Some had serious health problems or a family history of health issues and don’t expect a long retirement. Others cited the general uncertainty of life: “A bird in the hand is worth two in the bush,” was frequently quoted among participants in the take-it-early camp. There were also concerns the CPP could be compromised in the future, with a few citing recent threats that Alberta could abandon the CPP in favour of its own provincial plan.
Some Canadians take their CPP benefits early and invest the money, betting they can generate a higher return than what the government would provide down the road. Some opted to take the money sooner to avoid being in a higher tax bracket later in life (CPP benefits are fully taxable) and risk having their Old Age Security benefits clawed back.
For those who took the pension later, between 65 and 70, the reason was largely the same: to increase the payout.
The amount of CPP benefits a person receives is also based on other factors, including how much they contributed to the plan during their working years and their average earnings. The calculation can also be adjusted for periods of low or no earnings, years when someone is raising young children and if they received a CPP disability pension.
For 2024, the maximum monthly amount someone could receive if they started taking their CPP benefits at 65 is $1,364.60, according to the federal government. Canadians can get an estimate of their own monthly CPP retirement pension payments by signing in to their My Service Canada Account.
The ‘Planning for the CPP’ series
The CPP is a huge topic, with many considerations and angles to review and examine. In this series, we’ll tackle a few of them including (but not limited to): the pros and cons of calculating your “break-even” age; understanding the “drop out” and child-raising years; how to qualify for other CPP benefits such as the survivor’s pension, children’s benefit and death benefit; and insights from advisers on the right time to take the CPP depending on someone’s assets and personal circumstances.
We will also introduce you to a few Canadians who have taken the pension at different ages and life stages – and the reasons behind their choices. We’ll also talk to some who regret their decisions and offer advice for others considering when to take their CPP benefits.
The series will be continuing, so we may add topics along the way. If you have any CPP story suggestions or feedback on the series, please leave a comment in the stories or e-mail us at: globecpp@gmail.com
For more from Globe Advisor, visit our homepage.