A person's break-even point for the Canada Pension Plan depends on several factors.VectorMine/iStockPhoto / Getty Images
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This is the latest article in our series, Planning for the CPP, in which Globe Advisor explores the decisions behind when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
While deciding when to start taking Canada Pension Plan (CPP) benefits, many Canadians cite their “break-even age.” The calculation, also known as the crossover point, is the age at which the cumulative amount from taking your CPP benefits later – and receiving a higher monthly payment – catches up with the lower monthly payments received when starting CPP earlier.
Canadians then need to guesstimate if they’ll live beyond that age.
For example, if a person’s break-even age is 75 and they don’t expect to live that long, they could be better off taking CPP benefits at 60, according to one break-even calculation. However, if they expect to live past 75, they might be better off taking CPP benefits at 65.
While the math can seem enlightening, some retirement planning experts say it shouldn’t be the only factor used when determining the right time to start taking your CPP benefits. Other considerations include additional sources of retirement income, potential cost-of-living increases, your health and, perhaps most importantly, how long you’ll live – which is unknown and could be longer than expected.
Bonnie-Jeanne MacDonald, director of financial security research for the National Institute on Ageing at Toronto Metropolitan University, says people like to use the break-even age analysis because it makes them feel like they’re getting value for their money. In this case, the money is the CPP contributions they made during their working lives.
However, she believes the break-even age is misleading because it can influence people to take their pension early without considering what could happen if they live longer.
“It gets people to focus on the risk of dying early instead of the possibility of living longer and being financially vulnerable. That’s the risk people should be thinking about,” says Ms. MacDonald, who is based in Halifax.
She describes it as a “mental gamble” that can impact someone’s financial security in retirement negatively.
“Bad things happening in the future are hard to understand and easy to ignore,” Ms. MacDonald says.
She encourages advisors and investors to move away from talking about the break-even age and instead review the full financial implications around CPP timing and other retirement income.
Rising cost of living is also a factor
Fred Vettese, the former chief actuary of Morneau Shepell and author of several retirement books in Toronto, agrees that too many Canadians focus on the possibility of dying younger when they’ll likely live longer.
“They’re worried about the risk of looking foolish if they die young when they should be worrying about the risks that they’ll live beyond their break-even age,” he says.
Mr. Vettese says the break-even age is only really useful for people who need to take their CPP benefits sooner rather than later, either because they need the income in their 60s or have health issues and possibly a lower life expectancy.
Canadians who can wait for their CPP also need to consider the rising cost of living, which has had a huge impact on retirees in the past few years.
“When you have massive inflation, you want as much of your income to be as inflation-protected as possible – and that means CPP and [Old Age Security],” he says, noting that CPP benefits are indexed to inflation and the income is guaranteed for life.
Too often, Canadians take their CPP benefits early to avoid spending their other retirement savings, which Mr. Vettese doesn’t see as a good strategy.
“I’m not telling people not to spend their money; just don’t spend your CPP dollars first if you don’t have to,” he says. “That’s the problem; nobody wants to draw down their savings.
“More people need to look at the strategy that’s going to give them more income for life and put them in better shape if they do live well into their 80s and 90s,” Mr. Vettese adds. “That’s the question people ask without getting into the minutia. And that’s what they have actuaries and financial advisors for.”
No single rule for CPP planning
Daryl Diamond, chief retirement income strategist at Dynamic Funds in Winnipeg, says relying on the break-even age calculation is also problematic because it doesn’t consider other assets people have for retirement. Those with registered and non-registered assets and other pension plans need to determine whether it’s better to draw from those funds first, their CPP, or a combination of both.
“It’s not just about receiving the CPP early and getting less or receiving it later and getting more. It’s about how these various income streams best fit the situation of the individual retiree,” he says.
Retirees also need to consider the “time value of money,” Mr. Diamond says, referring to the potential benefit of receiving a sum of money now rather than later. That can apply to CPP or other income streams. For instance, depending on how the markets perform, you might see higher returns by withdrawing from a registered retirement savings plan and leaving your CPP until 70, or vice versa.
“So, there are other factors involved: money you don’t have to use and the future value of money,” says Mr. Diamond, the author of a handful of retirement planning books.
“It also depends on whether you plan to leave money to beneficiaries,” he adds. “As you can see, there’s no one rule that applies to everyone when it comes to financial issues and retirement income planning.”
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