To Take Or Not Take Early CPP

Happy Non-Retirement

CANADA PENSION PLAN DILEMMA

 

My husband just turned 62 and we’ve been in a quandary about whether he should take his Canadian Pension Plan (CPP) early (before 65) with penalty or not.

We’re both still working and plan to be for the next 4 years while we pay off a whack of debt.

Because of penalties introduced in 2012, the amount you receive by taking your CPP early is less than before this legislation was introduced.

Let me try to walk through the peculiarities of our situation and how we reached our final decision.

 

The CPP Rules

 

While I can’t walk you through all the rules, I will highlight the key ones or ones that were relevant for us but refer you to the CPP website which is actually pretty clear.  I just want to point out that the Quebec Pension Plan (QPP) has a different set of rules, up front.

Normally CPP was collected at 65, with penalties and premiums if you elected to take it anytime from age 60 to 65, or from age 65 to 70. Contrary to popular belief, with the new rules introduced in 2012, the age for CPP has not changed to 67, but rather it is the OAS (Old Age Security) which will start at age 67 in 2023.

It will be graduated, therefore will only impact people born before 1958 so it does not impact my husband but will impact me a little (born in 1959). Since the topic of this post is about CPP and not OAS, I won’t say much else about it, except to note that OAS is not guaranteed – it can be clawed back if you make too much money.

The penalty or reduction in CPP amount if you take it before age 65 currently is currently 0.56% per month in 2014, increases to .58% per month in 2015 and maxes out at .60% per month in 2016.

The graduated change from 0.5% per month in 2012 to 0.6% per month in 2016 was to discourage people from taking CPP early (between 60 and 65).   I found this to be a bit complicated, although fair, which I will explain below.

Likewise, the premium for waiting until age 70 before collecting benefits was increased so as to encourage people to defer collecting benefits. It is 0.7% per month and it used to be from 0.5% per month.

In addition, now you can still collect CPP and pay into it from age 60 to 70. This is known as the Post-Retirement Benefit (PRB) and is a means to increase your pension amount if you are still working. You must pay into it from age 60 to 65 (which is tough on my husband as he is self-employed and must pay both the employee and employer portions of this) if you are working.

You can elect (using Form  CPT30)  to not pay into it at age 65, even if you are still working beyond that age. No matter what, you stop contributing at age 70. There are other rules to be evaluated around Guaranteed Income Supplement and Survivor Benefits, the latter of which I will touch on below.

 

Early CPP Considerations

 

There is a break even point that you need to calculate to determine if it is better to take your CPP early or on-time or late. The decision depends on two things and only one of them is cut and dried, unfortunately.

The first is your projected payout based on your history of earnings and contributions. The more years that you have contributed the maximum amount allowable, the higher your projected payout will be. It’s unique to each person’s earnings history so the only way to get your figure is to request it from Service Canada.

Service Canada indicates the average monthly amount for new retirement pension (taken at age 65) was $596.66 as of March 2013 and the maximum amount in 2013 is $1,012,50. Don’t assume you are at the maximum, unless you have worked full-time throughout your career.  Your zero or low earnings years (up to 8 as of 2014) are dropped from the calculation, however.

The second consideration is quite nebulous and involves family health history and crystal balls and so forth. Once you do the math and determine at what age your higher CPP payments will accrue more money to you than your lower payments if taken early, you need to decide, do you think you will outlive that age?

Recent life expectancy in Canada is 84 for men and 80 for women, but this is for children born in 2012, but reflects an increasing trend up, as compared to children born in 1990 which is 74 and 81, respectively. However, if you reached the age of 60 last year, your expected longevity is now 87.3 for men and 89.3 for women, which takes early death rates out of the according to the Canadian Institute of Actuaries.

 

Early CPP Complications

 

We have been humming and hawing about whether my husband should take early CPP since he turned 60. The penalties scared us plus we had a complication. My husband was a widow when we married and he received monthly Survivor Benefits for himself and his children until they were of age.

Currently he receives $321.62 per month. Whenever he contacted Service Canada, the information given over the phone was not clear (and they will only communicate with the recipient). His Survivor Benefit will decrease if he takes his CPP early.

What has now been clarified is that he will not lose his Survivor Benefits, but they will decrease if he takes his CPP early. At the present time, they will decrease to $264 but be lumped in with his CPP which will be $554. So he will get a total of $818 monthly, which is a net increase of $496/month.

If he was 65 now, his CPP would be $639 and Survivor Benefits $137 for a total of $776. So the CPP would be more by $85, but the Survivor Benefits less by $137 for a net decrease of $42.  Seems like a no brainer to take the CPP and say “Start the Car!” doesn’t it?

But the missing piece of the puzzle that Service Canada doesn’t seem to be able to tell us is what will his Survivor Benefits be at age 65 in the future? Will they be the same or more or less? We assume they will be the same but adjusted for inflation, the same way CPP will be, but if it were that simple, you would think Service Canada could tell us that.

 

Early CPP Calculations

 

Looking strictly at the numbers, and assuming Survivors Benefit drops at age 65, the cross-over point is age 83, where he would be better off to take his pension at age 65 instead of now at 62.

You can see that the benefit of Option 2 is quite significant until age 65, in that we accumulate almost $18K more to put towards debt. This would put our debt repayment forward by one-quarter.

 

Early CPP

We have not even considered the option of delaying CPP until after age 65, because we know we are going to need the money once he retires.

Note:  None of these numbers are adjusted for the effects of inflation through the indexed CPP. We can expect that they will all increase with the passage of time, but for purposes of illustration and decision-making, these numbers are comparable between the two options.

 

Early CPP Decision

 

We are still ahead of the game by $3K by the time he is 80, and we will have advanced our debt repayment and corresponding retirement forward one-quarter. It’s not a lot of advancement, and I do hope and pray we both live to beyond 83 years, and according to the actuarial projections he’s good to go to 87.3!

However, a bird in the hand is worth two in the bush, so we are strongly considering that he should file for his CPP now.

 

What do you think of our decision?  Are there other factors that you think should be considered?  Have you or will you apply for your CPP before the age of 65?

 

Post Contribution: Debt Debs is a fifty-something wife, mother and new grandmother, who admits to having her “head in the sand” about their financial situation until amassing $247,500 of consumer debt for a total debt of $393,500. She’s sharing her journey at debtdebs.com and welcomes dialogue with anyone coping with debt repayment.

 

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Comments

  1. Just wait till the Silver Tsunami hits the nation – just few yrs away.
    Ottawa works with ancient and retarded formulas, their intention is to choke and kill elders.
    Right now we have an insane left wing Fascist govt – that helps Syrians, blacks – no whites have much chance in receiving social help. In some countries, an older citizen is respected by law and society – in Canada hardly nobody gets up on he subway when a senior citizen walks by.
    I am 72, my daily combined pension is $ 55/day – CPP/OAS/GIS and Ontario Trillium – none of the elected politicians are willing to help or listen. I never had company pension, never had a union job,
    Politicians work for themselves, they lie and steal, and exploit those they supposes to look after.

  2. I am on the verge of this decision also, and am closing in on 62. I retired at 60 over a year ago. Like you I have been doing calculations although my situation is complicated in different ways. I have to also decide when to stop contributing the maximum to CPP. I may start using my RSP first so that I do not have to pay CPP tax any more (I am self-employed). I think you can ignore inflation as CPP indexes. However, it costs 4,600 per year for the CPP premiums and that is a huge penalty when the reward is 20 years down the road. In my calculator I work in the value of investing the income also – in your case that is paying down debt. Plus the CPP premiums are tax deductible whereas the payments are taxable. I try in include all of this into a big spreadsheet.

    Service Canada will estimate your CPP. The estimate becomes a promise once you hit 60. Worth watching your account there.

    In all of my calculations the payoff for waiting ends up being in the late 70’s at least. My family tends to live long, but for the most part the expensive years are the earlier ones. I travel a lot now. My travel will be modest by the time I hit 80. Many of my activities will be strictly simple low-cost ones. So I figure if the calculation looks anything like this a person should take CPP earlier, when the money is more needed.

  3. I would apply for the CPP benefits as early as possible. The break even point may be a couple decades down the road, but the enjoyment your husband will experience from the money he receives now will be greater than spending money after he turns 83 years old.

  4. @Peter – This is a good point, and why we are leaning this way, even though we will have to pay income tax on the income. Thanks for sharing your views.

  5. @Jean – Sounds like you’ve run your numbers too. Thanks for reading and commenting.

  6. No right answer for all, as these decisions are always difficult. I like to think of it this way. The government is handing out money when I’m 60, sounds like a great deal. What if they change their minds like OAS. I want to start collecting this benefit as soon as they make it available. In my situation I will take the monthly and invest it immediately. I plan on working PT until 65, I will still be contributing to CPP and my monthly will continue to grow. Good Luck

  7. Wow, you’ve done a great job thinking this through. It’s hard enough working through the differences between early and full retirement, without also adding in the ambiguities about your husband’s widower benefit. My husband and I are U.S. citizens and are waiting for full retirement age before drawing social security. In theory we could earn more (8% per year) if we hold off past full retirement but aren’t going to wait that long. I’m glad we don’t also have the complications of surviving benefits to work through…

    Great job running the numbers Deb — sounds like you have a good handle on a challenging scenario.

  8. @Judy – Thank you so much for the great contact. I’m sorry you lost your husband at such a young age. That’s really sad and to have financial worries on top of that is difficult. It sounds like you are approaching things very logically and methodically to help bolster your retirement income as much as possible. I’m going over to the MMM forum now to read your story. I love finding new PF contacts who are in my age bracket. 🙂

  9. @Dan – from the people we have talked to, all are taking early. My Dad did not because he didn’t retire until 71!

  10. @Kate ~ Thanks for sharing and for your confidence in my number crunching! he he
    I’m interested to see how government pensions / social security morph and change for millennials.
    The times they are a changin’!

  11. @Maria ~ exactly, that is the break-even point. His Dad died at 81 and his mom is alive at 83 now. Not that you can entirely use your parent’s longevity as a guideline. If we take the CPP now and he lives beyond 83, we will just be thankful that he is still alive. 😉 A bit morbid to think this way, but that’s life!

  12. Hi Christine ~ you can contact Service Canada at the links included in the article you will find some phone number information and request a statement of earnings to date for yourself for your planning purposes. I agree, some stuff you can’t control but since there are some options available, it’s good to have all the information up front so you can decide what is best for you. Sorry to hear about your husband’s disability. It’s never easy when we must face these challenges. Glad to hear he is stable and hope he continues this way. 🙂

  13. Since longevity is always uncertain, that’s why we’re thinking of going with the sure thing. Thanks for visiting, Prudence!

  14. I am also a widow, and receiving Survivor’s Benefits. The formula for the SB is complicated. I ended up contacting a guy who used to work for the government in the CPP department. For $25 he ran the numbers for me, so at least I can make an informed decision when the time comes. His website is http://www.DRpensions.ca, or you can contact him on the Canadian Money Forum in the Retirement section. He is very helpful.

    I am 55, and when my husband died we had a home equity line of credit of $93K and our mortgage was $25K. I paid off the mortgage with the life insurance money, and have almost paid off the heloc. There were other financial factors at play, which I won’t get into here. You can email me, or read about them on my journal at MMM if you want. http://forum.mrmoneymustache.com/journals/prairie-gal's-fi-journal/

    I also may be eligible for the Allowance for the Survivor at age 60, but your husband wouldn’t be since he is remarried.

    The long and the short of it is, the longer I can wait to retire, and collect a combined CPP/Survivor’s Benefit, the more I am going to get, and the more comfortable my retirement will be. Makes sense. The problem is, I want to retire now dammit! lol! This is not possible, though, so I will continue slaving away as long as possible.

    Good luck with your decision. It sounds as if you have thought about it carefully.

  15. That decision is a ways off for me but I have worked with a few clients in the past who have taken it early (similar situation as yours) and did not regret the decision. Personally I would take it early. I know the rules have changed and it’s not as great as it was before but I still think it’s better to take it early rather than waiting. Sure, you can wait longer and the payments will be higher but how long is too long?

  16. Great analysis. The thing that strikes me immediately is how small the payments are. I think of all the people that are counting on nothing more than CPP and OAS. What a rude awakening! Tough decision – I think you have made some points about taking it now. You can move up debt repayment, you don’t know what tomorrow might bring and a bird in the hand…. Good luck and interested to know how it goes.

    • @ May ~ The payments are lower than normal as he had some unemployed and lower income years. I expect I will have more than $1K per month because I pretty much contributed the maximum every year except for when I was on maternity leave and you are able to throw out at least 7 of your lower income years. I think it’s actually higher than 7 now. But you are right. People relying strictly on this would be in the lower income level for sure.

  17. You definitely have a lot to consider, Deb. My parents are going through a similar situation as they weigh their options for social security and their pensions. Fewer and fewer Americans are being offered pensions these days and it’s hard to say if social security will still exist (in its current state) by the time I’m old enough to collect it (30+ years). I can tell you’ve put a lot of thought into your decision and carefully run the numbers. Best of luck in whichever route you decide!

  18. Based on your graph, the cumulative numbers are pretty much equal by age 83… if this is accurate, I say apply for CPP now 🙂

  19. Christine Weadick says:

    Some interesting information about CPP in the article. We are in a different kettle of fish here as hubby has Amyloidosis and is currently collecting CPP-Disability because he can’t work. We also get Ontario Disability Supplimental payments from the On Government. Hubby is 59 now and we do know that his payments from CPP will go down when/if he turns 65. I’ve been a stay at home parent for years so I don’t even know right now what I would get when I turn 65 as I haven’t worked outside the home in years. I should look into this all before then. Right now his Amyloidosis is stable but we see a cardiologist in December for more information on how this is progressing.
    All you can do is make the best decision you can at this time and hope it works out for you…..Good luck

  20. I think that you’ve made the right decision. Boy, you have those numbers down! The early CPP will benefit you both in the short term, and in the long term, you’ll benefit from your acquired frugality and wise and abundant investments. Good choice!

  21. I know, it is annoying. It’s like it’s some information that they don’t have when you call them. In addition, of course they will only speak to him, and I tend to have tons of questions. So sometimes when we call I get him to put it on speaker and advise them that his wife is listening in so I can speak up when I have a question he didn’t think of! Thanks for visiting, Erin!

  22. Thanks for your comment, Tommy. My CPP will be higher than his so I think this is not a concern for us, but very good point. In addition, since we could use all possible funds to pay off debt now, this is why we are considering taking it early.

  23. Sounds like you have thought things through, Mary. We have some money (8 months of emergency fund) in TFSA’s, but we are no longer contributing to them while we are paying off debt. When we eventually downsize our home we will top up our TFSA’s, unless we decide to buy a rental property. I think it’s great that you can wait until you are 70 to apply for your CPP. I haven’t figured out yet when I will apply for mine. I will delay as long as possible but we’ll have to see how our cash flow looks at that time. Thanks for sharing how you are going about it all. It’s a difficult decision so I like to understand the different aspects people are factoring into their decision.

  24. We are still leaning towards applying for it early. However, I don’t like to make hasty decisions without doing my homework. Plus there’s a wonderful network of PF bloggers out here who may be able to weigh in, which is part of the reason I put this out here. All inputs gratefully considered! Thanks for reading, Genevieve!

  25. Wow! I had to read through that twice just to try to get a handle on it … and still not quite sure I understand it all. Being a neighbor to the south, I was interested in the read because I know nothing about your CPP. Based on my read, it seems like taking it now might be the wiser move.

    Love the sub-title in the header, “It’s not about how much money you make, it’s how you save it.” I often say something similar. “”It’s not about how much you make, it’s about what you do with it.”

  26. squasher55 says:

    This is a no brainer. Take the pension now. If you had no debt and did not need it, you would still take it and invest it at about a 7% return (stock market) and you would be way ahead of those who wait until 65 or 70. You know that Service Canada could, and likely will, change the rules again. The only winners are those already receiving their pensions. I took mine at age 60, and have never looked back.

  27. I’m sorry I’m of no help here! It seems like there are a lot of factors to consider, and from what you’re saying, it looks like a good idea to take it now. $18k more toward debt is tempting! That’s rather annoying that Service Canada is unable to tell you how the survivor benefits will pan out in the future, though.

  28. It looks like you Canadians have the same CPP concerns as Americans and their Social Security as far as when is the best time to start payments. I am now 56 and few years from the same decision but here there is also another wrinkle to consider and that is if you are married and the impact to survivor benefits. You made no mention of that so I don’t know if CPP doesn’t have the same transfer benefit of the higher payments to the surviving spouse or not. With you being younger if his CPP is estimated to be more than yours then you should take that into consideration. My current plan is to hold off to my full retirement age 66 & 7months because of that reason. If you have no survivor benefit concerns then its all about unknown longevity and the bird in the hand. If you need the money then I say take it. If you don’t and have other funds to finance his retirement, then I would wait. I will probably enlist the help of a good financial planner to help me with my final decision when I turn 62.

  29. Mary F. Campbell says:

    Everyone’s situation is different and must be evaluated as such. Hubby and I have no debt plus hubby is still 12 years from a retirement at age 65 with a full municipal pension that will be paid to the surviving spouse, if I survive him. I am turning 59 in December. Since we are living very carefully but satisfactorily on hubby’s salary, our current plan is that we’ll postpone receiving my CPP payments until my age 70 (he’ll be 64). The OAS will start for me at age 65 & be saved for a future “final” vehicle purchase. That having been said it also assumes that no health or other emergency situations arise to change our needs. I increase my CPP payments by 84% by waiting until age 70 and as I have no pension plan, this delay will keep my standard of living far healthier if hubby pre-deceases me & I lose his CPP/OAS. Hubby will presumably be working at age 64 when my CPP payments start and we’ll tuck away that year’s worth of my CPP income into our Tax Free Savings accounts for possible rainy day expense needs. It all depends on how much you need and when you are going to require the funds. 🙂

  30. Man, that’s a tough call. Have you made a decision about what you want to do?

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