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By far, the most popular question I get on CPP is whether it makes sense to take CPP early. Let’s start by reviewing the rules.
Although the normal age of benefit for CPP is 65, you can take CPP as early as age 60 but if you take it early, you will receive a reduced amount.
A change in reduction amounts
Prior to 2012, the reduction was 0.5% for every month prior to your 65th birthday. Taking CPP at age 60 meant a 30% reduction in benefit (60 months times 0.5% = 30%). Under the new rules, the reduction rate will increase to 0.6% over the next 5 years:
- In 2012, the reduction is 0.52% for every month prior to your 65th birthday.
- In 2013, the reduction is 0.54% for every month prior to your 65th birthday.
- In 2014, the reduction is 0.56% for every month prior to your 65th birthday.
- In 2015, the reduction is 0.58% for every month prior to your 65th birthday.
- In 2016, the reduction is 0.60% for every month prior to your 65th birthday.
Those turning 60 in the next 5 years, need to pay attention because they have a big decision to make. They can apply to collect CPP even if they are still working. Many people can use the money in the short term and even it they don’t need it, they can invest it for the future.
If they choose not to take CPP income early, every year they delay up to age 65 will mean a bigger reduction because the rate of reduction is increasing accordingly.
Should you take CPP early?
For me, the starting point to answering the question is looking at the mathematical breakeven point. Here’s the chart for 2012
AS you can see from the data, taking income at age 60 this year (assuming you qualify for the maximum CPP at age 65) would give you $676.83 per month. By the time you turn 65, you will have collected $40,729.74 of income over the 5 years.
Alternatively, if you waited until 65 to collect a higher amount, you are foregoing the $40,729.74 to get more money in the future. It takes until age 76 to make up the $40,729.74 that you left on the table.
In other words, the mathematical breakeven point is age 76 this year. If you live past age 76, the one could argue the math says take CPP later. If you don’t live to 76, then you should have taken the money early. Unfortunately, no one knows when they are going to die.
Here’s the charts for 2013, 2014, 2015 and 2016 as CPP phases in a bigger reduction.
For more information on this topic, visit my Online Guide for CPP and OAS.
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Jim,
thanks for preparing these calculations for your readers. It is a good visual for those of us contemplating what we should do now that the rules have changed.
I would take CPP as early as possible, as you never know when you will die. If you can afford it, then it would be a good idea. You don’t want to have too much money left over, unless you are planning to give it to loved ones or donate it to a worthy charity.
Jim,
Thanks so much for the CPP Breakeven Point charts. This is important information to have in hand, if you are considering taking CPP early and before age 65.
Three Questions:
1) Does it make sense to take early CPP and continue working from a tax prospective?
2) How does taking early CPP impact on a person choosing to continue working if they are in a low, medium or high income job?
3) Based on the Canadian/USA actual life expectancy figures, who is better off taking early CPP – men or women?
Jim:
Great charts. Can you prepare one showing the breakeven points for someone who chooses to take CPP late (ie ages 66-70)?
Thanks.
It would also be interesting to factor in the time value of money – a dollar today is worth more than a dollar tomorrow.
I have factored in my calculations both the present vlaue of CPP Payments and the fact that CPP increases over time. Under the old rules it would be difficult to convieve of a situation where one would not be better off taking CPP as early as you could. I suspect this is true under the new scenarios also however one greatly increased cost is the fact that if you keep working and draw a salary you and your employer continue to be responsible for CPP – and while this augments your payments it is a losing proposition on any time value basis.
The new rules bring the breakeven point earlier but also gives more people access to early CPP because you no longer have to stop working to get CPP
These calculations don’t take into consideration the tax consequences. Not taking the CPP and drawing down RRSP at a lower tax rate prior to taking the CPP and possibly bumping your tax bracket is worth calculating.
Hi Peter, you are correct. It is important for people to take this information and make it personal. Everyone must apply the math using their personal situtation.
The math I present is universal information. No matter what your CPP benefit is, the breakeven point will be the same for everyone. Tax rates are different for everyone. Some people retire to a higher tax bracket. Most to a lower bracket and some to the same bracket.
Jim
How does the pension picture change if a person is at the 40% marginal tax bracket from age 60 to 65, but will be at the lowest tax bracket after age 65?
If you take the CPP early and continue working what effect does continuing to contribute to the CPP have? For example, say you take it 9 months before you reach 65 and you work 9 months after you reach 65 ( and contribute) do things even out?
Thanks,
philip