Taking CPP Early Or Late? How Long Until Breakeven?
Fee-for-service financial planner and founder of PlanEasy.ca
Should you take CPP early or late? Are you considering taking CPP early? Are you wondering if you should delay? Should you take it early at age 60? Should you wait until regular retirement age at 65? Should you delay until age 70, the last date possible?
When to start taking CPP is just one of the many difficult decisions soon-to-be retirees face as they approach their retirement date.
It’s a big decision, and like many financial decisions there are many aspects to consider when deciding when to take CPP.
When a soon-to-be retiree is deciding to take CPP early or late there are both financial considerations as well as non-financial considerations to weigh.
Taking CPP late can provide a financial benefit if you plan to live past a certain age. This is a number and it’s easier to evaluate but it’s based on longevity, which is a big unknown.
Taking CPP late also has non-financial considerations. There are “soft benefits” to delaying CPP. Depending on how much you value these soft benefits they can be worth quite a bit as well.
Even when two people have the exact same financial situation, they may choose different times to start CPP simply due to these longevity questions and soft benefits.
When deciding to take CPP or delay its first important to get basic understanding of how CPP works and how CPP payments change each year as you delay.
How CPP Works…
CPP payments are based on a number of different factors. These factors mean that most people do not qualify for the maximum CPP benefit at age 65. To get the maximum CPP you need at least 39+ years of maximum contributions between age 18 and 65. Due to schooling, breaks in employment, early retirement etc, many people never reach the maximum.
Your CPP amount at age 65 is based on your contributions. You can get something called your “Statement of Contributions” from the CRA that clearly outlines your contributions since the age of 18. This can be used to get a very good estimate of how much you could expect from CPP.
What Happens When You Delay CPP Or Take CPP Early?
Using the Statement of Contributions we can calculate how much you’ll receive at age 65 , but then we need to increase/decrease that amount based on when you actually decide to take CPP.
For each year you take CPP early you need to decrease your CPP by 7.2%. If you take CPP 5-years early, your CPP payments at age 60 will be 36% below what you would have received at age 65.
On the flip side, for each year you delay CPP after age 65 you need to increase your CPP by 8.4%. If you take CPP 5-years late, your CPP at age 70 will be 42% above what you would have received at age 65.
The difference between CPP payments at age 60 and CPP payments at age 70 is an extra 122%! Taking CPP early at age 60 will give you 64% of the amount you’d receive at 65 but taking CPP later at age 70 will give you 142% of the amount you’d receive at age 65.
You get more than double the CPP payment by waiting 10-years. That’s a pretty big incentive to wait. The downside of waiting however is that you don’t receive any CPP payments for those 10-years, whereas someone who takes CPP early will have already gotten a large amount in payments.
Someone who takes CPP early gets a lower payment each month, but those early payments really add up over 10-years. Someone who takes CPP later gets a higher payment, but it takes a few years for those higher payments to catch up.
So even though the payment, is higher it still takes a bit of time for those higher payments to offset the benefit of getting payments early, this timeframe is called the breakeven point, and it can be one factor to consider when deciding to take CPP early or delay.
- Taking CPP Early or Late? The Soft Benefits
- Canadian Pension Plan (CPP) is Expanding! And That’s Going to Make Retirement Easier
- Don’t Get Surprised by OAS and CPP Survivor Benefits
Simple CPP Break-Even Analysis
There are lots of simple CPP breakevens that can be found online. There is this one from RetireHappy.ca which we’ve replicated below. The analysis looks at how long it would take the higher payment you get at age 65 to make up for the fact that taking CPP earlier creates a lot of advanced income.
It suggests that if you choose to take CPP at age 65 vs age 60 it would take 106.7 months to reach break-even. If you choose to delay until age 65 then by the time you reach age 73.9 you’re now benefiting financially from the increased monthly payments.
This analysis is simple… but it’s too simple… This simple breakeven analysis doesn’t take into account the opportunity cost of drawing down investment assets early when we choose to delay CPP.
Taking CPP Later Means Drawing Down Investment Assets
The reality is that for most retirees the decision to take CPP early or late also means deciding to start drawing on investment assets earlier or later.
Realistically we need that CPP income. Most of us are not rich enough to consider CPP an “extra”. When we decide to delay CPP we need to make up that income through higher withdrawals from our investment assets. This has an impact. There is an opportunity cost because higher investment withdrawals mean lower investment returns in the future.
To get a clear sense of CPP breakeven we need to take into account the faster drawdown on these investment assets as we wait for CPP to start.
Detailed CPP Breakeven Analysis Including Opportunity Cost
Let’s look at at more detailed CPP breakeven analysis where we include our investment portfolio. In this analysis we’re going to assume that we already have some form of retirement income like LIRA/LIF withdrawals, a defined benefit pensions, or other RRSP/TFSA assets. The decision we’re trying to make is how to create that LAST $15,000 of retirement income.
We’re going to assume $200,000 of RRSP assets. We’re going to assume the average CPP of $8,687/year. We’re also going to assume a 60/40 asset allocation. These factor are important and will impact the breakeven point. To do this breakeven for your personal situation please seek the help of an advice-only financial planner.
Because we’re drawing from either RRSP or CPP to create that LAST $15,000 of income the tax impact is the same. Both CPP and RRSP withdrawals are taxed at the marginal tax rate. As a result we’ll look at pre-tax numbers.
The question is, should we start CPP early and make a combination of CPP and RRSP withdrawals to create $15,000/year? Or should we delay CPP and make larger RRSP withdrawals for 5-10 years?
CPP Breakeven Age 60 vs Age 70
Using the scenario above we can create a breakeven chart for taking CPP at age 60 vs taking CPP at age 70. The line represents the RRSP balance in the future.
Notice in the chart below how delaying CPP until age 70 causes the RRSP balance to decline rapidly from age 60 to age 70?
Also notice how after CPP begins at age 70 the higher CPP payments means that RRSP withdrawals are much smaller, and as a result the RRSP actually starts to grow?
The breakeven point is where the two lines cross at age 81.
Both scenarios provide $15,000 in pre-tax income. Taking CPP at age 60 means the RRSP balances decreases at a slower rate in the early years. Taking CPP at age 70 means the RRSP actually grows after age 70 but one downside is that the RRSP balance declines rapidly between age 60 and age 70.
CPP Breakeven For All Ages Between 60 and 70
We can replicate this analysis for all ages between 60 and 70. The chart itself is hard to read, but in the table below you can get a much clearer sense of the financial trade-off between taking CPP early or delaying.
One particularly interesting insight into the “take CPP early or late” question is that it is rarely optimal to take CPP at age 65. Notice how in this scenario it’s better to either take CPP at age 64 or age 66 but not age 65. This is because delaying to age 66 means a monthly payment that is higher by 8.4%. The higher payments mean that it reaches breakeven BEFORE taking CPP at age 65.
The only exception would be if you expect a shortened longevity. Breakeven still takes 14 years so if you expect a shortened longevity then consider taking CPP earlier.
Disclaimer: As always, please seek the advice of an unbiased financial planner when making these complex retirement decisions. The analysis we’ve presented here is dependent on a number of different factors. If your situation is slightly different the analysis may lead to a different conclusion. This post is for educational purposes only.
In the next post we’ll look more closely at the “soft-factors” when deciding to delay CPP or take CPP early.
Table For CPP Breakeven Scenario
(Same data as chart above but in table format)
Financial planner, personal finance geek and founder of PlanEasy.