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Which CPP Choice Is Best For You?

As I talk to people, I am amazed at how many of them are still applying for Canada Pension as soon as they turn age 60. I am not implying that this is always a wrong decision, but in the vast majority of cases this is done with very little investigation. This is even more important with the new changes recently made to the Canada Pension Plan.

CPP is a defined benefit plan. If you do not work for some level of government or a very large organization, you probably do not have a defined pension plan. CPP provides lifetime income, indexed to inflation, with survivor benefits, and is based on contributions made by you and your employer while you work. Most people have little guaranteed retirement income except for government benefits.

There are several changes to CPP, but I will only address the main one regarding income options. The biggest change is that if you take CPP prior to age 65 your pension amount will decrease by a larger percentage than previously. If you take CPP after age 65 your pension will now increase by a larger percentage than before. Obviously there is even more incentive to delay the start of your CPP benefit.

The new rules for CPP were implemented in 2016. Now taking CPP five years early (age 60) will reduce your pension by 36%, while waiting an additional five years (age 70) will boost your pension by 42%. This is a considerable difference. By 2016 the annual pension for a full CPP would be $4000 less if you start at age 60, rather than at age 65, and about $4600 more if you wait until age 70.

Many people base their decision on the “break-even” age at which point they believe they will get the maximum lifetime income from the plan. Under the 2016 rules drawing your CPP at age 60 would be the right decision if you live to age 73 or less. If you live beyond age 81 you would be better drawing CPP at age 70. (If you live to age 90 and start CPP at age 70, you will collect about $100,000 more than if you start collecting CPP at age 60.) If your life expectancy is between age 73 to age 81, you would probably consider drawing pension at age 65.

Do note that your options to start CPP are not only at age 60, 65, or 70. You can choose any age between age 60 to age 70, with the adjustment prorated to your choice. In most cases waiting even one year could raise your pension by 7% or more.

My biggest concern is that most people underestimate their life expectancy. The Conference Board of Canada found that Canadians are living, on average, 10 years longer than they were in 1960. Statistics today show that for a couple at age 60, there is a 60% probability of one of them living past age 90. Add to that an inflation rate for over 30 years and, in the future, you may well be thinking your CPP decision was a poor one.

Retiring early and living longer are two of the biggest pressures on any retirement plan, even for wealthy individuals. While the CPP is only one piece of your retirement planning puzzle, it should not be ignored, or taken lightly, as the plan now provides even more flexibility in choices available. It is important to understand that guaranteed monthly income is much more secure than investment returns.

Your decision of when to take CPP should be based on your personal circumstance, but you should know all your options before you apply for early benefits. Early benefits could be the right decision for you, but I am concerned that you make an informed retirement decision — especially for something this important. If you would like more information on all the CPP changes, I would be pleased to discuss them with you, or you can check www.servicecanada.gc.ca.

There is a combination of areas that need to be reviewed to finalize the right decision for your personal situation. Retirement Income Planning is my specialty — and should be your retirement priority.

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