should-i-start-my-cpp-early

The most common CPP question I am asked is: “Is it smart to take my CPP early?”

A quick review of the facts:

  • The maximum CPP benefit in 2017 at age 65 is $1,092.50 per month, or $13,110 per year.
  • You can start as early as age 60, but you get 7.2% less for every year before age 65. If you start at age 60, you get 36% less, so the maximum is $8,390 per year.
  • New rules in 2012 increased the penalty for starting early, but you can start CPP even if you are still working.

The simple breakeven calculation misses many important factors. For example, if John starts receiving $8,390 per year at age 60 and Jane starts receiving $13,110 at age 65, it will take her 9 years to catch up. The simple breakeven is age 74. John gets more before age 74 and Jane gets more after.

This implies if you expect to live past 74 (and most people will), you should delay your CPP. But this is not the full answer.

The answer depends on 5 main factors:

  1. How long do you expect to live? Morbid question, but important for this decision. If you start CPP at age 60 instead of 65, you collect for 5 more years. If you start at age 65, you get more and eventually catch up. The longer you expect to live, the better it is to delay CPP. Today, a 60-year old of average health should expect to live until age 85. (Actually, it’s 84 for men and 87 for women.)
  2. How do you invest? Starting your CPP early might mean you can take less income from your RRSPs and investments, leaving them to grow. Then you can take more income from your investments later.
  3. What will inflation be? CPP benefits rise by inflation each year. Higher inflation means you get more up front by starting earlier. With 2% inflation, the simple breakeven rises from age 74 to age 76.
  4. Are you still working? If you are still working, CPP income will be added to your work income and will probably be taxed at a higher rate.
  5. When do you need the money? Part of a retirement plan is figuring out how much income you want and when. If you plan to travel a lot for a few years, it might make sense to start CPP earlier.

Let’s look at some real-life stories from my clients. Should they start CPP early?

  1. Angela is 59 and ready to retire. She has no investments and only has a fixed pension (not integrated with CPP). Her breakeven age is 76 and she expects to live longer than that. Should she start CPP early? No.
  2. Brian is about to retire. He is a conservative investor with GICs in his RRSP and TFSA. If he starts CPP early, he can withdraw less from his GICs and keep earning 2% per year. His breakeven age is 77. Should he start CPP early? No.
  3. Chris is retiring and is a moderate investor. She wants her balanced and income funds to continue to grow. A reasonable expected return is 5% per year. Her breakeven age is 82. Should she start CPP early? No.
  4. Dave is a more aggressive equity investor. His investments are all in equity funds, which he expects should average 8% per year. The stock market has averaged 10-12% per year long term, but it is reasonable to expect somewhat less in this lower inflation environment. His breakeven age is 93. Should he start CPP early? Yes.
  5. Erin plans to keep working a few more years and makes $50,000 per year. If she starts CPP early, it will be taxed at 30%, because it is on top of her salary. If she waits until she stops working at 65, her income will be lower and she will pay only 20% tax on her CPP. If she was a GIC or balanced investor, the answer would be a stronger “No”. But she is also an equity investor. Her breakeven age is 86. Should she start CPP early? Yes.
  6. Fred is still working and earns $100,000 per year. He is a relatively aggressive investor expecting to earn 7% per year on his investments. His CPP will be taxed on top of his salary in a 43% tax bracket. The answer would normally be “No”. However, Fred has lots of RRSP room. His plan is to take CPP early, request no tax withholding, and then contribute the full CPP amount to his RRSP to offset the tax. His breakeven age is 87. Should he start CPP early? Yes.

should-i-start-my-cpp-early

The answer is complex and CPP is only one piece of your retirement income. The best advice is to look at this as part of a professional retirement plan.

 

 

Ed

36 Comments

  1. Dave Garvey on December 3, 2016 at 3:15 am

    What about someone who retires very early eg age 48 and only worked 30 years? Take at 60 or 65? I have a pension, not disabled and with a comfortable life. I know I am penalized for only working 30 of 40 years ie maximum CPP would be 75% and then if taking CPP early this would be further reduced by 7.2% per year, but of what – the 75% or the original 100%?



  2. Ed Rempel on December 3, 2016 at 4:20 pm

    Hi Dave,

    Congrats on retiring at 48! That’s cool.

    In your case, you should probably start CPP at age 60.

    The good news for you is that CPP does drop-out the 8 years with the lowest income. You already have 12 low years from 48 to 60. They can drop out 8 of those 12.

    The process is that they calculate your average income over your working life, excluding the 8 lowest years. Then they reduce that figure by 36% (7.2% x 5) to calculate your CPP retirement income.

    If you delay starting CPP until 65, those would all be low years that won’t be dropped out, so your average income will be lower. You wouldn’t have the 36% reduction, but your average income would be lower, so you wouldn’t get that much more by waiting.

    To know for sure, you could call Income Security Programs to get an estimate of your CPP income. Do the math both ways, taking into account inflation and possibly being able to leave your investments grow longer.

    In your case, though, most likely taking it at age 60 is best.

    Ed



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  18. Dave on January 19, 2018 at 2:56 pm

    Ed,

    First off, great blog. So much good info here.

    I’m looking to retire early, ~35 (two years from now). Will be using a mix of RRSP/TFSA to provide an annual income of $30,000 (split between my wife and I) for my wife and kids. I maxed out CPP contributions every years since 21. I want to know what, if any, CPP I can expect. Since so many of my years between 21 and 60 will have very low income, I wonder if my CPP will be low.

    Say I earned $100,000/yr between 21 and 35 and then $15,000/yr from 35 to 60. After accounting for 8 low years of $15,000, my average income would be ~$52,000. Reduce that by 36% and I get ~$33,000. Is this correct? Should I expect to still get max CPP?

    Thanks for your info! I have struggled to find a clear answer on how CPP works if you “retire” early.

    Dave



  19. Can we retire now? Retirement rules of thumb on January 23, 2018 at 2:12 am

    […] to take CPP early or delay it depends on many factors. I showed them my studies of “Should I start my CPP early?” and “Should I Delay CPP & OAS Until Age 70?“. They showed that how you […]



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  23. […] to take CPP early or delay it depends on many factors. I showed them my studies of “Should I start my CPP early?” and “Should I Delay CPP & OAS Until Age 70?“. They showed that how you invest is one of […]



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  28. […] GIS. Rempel has tackled the timing question on his Unconventional Wisdom blog a few times, notably here and here. For those who qualify, the maximum monthly CPP benefit in 2018 at age 65 is $1,134,17 per […]



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  30. John on January 27, 2019 at 1:50 pm

    Hi Ed – great web site and great articles – read your article on taking CPP or OAS early and the questions that were asked by your readers with great interest – didn’t come across a situation like mine though so…. – I am a OMERS pensioner ( 35 years of service ) 58 years old and as I understand it OMERS is integrated (bridged) with CPP – so at age 65, CPP starts paying the bridged part of my pension and OMERS stops paying the CPP portion of my penson – my question is, would it be better for me to take CPP at age 60 that way I would be ” double dipping ” for 5 years having my full OMERS pension plus the CPP pension coming to me OR would it be better for me to delay CPP until 65 or 70 ? I have RRSP’s and other private investments as well to compliment my pension should I need too.



  31. Dave on April 15, 2019 at 11:30 am

    I’m currently 60 years old and have worked full-time since I was 18.
    in 2008 via divorce (26 years of marriage) where my ex-wife worked
    part-time at best, my CPP and hers was combined/divided.
    Obviously I’ve worked an additional 11 years since then and will
    continue to work until most likely 67.

    My question is – do you think I’d get Max CPP given that I’ve worked
    so long even after loosing 50% of 26 years?



  32. Dave(2) on April 15, 2019 at 11:39 am

    I’m currently 60 years old and have worked full-time since I was 18.
    in 2008 via divorce (26 years of marriage) where my ex-wife worked
    part-time at best, my CPP and hers was combined/divided.
    Obviously I’ve worked an additional 11 years since then and will
    continue to work until most likely 67.

    My question is – do you think I’d get Max CPP given that I’ve worked
    so long even after loosing 50% of 26 years?

    Think I need to provide more information:
    – I’ve maxed out CPP for the past 25 or more years. Income >99k
    – I have no work Pension, only RRSP’s which I’ve been
    building back up since my divorce;
    – probably delay CPP until I stop working 67 is my goal (unless you think otherwise)
    – might take part-time job to hold off drawing RRSP or taking less
    – house will be paid off prior to retirement



  33. Ed Rempel on April 22, 2019 at 11:26 pm

    Hi Dave,

    You probably will not get maximum CPP. It is based on 40 years of paying the maximum, less your 7 worst years (assumable when raising kids)..

    You were married for 26 years and your ex-wife earned very little, so you will lose half of 26 years, or 13 years of CPP-able (if that’s the right word. 🙂 ) income. Thta’s more then the 7 year knock-out they allow.

    Your best bet is to call ESDC directly and ask them. You can also get online access (linked with your CRA account online) and look it up.

    I hope that’s helpful, Dave.

    Ed



  34. F on June 28, 2019 at 1:32 am

    I’m bamboozled why Dave and Erin ought take their CPP early?

    1. You’re assuming that just Fred has RRSP room. Right? Dave and Erin don’t.

    2. Here’s my reasoning for Chris and Dave – Chris “is a moderate investor”, but Dave “a more aggressive equity investor.” Thus if I assume that stock prices will increase in the long run, Chris will earn less profits and rate of return than Dave, when they sell their equities. Thus Chris needs the CPP money less than Dave. Thus Chris ought take the CPP early, and Dave not.

    But you concluded the opposite. Why? What am I missing?

    3. For Erin, you wrote “If she was a GIC or balanced investor, the answer would be a stronger “No”. But she is also an equity investor.”

    Again, I reason as I did for Chris and Dave. Being “an equity investor”, Erin needs the CPP money less than a “balanced investor”. As she “plans to keep working a few more years and makes $50,000 per year”, she doesn’t need the CPP money. Thus why not wait “until she stops working at 65, her income will be lower and she will pay only 20% tax on her CPP”?



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