Questions and Answers – Deferral or early collection of CPP benefits
Question: I am turning 60 next year, retiring and I will be receiving a pension from my employer. I understand that I’m also able to start receiving CPP early. To further complicate my decision, I am planning on starting a small business. I was wondering if I should collect my CPP benefits early? With my other pension and business income I will make $35,000+. My friend thinks I should take the money now, as it may not be there in the future.
Answer: This questions is being asked a lot more these days with the new changes to CPP. Some key considerations in deciding when to apply for early CPP benefits includes:
The problem is that, based on the facts presented in the question, we are missing some important information.
It is very important that you take your health and life expectancy into consideration when deciding whether to take CPP early or to defer taking CPP and/or OAS past the age of 65.
When receiving early payment, there is a “penalty” which is a % of the amount you would have received at 65 and similarly, when deferring payment, there is a % “increase” to the amount you would have received at 65.
Why age and health is an important consideration is that, based on the age (the point) where you “break-even” (where early payment costs you and deferral benefits you), you have to make a decision as to how long you expect to live and therefore which you feel is the best option.
Check out this website: CPP Breakeven Points. As you can see, if you start collecting CPP early (at 60), you “lose” out starting at age 75 (where delaying collecting CPP until 65 would start paying off).
Also, please consider the article: Four reasons why you should still take CPP early (post 2011 rules) which elaborates on other issues when considering your health and age expectancy.
“When are you most likely to enjoy the money? Before age 74 or after age 74? Even though the break-even point is three years sooner, for most people, they live the best years of their retirement in the early years.
“Some believe it’s better to have a higher income later because of the rising costs of health care. Whatever you believe, you should plan for. It might be worthwhile to look around your life and see the spending patterns of 70, 80 and 90 year olds to assess how much they are really spending. Are they spending more or less that they did when they were in their active retirement years.”
It’s also important to remember that the “break-even point” is delayed even farther if you don’t spend the CPP and instead invest it.
Although there are a number of issues to consider (and in this case I have put more importance on the issue of age vs income/tax consequences), I would agree with your friend, and I would take the CPP early and, in your case, invest it.
Although there are tax consequences based on your income level, the reality is that these days there is no security that your business will do well or that your company based pension fund will always be there (consider Detroit and Greece) so it is always better to be able to access the CPP income.
Lastly, let’s not forget inflation, where a dollar today is always worth more than a dollar tomorrow.