Early collection of CPP benefits – real world example
I looked at early collection of CPP benefits in the Q&A: Questions and Answers – Deferral or early collection of CPP benefits
The other day a client asked if early collection of CPP benefits at 60 was beneficial to him. The information available was that he would collect $583.89 a month starting October 2013, if he took the CPP early, and he expected to have $75,000 in estimated yearly income for the next 5 years until 65.
The rule of thumb is that the early collection penalty is 30% (6% per year taken early) but this penalty increased to 7.2% beginning in 2012 so it would be 32.4% (6+6+6+7.2+7.2) for someone starting to collect in 2013.
If we work backwards: $583.89 early CPP / 67.6% adjusted payout means his maximum pension is $863.74 at 65 *1.
Based on these numbers, and ignoring tax, it is at the age of 75 that it becomes more beneficial to wait until 65 to collect CPP (vs taking CPP early).
What if you don’t require the funds and instead you invest the monthly CPP cheque in a RRSP?
1) You negate the tax cost of taking the CPP early
2) You have an additional $35,033.40 in RRSP’s when you turn 65.
3) The additional RRSP’s are part of your estate meaning when you pass away they are transferred to your beneficiaries (net of tax) where as with CPP there is only a $2,500 death benefit (though a survivor benefit may exist for a spouse)
Also note, as the RRSP’s will rollover into a RRIF at 70, it is hard to calculate the tax effect of the increase in RRIF’s vs CPP or the effect on the OAS clawback (if applicable).
What if you don’t withdraw the additional RRSP’s at 65 and they continue to earn investment income?
If we adjust for a 3% rate of return per year (low risk) on the $35,033.40 starting at 65 (compounding annually), it delays the age that it becomes more beneficial to wait until 65 to collect CPP (vs taking CPP early) from 75 to 81 (see spreadsheet). *2 *3
*1 This amount may change considering your income levels for the next five years as CPP earnings at 65 is based upon your lifetime contributions.