I have previously written about reasons to take CPP early at age 60. In this post, I cover some reasons why you may actually want to delay taking CPP until age 70 instead of the standard 65 years.
Obviously, there is more to this issue than what I have provided below. Consider working with a financial planner to figure out what’s best for your circumstances.
How Much is CPP at Age 70?
Your CPP payments depend on how much you have contributed to the plan and for how long you contributed.
To qualify for the maximum monthly CPP, you need to contribute to the CPP for at least 83% of the time you are eligible between age 16 and 65 (i.e. for 39 years).
And, in those 39 years, you must have made the maximum contributions as per the Yearly Maximum Pensionable Earnings (YMPE).
For 2020, the YMPE is $58,700. This means that the maximum employee contribution to the CPP for 2020 is $2,898 (5.25% contribution rate) and for self-employed folks, the amount is $5,796.
Canadians can opt to take CPP early at age 60 in exchange for a 0.60% reduction in benefits per month i.e. 7.2% per year or 36% at age 65.
Alternatively, you can choose to defer CPP until later up to age 70 in order to enjoy an increase in benefits equivalent to 0.7% per month i.e. 8.4% per year or 42% at age 70.
For 2020, the current maximum monthly CPP benefit is $1,175.83. If you had delayed CPP until age 70, your benefit would increase 42% to a maximum monthly CPP payment of $1,669.68 in today’s funds (not adjusted for inflation).
The average CPP benefit is much lower than the maximum. For example, the average monthly payment as of October 2019 was $672.87.
Adjusting this amount for a 142% increase means an individual who delayed collecting CPP until 70 could receive an average of $955.48 per month in today’s dollars.
Reasons to Defer CPP Until 70
Here are some reasons why you may want to delay collecting CPP until age 70.
1. Average Life Expectancy or Better: If people in your family generally live past age 90 and you are in good health, it may make sense to delay CPP to age 70 for more benefits and to minimize your longevity risk.
2. Higher CPP Payout: An extra 42% increase in benefits for life compared to what you would otherwise receive at age 65 is nothing to scoff at. For every year after 65 that you delay, you get an 8.4% boost which equates to 42% by the time you turn 70.
Using today’s CPP numbers, this is an extra $493.85/month or $5,926.20 per year in your pocket if you qualify at the maximum level.
3. You Are Still Working: If you are still employed after age 65, CPP contributions become optional. However, CPP benefits are included in your taxable income and thus increase your taxes.
If you don’t need the extra income, deferring CPP income by a couple of years could result in tax savings. The same goes for OAS payments.
4. Eligibility for GIS: The Guaranteed Income Supplement is a part of OAS benefits. The maximum monthly GIS payment for the January to March quarter (2020) is $916.38 for a single, widowed, or divorced pensioner.
If you can live on your OAS/GIS benefits alongside income from your TFSA and non-registered investments, you could defer CPP until later while enjoying up to $10,996.56 in GIS money per year (i.e. $916.38 x 12 months).
5. Investment (Market and Inflation) Risks: There are lots of arguments out there for taking CPP early and keeping your investments intact as long as possible so you can maximize your returns.
Recent events show that you can’t rely on the financial markets to always deliver high returns, even more so, when your investment horizon is short.
If there’s a prolonged economic downturn, your investments could suffer and provide less-than-stellar returns. The same goes for when market returns do not keep up with inflation.
On the other hand, you are ‘almost’ assured that your CPP amount will increase by 8.4% for every year you delay and it is indexed to inflation as well. The increased CPP benefit will continue to be paid for life.
If your only reason for taking CPP early is because you are afraid that CPP funds may dry out, you can rest easy.
Recent reports by the Canada Pension Plan Investment Board (CPPIB) indicate that CPP is sustainable until at least 2090 even with the recently introduced CPP enhancements.
CPP Breakeven Point
Although you get lower CPP benefits if you start to collect at age 60, you potentially take it for longer than someone who starts at age 65.
So what’s the breakeven point?
Based on the chart below, if you take CPP at age 65, you will start benefitting from the extra monthly payments (compared to the 60-year old taker) when you reach age 74 or 73.9 years to be precise.
And, compared to someone who started collecting CPP at age 61, you will start earning more money overall when you reach age 75 (or 74.9 years).
CPP Breakeven Point Chart
Note: This table scrolls horizontally to the left on mobile phones.
*Based on CPP benefit entitlement of $1,000/month at age 65.
*Chart adapted from https://moneycoachescanada.ca/blog/take-cpp-age-60/
- CPP Survivor and Death Benefits
- What happens To CPP If You Retire Abroad
- CPP Benefits After The Death of a Spouse
- Complete Retirement Income Guide for Canadians
How To Apply for CPP
Note that even though you wait until age 70 to collect CPP, you will still need to apply for it. You can apply online via your My Service Canada Account or send in a paper form.
Online applications take 7-14 days for processing and for paper applications, expect to wait for up to 120 days.