Basic Rules – benefits based on contributions made by individuals
to the CPP plan
- Normal CPP benefit payable at age 65
- Early CPP
benefit payable as early as age 60, with a reduction of 0.6% per
month (7.2% per year) for each month benefit is drawn before age
- Deferred CPP benefit – can delay drawing until age 70,
with an enhancement of 0.7% for each month benefit is deferred from
age 65 (8.4% per year)
- Benefit is fully indexed to the
Consumer Price Index (CPI)
Example – Assume CPP Retirement benefit of $1,200 per month at age 65
- Benefit at age 60 - $768 per month = $9,216 annually
- Benefit at age 65 - $1,200 per month = $14,400 annually
- Benefit at age 70 - $1,704 per month = $20,448 annually
It is not just the numbers - other considerations are your personal
income needs, your health and family longevity, marital status, and
other financial assets and/or pensions available to supplement your
retirement income as a bridge until you draw your CPP benefit.
In the past when determining when to draw CPP, we often only
considered the “breakeven age”, a simple calculation that did not
factor in the impact of inflation or longer life expectancy.
Today, financial planners must consider life expectancy probability,
outlined in the FP Canada Assumptions and Guidelines (1), and apply
the concept of Lifetime Loss, which looks at the potential loss of
indexed benefits over full life expectancy period.
Example – Person aged 60, good health with family longevity,
assumed life expectancy of 88
- Draw at age 60 - $9,216 x 28 years = $258,048
- Draw at
age 65 - $14,400 x 23 years = $331,200
- Draw at age 70 -
$20,448 x 18 years = $368,064
Simple math tells us that the difference between drawing at age 60
vs 70 is $110,000. A research paper developed by the National
Institute on Ageing and the FP Canada Research Foundation (2)
estimates the actual amount of the Lifetime Loss, defined above, is
closer to $155,00 - $300,000, when considering inflation and longevity.
Consideration: Identify your non-CPP incomes and assets that
you have to support your required retirement income? Do you have an
employer Defined Benefit Pension Plan, with indexing to inflation? How
you draw on the above during retirement is part of the overall income picture.
Consideration: What cash flow do you need? Many people require
more income early in retirement and less income in the later years.
Can you keep up with increases in inflation?
Consideration: If your family history is blessed with longevity
and you are in good health, consider the benefit of deferral to
provide for increased secured income in your later years.
When Deferral is not the best option …
- Those who already have sufficient lifetime secure retirement
- Life limiting illness or family history of major
illness – shortened life expectancy.
- Marital status and
impact of survivor benefits – survivor benefits are based on age 65
and are not adjusted or increased for the deferral after age
- Those who can not afford to delay and do not have other
assets to draw on and require the income sooner.
There is more information to consider, and we will continue our
discussion of the CPP program in a future blog. But if you want to
learn more, give our office a call to connect with one of our
knowledgeable team members.