The Canada Pension Plan (CPP) is a central part of the retirement planning process for many Canadians. But how does it work, and when should you begin taking benefits?
The Fundamentals
1. Start Age: One can start CPP benefits between 60 and 70. The amount you receive is determined by the age you begin. Remember, there’s no advantage in starting after 70.
2. Inflation Protection: One of the best features of the CPP is its protection against inflation. Established in the 1970s, the federal government ensured the full CPP, OAS, and GIS indexing. This move adjusted the latter two to quarterly changes instead of yearly, shielding pensioners from rising costs.
3. Contribution and Calculation: The amount you receive depends on your contribution history. At 65, the maximum payment in 2022 was roughly $1,300 monthly. There are adjustments if you take CPP before and after 65:
• Starting CPP before 65 reduces payments by 0.6% monthly, with a 36% reduction at 60.
• Starting after 65 increases payments by 0.7% monthly, with a boost of up to 42% at 70. But this calculation has more depth – factors like the Consumer Price Index (CPI) and wage inflation affect your overall benefits*.
The Decision Factors
1. Life Expectancy: If health issues shorten your life, starting CPP early might make sense. But, if you’re in good health, basing your decision on life expectancy at age 60 or 65 can offer clarity. As of recent data, men and women at 65 generally live until 85 and 87.6, respectively. Higher-income individuals are even more so.
2. Income in Retirement: Your retirement finances can come from multiple sources like Government Retirement Benefits, Employer Pensions, Registered Plans, and more. Some are guaranteed (like CPP), while others aren’t. Considering the current inflation discourse, the guaranteed income from CPP seems more attractive compared to volatile sources like RRSP/RRIF accounts.
Conclusion
While the numbers might push for a delay in starting CPP till 70, aligning this decision with health conditions and expected retirement income sources is crucial. Deciding when to start receiving CPP benefits is a personal choice, influenced by various factors. While the math can get complex, consider your health and potential retirement income before deciding. And always remember, there’s no one-size-fits-all approach! As always, a personalized approach works best.
Helpful Links
- Canadian Retirement Income Calculator
- My Service Canada Account
- Canada Pension Plan Eligibility
- Canada Pension Plan – How much could you receive?
- Apply for OAS
*CPP payments are indexed using the Consumer Price Index (CPI), and the maximum retirement benefit is indexed using an increase in wage inflation. If you want to learn more, here is an excellent article by Lea Koiv. The bottom line is that if wages rise faster than price inflation, the pension payable at 70 will exceed the amount at 65 by more than 42 percent. Historically, wage inflation has been higher than price inflation by about one percent annually. Regardless of the metric used, there is inflation protection, whether you start CPP payments early or delay them until a later age.
