For every month you take your Canada Pension Plan retirement benefit early, you permanently lose 0.6%, reducing your monthly cheque up to 36% if you take it at age 60.
On the other hand, for every month you wait after age 60, you increase your benefit amount by 0.7%. If you wait until age 70, this works out to an increase of 42%.
According to figures from the Government of Canada, only 6% of new CPP recipients waited until 70 in 2023, while 29% opted to start their benefits at age 60.
So why would anyone want to take it early? Here are three reasons why it would make sense to take a reduced benefit.
1. You think you can make more by investing the money yourself
While this isn’t impossible, you’ll need to beat an annual guaranteed increase of 7.2% per year until age 65, then 8.4% from there to age 70, plus increases to adjust for the cost of living.
The average CPP payout in 2024 was $815 per month or $9,780 per year. With the help of tools like CIBC Investor’s Edge, you can invest that $815 per month and potentially grow your retirement fund even more until you’re ready to retire at 65 or 70 years old.
CIBC Investor’s Edge offers a Stock Centre, ETF Centre and Fund Centre to help you dive deep into the underlying fundamentals of individual stocks or the management fees and holdings of specific mutual funds and exchange-traded funds. This allows you to tailor your investments for potentially higher returns based on your timeline, risk portfolio and long-term goals.
Plus, you pay $0 account fees if you’re investing within an RRSP account with a balance of $25,000 or more, as well as a TFSA account with a balance of $10,000 or more.
2. You’re retiring during a market selloff and you want to give your portfolio time to recover
If you need immediate cash but want to hold off on withdrawing from your investments to give your portfolio time to recover, it might be a good idea to tap into CPP early.
However, financial planners generally advise against taking CPP early for this reason. If you’re nearing retirement, a portion of your portfolio should be allocated to cash in order to meet your expenses, without needing to supplement your income with the CPP benefit.
Consider creating a cash cushion of about a year’s worth of living expenses with a chequing or savings account that pays high interest.
For example, the EQ Bank Personal Account offers the interest-earning potential of a high-interest savings account at a rate of 3.50% per dollar, while also having easy access to your money when you need it.
Plus, you pay $0 account fees and the account requires no minimum balance.
3. You have a low income and may qualify for the Guaranteed Income Supplement (GIS) in addition to OAS
In this case, you might want to minimize your CPP payment to maximize your GIS.
It’s a good idea to engage a financial advisor when using OAS or GIS reasons to determine when to take CPP, as these are complicated calculations that can have lifelong implications. An advisor will have software that can help model these decisions.
Whether retirement is five, ten or 15 years away, it’s never too late to try to grow your retirement fund in an effort to reduce your reliance on GIS.
Robo-advisor platforms like Wealthsimple make it easy for you to set up regular contributions and take advantage of the power of compounding — a strategy that many financial experts say is one of the most effective ways to save for retirement.
Compound interest works by allowing your money to grow not just on your initial contribution, but on the accumulated interest as well, creating a snowball effect over time. You can start small and increase the amount you contribute as your salary grows. Your funds will be managed in a smart investment portfolio, so that you don’t have to keep track of market movements yourself. You’ll get a $25 bonus when you open your first Wealthsimple account and fund at least $1 within 30 days. T&Cs apply.
Sources
1. Canada.ca: CPP Retirement pension: How much you could receive
2. Statistics Canada: Income Explorer, 2021 Census
3. Canada.ca: Canada Pension Plan: Pensions and benefits monthly amounts
4. Canada.ca: CPP Retirement pension: When to start your retirement pension
5. Canada.ca: Canada Pension Plan (CPP) – Number of New Retirement Pension by Age, Gender and by Calendar Year – Canada Pension Plan (CPP) – Number of New Retirement Pension by Age, Gender and by Calendar Year
6. Canada.ca: How we calculate your CPP payment
7. Canada.ca: Old Age Security
8. Canada.ca: Old Age Security: How much you could receive
9. Canada.ca: Old Age Security pension recovery tax
10. Canada.ca: Guaranteed Income Supplement
11. CPPInvestments.com: Sustainability of the CPP
This article provides information only and should not be construed as advice. It is provided without warranty of any kind.
