CPP: When to Apply?
While the normal age to begin receiving regular CPP is 65, individuals can apply to start receiving earlier at a cost, or later for a greater benefit:
- If the individual starts before age 65, payments will decrease by 0.6% each month (or by 7.2% per year), up to a maximum reduction of 36% if started at age 60.
- If the individual starts after age 65, payments will increase by 0.7% each month (or by 8.4% per year), up to a maximum increase of 42% if started at age 70.
The decision as to when to commence CPP payments can be very complex, with extensive variables to consider, primarily related to personal factors and economic scenarios. While 95% of Canadians have consistently taken CPP payments at normal retirement age (age 65) or earlier since the CPP introduced flexible retirement in the 1980s, a July 27, 2020, report (The CPP Take-Up Decision) by the Canadian Institute of Actuaries and the Society of Actuaries examined whether that is always the best option.
The report compared receiving CPP commencing at age 65 against pulling funds from RRSP/RRIF savings to replace the CPP payments and then commencing CPP at age 70. The two primary factors which influence the decision are life expectancy and rate of return. In particular, the report noted the following:
- A major advantage of increasing CPP payments via postponement is that the increased CPP provides additional secure lifetime income that increases each year alongside the price of consumer goods, thus protecting against inflation, financial market risk, and the risk of outliving retirement savings.
- Given today’s low-interest-rate environment and general population longevity expectations, the report noted that delaying CPP payments is often a financially advantageous strategy.
- In the risk-free investment comparison, 75-80% of Canadians within this framework receive more income by delaying their CPP payments.
- Even in an extreme case that favours not deferring CPP payments (low longevity expectations and very high expected investment returns), a person faces a 50% probability of receiving more income by delaying CPP payments, along with the risk-reduction benefits of a delay mentioned above.
- Higher-income Canadians have longer life expectancies than lower-income Canadians, and females generally live longer than males; therefore, it would more often be in their best interest to delay CPP payments.
ACTION ITEM: Consider whether starting CPP before, after, or at age 65, would be the most advantageous.