You often hear that the best time to start claiming your Canada Pension Plan (CPP) is at age 70. While the average retirement age is 65, if you delay your payout, the Canada Revenue Agency (CRA) rewards you by increasing your payout by 0.7% for every month of delay. For the higher payout, it is suggested you delay CPP benefits till age 70. But this may not always be the case.
Things to consider before claiming CPP benefit
The idea behind CPP is to substitute a portion of your average work income when you retire. When planning to claim your CPP, analyze your situation and see if you need that income. Claiming the benefit at age 65 comes with an opportunity cost of 0.7% a month and 42% overall.
So, consider a few things before claiming the CPP benefit – your taxable income, financial situation, and retirement savings.
What is your taxable income at age 65?
What is your taxable income? The CRA increases the tax bracket annually and offers various exemptions to help you reduce your taxable income. While the retirement age is 65, many people continue working past this age if their health permits and the job requires it. Sometimes people also continue working if they have debt or financial obligations.
Remember, the CPP payout is taxable. If you are in a higher tax bracket, you are not only losing out on the opportunity to increase the CPP by 42% but also increasing your tax bill. If you are unable to work or have to retire, you can consider claiming CPP benefits at age 65. It will substitute 25% of your working income and won’t add to your tax liability.
For 2023, the average CPP benefit for people age 65 is $760.07/month, or $9,120.84 a year. You can also claim your Old Age Security Pension. Income up to $15,000 is not taxable as you can claim a basic personal amount.
What is your financial and health condition at age 65?
The next thing to consider is your financial and health conditions. The biggest uncertainty of retirement is you don’t know how long you will live. And with age, your medical bills will increase. If you are in good health and have several sources of active and passive income (rent from property, dividends from investments, a salary or net income from business), you can delay the CPP payout.
But if you don’t have sufficient income to make ends meet and health is not your strength, it is better to claim CPP benefits. The main objective of the pension is to give you a source of income in the later half of your life when you need it the most.
What are your retirement savings at age 65?
The last thing to consider is your retirement savings. The CPP contribution is mandatory. That is the government’s way of making you save for retirement. But the CRA also has several accounts like the Registered Retirement Savings Account (RRSP) in which you save and get a tax benefit but don’t withdraw as the withdrawals are subject to tax.
If your earnings are falling short, consider converting your RRSP into a Registered Retirement Income Fund and start withdrawing dividends.
Get the freedom to claim CPP benefits at age 70
If you are still in your 60s or younger, you have time to boost your RRSP and increase your alternate sources of income. This way, you get the freedom to determine when to claim CPP.
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Retirement can be comfortable if you diversify your income and time your withdrawals and payouts properly.
