When it comes to CPP, 3/50 is the most important number you’ll ever have to know. The reason has nothing to do with the way the figure looks – you could think of it as 0.6% if you preferred. The reason is that the number is a major factor in your decision about when to take CPP. Basically, if you’re not yet taking CPP benefits but are planning to, this “3/50” number plays a major role in your decision about when to start taking the benefits. In this article, I will explore the significance of 3/50 in your decision about when to take CPP benefits.
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CPP benefits decrease by 3/50 for each year you take them prior to age 65
According to the Federal Government, your CPP benefits are 0.6% lower each month you collect them prior to the age of 65, compared to what you would have received if you’d waited. This adds up to 7.2% per year. If you take CPP at 60, you will receive a full 36% less per year than if you’d waited until 65. To understand how damaging this is, take a look at the chart below, which compares the 15-year experience of a person taking CPP at 60 to that of someone taking it at age 65.
| AGE | AMOUNT FOR THOSE TAKING BENEFITS AT 60 | AMOUNT FOR THOSE TAKING BENEFITS AT 65 |
| 60 | $640 | $0 |
| 61 | $640 | $0 |
| 62 | $640 | $0 |
| 63 | $640 | $0 |
| 64 | $640 | $0 |
| 65 | $640 | $1,000 |
| 66 | $640 | $1,000 |
| 67 | $640 | $1,000 |
| 68 | $640 | $1,000 |
| 69 | $640 | $1,000 |
| 70 | $640 | $1,000 |
| 71 | $640 | $1,000 |
| 72 | $640 | $1,000 |
| 73 | $640 | $1,000 |
| 74 | $640 | $1,000 |
| TOTAL: | $9,600 | $10,000 |
As you can see, the person taking CPP at 65 is already profiting by age 74. And with the average life expectancy in Canada being 82 years, there’s good reason to think you’ll still be alive and kicking past age 74.
What to do instead
Now, if you’ve read the paragraphs above, you may be considering taking CPP late rather than early. However you might also have concerns; for example, health concerns, or not wanting to work much longer. Health concerns are in fact a valid reason to take CPP early rather than late – one of the few valid reasons to do so, in fact. Apart from that, you may wish to save money in the lead up to your retirement, to create a financial cushion.
How to save money while you delay taking CPP
You can save money pretty effectively by investing it. Putting money in a checking account isn’t really “saving,” as such money loses 2–3% a year to inflation. Investing in index funds like the iShares S&P/TSX Capped Composite Index Fund makes much more sense. Such funds typically return about 10% a year, which means you truly “save” the money that you invest into them.
Individual stocks like Royal Bank of Canada (TSX: RY) are worth looking at too. They’re not for everyone – you need to do a lot of research on individual stocks to be able to make informed investments in them. Although I have done a fair bit of research on Royal Bank of Canada and think it’s a fairly safe bet, it’s usually considered prudent to do your own research or work with a financial adviser. That way you can truly “know” what you are buying. Despite all of the foregoing, I will continue this discussion of Royal Bank of Canada stock, as it is a useful example of how bank stocks can help you increase your wealth in retirement.
Royal Bank of Canada is a dividend stock, meaning that the company pays a portion of its profit out to shareholders. It has a 4.2% yield, so it pays $4,200 per year for every $100,000 invested if the yield doesn’t change. Historically the yield has changed: it has risen. As a result, this stock has helped many a Canadian retiree pay the bills. Perhaps it could do the same for you.
