The earliest you can claim your Canada Pension Plan (CPP) benefit is at age 60. While the recommended age for claiming the CPP payout is 65, sometimes collecting CPP early makes sense. The Canada Revenue Agency (CRA) penalizes you by reducing your CPP payout by 0.6% every month you collect in your early retirement. By multiplying it by 60 months (five years), you permanently reduce your CPP payout by 36%.
The cost of claiming CPP at age 60
How much is 36%? The CRA has determined the maximum annual CPP payout at age 65 to be $16,375.20 in 2024. If you claim the benefit at age 60, your payout reduces to $10,480.13. It isn’t easy to justify a $6,000 reduction for the remainder of your life. These numbers might look bad, but financial decisions are not to be taken looking only at one angle. You should look at your financial situation in its entirety and choose the one that is suitable for you.
Four reasons to claim CPP benefit at age 60
- You need the money – What use are the benefits if they are not accessible in your most difficult times? For instance, let’s consider a situation where James lost his job and cannot find a new one in this economy. He needs the money to pay his bills and put food on the table. If it means taking a 36% cut, be it so as you need to survive.
- Lower life expectancy – If you are suffering from a terminal illness or have a family history of early death at age 65 or 70, there is no point delaying the CPP payout. You might as well use it while you can still enjoy it.
- No CPP contribution since age 55 – The CRA calculates your CPP payout by looking at the best years of your earnings. If there was no income in the last five years, the CRA would take the best 35 years of your earnings instead of 39 years. The way the calculation works out, you could get a higher payout at 60 than at 65.
- OAS clawback – Apart from CPP, the CRA also gives you an Old Age Pension (OAS). The maximum monthly OAS for 2024 is $713.34. However, if your 2024 income is more than $90,997, the CRA will claw back your OAS at 15% of the amount above the income threshold.
Looking at these reasons, a 36% permanent cut looks justifiable. While you can’t do much about the last three reasons, you can avoid the first reason through better retirement planning.
Start planning for retirement
The job market is uncertain. You must build a diversified investment portfolio that can give you the financial freedom to survive prolonged unemployment or take an early retirement without taking the 36% cut.
The CRA offers several registered savings accounts with tax benefits so that you can grow your investments tax-free.
If you still have 10-plus years to retire, you could consider dividing your retirement savings between growth and dividend stocks. Growth stocks can help you build wealth, and dividend stocks can help with passive income.
Two stocks to complement your CPP payout
Slate Grocery REIT (TSX: SGR.UN) is a resilient dividend stock you can buy now at the dip. This pure-play grocery REIT manages 117 properties in the United States. Like all REITs, Slate Grocery REIT saw a 63% dip in net income as the fair market value of its properties fell. However, its rental revenue continued to grow, and it maintained a healthy occupancy of 94.1% in the third quarter.
The decline in the fair market value of properties did not affect its cash flow from rent, allowing the REIT to maintain its distributions. The payout ratio is at a healthy level of 79.6%. You can consider buying this REIT in the current dip and lock in a distribution yield of over 9%.
As for growth stocks, Nuvei is a stock worth considering for the long term. It has a scalable business and is moving in the right direction. The company offers new-age digital payment solutions and has the potential to be a preferred provider to many enterprises.
