The CPP or Canada Pension Plan is a taxable retirement benefit that aims to replace a portion of your income. Generally, the average age to begin the CPP payout is 65. But you can claim the benefit at the age of 60 or delay it until the age of 70.
So, will you receive the same amount if you claim the CPP earlier? Well, no. Actually, the Canada Revenue Agency reduces the CPP payment by 0.6% for each month for early retirees. It suggests the CPP will be reduced by 36% for those starting the payment at the age of 60.
What’s the cost of early claims for CPP pensioners?
How much exactly is 36%? The Canada Revenue Agency has stated the maximum CPP payment for a retiree beginning their pension at the age of 65 is $16,376.20 in 2024. So, for a 60-year-old, the maximum payout reduces by 36% to $10,480.13, which is less than $900 per month.
The annual reduction of $6,000 from your retirement paycheque might seem harsh at first, and it makes sense to see if Canadians should begin these payments early.
3 Reasons to claim the CPP benefit at age 60
You need access to money – Canadian individuals may have a significant portion of their investments in asset classes such as real estate or stocks. While stocks are liquid, they are highly volatile and should be held over the long term. Comparatively, real estate is highly illiquid. So, for those looking to have a liquid stream of passive income, starting the CPP at age 60 may be a good idea.
No CPP contributions since age 55 – The Canada Revenue Agency calculates the CPP payout by considering the best years of your earnings. So, in case you did not generate any income after the age of 55, the CRA calculation would mean you may get a higher CPP payout at the age of 60, compared to 65.
Avoid the OAS clawback – The Old Age Security, or OAS, is another pension plan offered by the CRA. The maximum monthly OAS payment is $713.34 in 2024. But if your annual income surpasses $90,997 this year, the CRA will claw back your OAS at 15%.
In case you think your annual income will surpass $91,000 in retirement, you can avoid the clawback by starting the pensions early.
Focus on retirement planning
Whether you begin receiving the CPP at the age of 60, 65, or 70 shouldn’t matter much unless you want to avoid the OAS clawback. Instead, you should focus on creating a diversified portfolio of investments and secure a passive income stream for life that can supplement your CPP.
For instance, you can invest in quality dividend ETFs such as the iShares Core MSCI Canadian Quality Dividend Index ETF (TSX: XDIV). The ETF offers you a forward yield of 4.6% and provides you exposure to some of the largest TSX companies, such as Manulife and the Royal Bank of Canada.
If the ETF is held in the TFSA or Tax-Free Savings Account, any returns generated in the form of dividends or capital gains are exempt from CRA taxes.
