The Canadian government introduced the Canada Pension Plan (CPP) to provide retirees with a stable stream of recurring income. While the CPP is a taxable monthly benefit, it aims to replace a portion of your income in retirement.
The average age to begin CPP payments is 65. However, Canadian individuals can start using the benefit as early as age 60. It’s crucial to understand that the CPP payment is reduced by 0.6% for every month the payout is advanced. So, over a five-year period, the CPP payment will be reduced by 36%, which is significant.
Alternatively, if you begin the CPP payment after the age of 65, it will increase by 0.7% each month, up to a maximum of 42%.
So, why would you claim the retirement benefit at an early age and lose out on higher payouts over time? Here are three reasons to claim the CPP benefits at age 60.
You need access to liquid cash
Generally, it’s advisable to hold your investments across asset classes to benefit from portfolio diversification and lower risk. However, you need to put your investments to work and profit from the power of compounding.
So, individuals who expect the stock market to move higher over time might want to avoid liquidating their equity positions to fund their retirement expenses. Moreover, the real estate market is highly illiquid, while interest rate hikes have driven housing demand lower. It’s possible that homeowners looking to sell their house may wait for buyer sentiment to improve.
In such cases you may want to give your existing investments additional time to appreciate in value and begin the CPP earlier, especially if you need access to liquid cash.
No CPP contributions since age 55
According to the Canada Revenue Agency, the CPP payment depends on contributions from your best earning years. So, if you haven’t earned after the age of 55, it’s possible that your CPP payment at age 60 is higher than what you receive at 65.
Prevent CRA clawbacks
Another reason to begin the CPP earlier is to avoid CRA clawbacks on benefits such as Old Age Security. If your annual income is more than $90,997 in 2024, the CRA will claw back your OAS at 15%.
Individuals who expect to earn more than $91,000 in retirement can avoid these clawbacks and begin the CPP as early as possible.
Focus on retirement planning
Whether you begin the CPP at the age of 60, 65, or 70 shouldn’t matter a lot especially if you have enough savings in retirement. It’s essential to begin your investment journey early and build wealth over time.
Canadians need to invest in asset classes such as equities, bonds, gold, and even cryptocurrency, depending on factors such as age, risk appetite, and investment horizon.
Newbie investors who want to gain exposure to stocks and save for retirement can consider investing in quality dividend ETFs, or exchange-traded funds, such as iShares Core MSCI Canadian Quality Index ETF (TSX:XDIV). The ETF provides you with exposure to some of the largest dividend-paying Canadian companies, including Manulife and Royal Bank of Canada.
The ETF pays a monthly dividend and offers a tasty yield of over 6%. This means you will earn $600 each year for every $10,000 invested in the ETF. In addition to a steady stream of dividends, investors will also derive long-term capital gains.
