It’s common for Canadians to choose to take CPP at age 60. It’s usually the wrong choice. If you look at how CPP benefits are calculated along with the average life expectancy, you’ll see it makes the most sense to take benefits at age 65. Taking CPP at 60 results in a lesser amount of annual and lifetime benefits. In this article, I will explore three major reasons why you shouldn’t take CPP at age 60.
Reason #1: You’re very healthy
If you are in good health, there is little reason to take CPP at age 60. Studies show that the longer you live without a serious health issue, the more likely it is that you will live well into your 80s. A population’s life expectancy is held back by a minority of people who die very young. Most people who live to age 60 live long, healthy lives.
If you are a 60-year-old Canadian with a clean bill of health, you are likely to survive to your mid-80s. So, there is no reason to worry about squandering your golden years. Working until 65 will probably result in a more “golden” experience in the long run.
Reason #2: You’re drawing down your RRSP/RRIF
If you are already drawing down your RRSP, then you may not need your CPP money right away. Assuming you have $1 million in your RRSP and take out 4% per year, then you’ll get $40,000 per year – assuming your dividends and capital gains make up for the amounts withdrawn each year.
If you hold dividend stocks, it’s quite possible to earn RRSP income that replenishes your withdrawals each year. Consider the Toronto-Dominion Bank (TSX:TD), for example. It’s a bank stock that yields 5%. If you hold nothing but $1 million worth of TD in your RRSP, you’ll get $50,000 in dividend income per year. You shouldn’t hold just TD stock in your RRSP, but the assumption that you do helps to illustrate the principle at hand.
Your TD dividends aren’t taxed until you actually withdraw them. So, you can easily finance 4% annual RRSP withdrawals with dividend stocks. If you’re 60 years old and drawing down your RRSP to the tune of $40,000 per year, why not keep working and building up your CPP nest egg? Remember: each year you delay taking CPP adds nearly 1% to your ultimate annual amount.
Reason #3: You won’t be able to make ends meet with the CPP you get at age 60
Last but not least, you ought to delay taking CPP because you are unlikely to make ends meet with the amount paid at age 60. The average CPP at age 65 is $758 – the average at 60 is likely even less than that.
Using the “0.7% less per month” formula, a person drawing CPP at 60 should only get $489 per month. Those extra years are definitely worth waiting for if you can still work without too much hassle.
The data doesn’t lie: whether you have a big RRSP or not, you should wait until 65 to begin taking CPP. It might feel like a drag, but it’s worth it in the long run.
