Canadians have a lot of considerations before retirement. And one of those considerations is certainly going to be when to take out Canada Pension Plan (CPP) benefits. While you must take them out by 70, there is an argument made that Canadians shouldn’t consider taking it out before this time.
What to consider
Why take CPP benefits out at 70? Because you could be missing out on money, of course! According to a 2020 report from the Toronto Metropolitan University’s National Institute on Aging, Canadians could lose more than $100,000 of “secure, worry-free retirement income.”
That’s because if you start after age 65, those pension payments increase by 0.7% each month, or 8.4% each year. That’s a maximum increase of 42% if you start by age 70. And this increase certainly should be taken into consideration, as it is even more than the ultra-high guaranteed investment certificates (GIC) offer right now!
So if you can manage it, then certainly try and hold off until 70. However, there are other items to consider for many Canadians approaching retirement. And while some are well known, others not so much.
Tax optimization
It might actually be more beneficial for some Canadians to consider claiming CPP benefits early to help optimize their tax strategies. By spreading their income over a longer period, retirees might be able to manage their tax liabilities more effectively. This can help especially if they anticipate higher tax rates in the future.
Such an example would be from pension splitting. For couples wherein one spouse has significantly higher CPP entitlements than the other, claiming benefits early for one spouse while delaying benefits for the other could create the benefit of pension splitting. This helps optimize your overall retirement income, as well as tax planning for the household.
Losses
It can be great to consider 8.4% increases year after year, but that won’t help if you have tons of debt on hand. Which is another reason to consider taking out CPP early. Instead of accumulating more and more interest on debts owed, you can use the CPP benefits to pay it off sooner.
This allows Canadians to reach financial freedom earlier and live out their lives with far less stress. And this has more benefits than being able to travel. Less financial stress means less stress on your health as well. So if you plan on enjoying your retirement in the long term, reduce as much stress as you can beforehand.
Hedging
There’s also the benefit of hedging your income, especially against inflation. Given the uncertainty surrounding future economic conditions, some Canadians see claiming CPP early as a hedge against inflation. So instead of waiting around, they can use those benefits sooner rather than later, and potentially mitigate the impact of rising living costs on their retirement income.
One way of doing this of course is seeking out investment opportunities. This is where you could meet with a financial advisor and invest in purchasing property, stocks, or starting a new venture. And there are options if you’re looking to create more than 8.4% each year.
One option would be to invest in an exchange-traded fund (ETF) such as the iShares Canadian Growth Index ETF (TSX: XCG). This ETF focuses on growth, allowing investors to check in on their investments year after year and take it out as needed. Something Canadians need in retirement. Year-to-date the ETF is up 7.22% already, while also providing a 1.03% dividend yield. That’s over 8% right there! And it has proven to provide a compound annual growth rate (CAGR) of 9% over the last decade.
Bottom line
In any circumstance, it’s of course always good to consider every option. Don’t take out CPP if you can afford to wait until 70. But if you believe that your immediate future looks a bit more uncertain, with more costs on hand, then CPP can certainly provide you with less stress now, and potentially more income as you age.
