Many people take it as a given that you should delay taking Canada Pension Plan (CPP) benefits past age 60. By taking CPP later, you maximize your lifetime CPP benefits. This is generally true, but there are specific situations in which it is not. In this article, I will explore the three rare situations where it makes sense to take CPP at 60.
Situation #1: You’re severely ill or disabled
If you’re severely ill or disabled, you might be better off taking CPP benefits now rather than delaying taking them to a later age. Sometimes, every penny counts. If you’re severely sick or injured and your employment insurance (EI) and/or disability benefits just aren’t paying the bills, the decision to take CPP at 60 could be the difference that makes the difference between you staying solvent and going broke.
Situation #2: You have a shorter-than-average life expectancy
The common notion that taking CPP at 60 is a bad idea comes from the fact that Canada has an average life expectancy of 81.75 years. If you expect to live until age 81, your lifetime CPP benefits are maximized by taking CPP around age 65. If you expect to live a very long life, you maximize your lifetime CPP benefits by taking benefits at 70.
If, however, you only expect to live until your early 70s, you may maximize your benefits by taking them at 60. Although taking CPP at a later date increases your monthly amount, it doesn’t necessarily increase your lifetime amount if you do not live very long after taking the payments.
Situation #3: You’ve already put your best 35 working years behind you at age 60
If, at age 60, you’ve already put your best working years behind you and will only be working part-time from that point onward, you might be better off taking CPP at 60. You see, there is more to the CPP formula than just the age at which you take benefits. It also partially depends on how much you earned when you worked. If your best working years are behind you, then delaying taking CPP won’t increase your benefits as much as you probably think it will.
What to do instead of taking CPP benefits at 60
If you think you really need to take CPP benefits at 60, then by all means, go ahead and do so. It isn’t necessarily the end of the world. However, there are other ways of making ends meet. If you have savings, you can invest in dividend stocks, for example. Dividend stocks pay regular cash income that reduces your need to receive CPP, enabling you to keep earning a living and stacking future CPP benefits.
Consider Brookfield Asset Management (TSX:BAM) for example. It’s a Canadian non-bank financial services company that operates primarily as a fund manager. It invests peoples’ money in exchange for fees. It is quite good at what it does: in the last year, it grew its revenue by 12% and earned a 45% net income margin as well as a 25% levered free cash flow (FCF) margin. Margin means the amount of profit earned per dollar of revenue; net income and FCF are different ways of measuring profit.
When a company has margins in the range of 26-45%, it means that it has lots of money it can use to pay dividends or re-invest in its business. BAM has opted to go the dividend route, paying a generous dividend that yields 3.4%. So, you get $3,400 in annual passive income for every $100,000 you invest into BAM. That’s not a bad deal if you ask me.
