CPP Benefits: Should You Wait or Take Them Now?

To take the Canada Pension Plan (CPP) or not to take CPP? For Canadians in their early 60s, that is the question.

Although we know that CPP benefits increase a little for each year you delay taking them up to age 70, having CPP coming in now might allow you to retire earlier. This creates a “time value of money” problem: is it better to have “X” now or a multiple of “X” in the future?

Ultimately, your decision about when to take CPP should be informed by your personal situation and preferences. Everybody is unique. However, there are some considerations you should think about before deciding, and some of these apply to basically everyone. In this article, I will explore three reasons for waiting to take CPP and one reason to delay taking it so you can make a more informed decision.

The case for taking benefits now

There are several reasons to take CPP benefits now, many of them involving urgent needs and diminished abilities. They include the following:

1. Ill health. If you cannot work due to ill health, you may be better off taking CPP now rather than in the future. Health issues sometimes result in prolonged periods of unemployment that disability benefits and employment insurance (EI) don’t fully cover.
2. A short life expectancy. If you have a shorter-than-average life expectancy based on your family history, it may pay to take CPP now, even if you aren’t currently ill. If you only expect to live until age 70, there is no reason to delay taking benefits until age 70.
3. Clear retirement plans that you could afford if you took CPP but couldn’t afford otherwise. If you estimate that you need $5,000 a month in retirement, and your investments pay you $4,500 a month, taking CPP early could make it more feasible for you to officially retire.

If reasons one or two above apply to you, then it may make sense to take CPP early. Reason three is a little more iffy; you probably should wait a few more years to take CPP if you can work, and “covering expenses” is your only reason for wanting to take benefits. However, the decision to take CPP early in such a situation probably won’t ruin you.

The case for waiting

The case for waiting longer to take CPP rests on one simple fact.

You get more benefits the longer you wait. You get an extra 8.4% worth of CPP for each year you delay taking benefits beyond age 65. You lose 7.2% per year for each year before 65 you receive benefits. So, if your life expectancy is about typical for Canadians, you should delay taking CPP, possibly until age 70.

What investing can do for you

If you aren’t sure whether to take CPP now, tomorrow, or even later, here’s some good news.

You can always get some passive income by investing. Investing in dividend stocks and interest-bearing bonds provides you with income, and unlike CPP, there are no deadlines to worry about with these assets.

Let’s imagine that you had a $500,000 position in Toronto-Dominion Bank (TSX:TD) shares. TD is a dividend stock that yields 5.1% at today’s prices. Therefore, a $500,000 position in it yields $25,500 per year. The math on that is down below.

Now, this isn’t to say that you should run out and invest in nothing but TD Bank stock. Like any individual stock, it’s subject to certain risks. However, its high yield makes it useful for illustrating how much passive income you can get with dividend stocks. Potentially, you can get much more with such stocks than CPP will ever pay.