Waiting until age 70 to take the Canada Pension Plan (CPP) isn’t the most popular decision, but it usually pays off for Canadians who make it. You get an extra 8.4% per year in CPP benefits for each year you delay taking benefits after age 65. The incremental benefits of taking CPP at 70 instead of 60 are even greater than that! You do have to sacrifice some years of benefits to make this work, of course. However, actuarial studies have generally found that waiting until age 70 to take CPP results in a greater amount of lifetime benefits.
In this article, I will explore several reasons why waiting until age 70 to take CPP might be the right decision for you — and a few reasons why it might not be.
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If you’re 60 now, you’re expected to live longer than most Canadians
One reason why waiting until age 70 to take CPP makes sense is because your life expectancy is likely longer than you think. An often-cited statistic is that the average Canadian lives 81.75 years. That’s true, but the statistic here is life expectancy at birth. The longer you live, the older age you are expected to reach. If you’re 60 now and contemplating taking CPP, then it’s quite likely that you will live well into your eighties. If so, your cumulative lifetime benefits from taking CPP at 70 will likely be greater than those earned by taking CPP at 65. They will be far greater than what you’d get by taking CPP at 60.
The benefits of taking CPP at age 70 can be substantial
As mentioned previously, delaying taking CPP results in 8.4% more benefits per year of delay after 65 and before 71. If you take CPP at 70, you get 42% more annual benefits than somebody who takes CPP at age 65. To put that into perspective, a $1,000 monthly CPP cheque could become $1,420 per month by waiting until 70 to take CPP — ignoring the effects of inflation adjustments. That adds up to more than $5,000 per year in additional benefits!
Rare cases where waiting until age 70 isn’t worth it
Although waiting until age 70 to start taking CPP is worth it for the average Canadian, there are some specific situations where it isn’t. One is having a known health condition that could be terminal. Another is not having the ability to work for whatever reason. If either of these apply to you, it may make sense to take CPP early. Otherwise, it’s best to delay taking benefits as long as possible.
Supplementing your CPP with RRSP and TFSA investments
If going many years without CPP benefits to maximize future benefits sounds like a drag to you, remember that you can supplement your CPP with investments. If you hold assets such as index funds in a Tax-Free Savings Account (TFSA) or Registered Retirement Savings Plan (RRSP), you can realize substantial returns and regular cash income.
Consider iShares S&P/TSX Capped Composite Index Fund (TSX: XIC). It’s a Canadian index fund that tracks the S&P/TSX Capped Composite Index, the 240 biggest public Canadian companies by market cap. It actually holds 220 of those stocks, so it is a pretty representative sample of the index it tracks.
XIC’s dividend last quarter was $0.2555. Annualized, that provides a 2.5% yield at today’s prices. Index funds’ actual dividends vary a lot over time because they are made up of many stocks, some of which cut, increase, eliminate or initiate dividends. So, it’s hard to say exactly what XIC’s yield will be in the future, but somewhere in the 2-3% range appears probable.
Finally, XIC has a very low 0.05% management expense ratio, which means you don’t lose much to fees when you invest in it. Overall, it’s a great portfolio asset for many Canadians.
