To take Canada Pension Plan (CPP) benefits or not to take CPP benefits: that is the question. While it’s always tempting to take CPP at the first available opportunity — when you turn 60 — you get fewer annual benefits if you do so. Additionally, you get fewer lifetime benefits by taking CPP at 60 than at older ages if you live an average Canadian lifespan.
For the reason above, most financial advisors advise against taking CPP at age 60, barring extreme circumstances like terminal illness.
That still leaves the question of when you should take CPP, though. The age at which the federal government expects people to start taking CPP is 65. Taking CPP at age 70 instead of 65 has many of the same advantages as taking CPP at 65 instead of 60, yet 65 is considered the default. What’s going on here?
The truth is that the “best” age at which to take CPP all depends on your individual circumstances. If you just turned 60 and are terminally ill with a poor prognosis, by all means, take your benefits now. For the average Canadian, though, a different decision is optimal. In this article, I will share the best age to take CPP, according to data.
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70 years old
According to research conducted by actuaries — the people who study risk at insurance companies — 70 years old is the best age at which to take CPP. First off, taking CPP at 70 results in slightly more lifetime benefits than taking CPP at 65 if you live to age 82 (the average for Canadians). If you discount the CPP cash flows back to the present, then taking benefits at age 65 might still make sense. But what actuaries discovered is that those who are already 60 are likely to live well past age 82. Taking that into account, the case for taking CPP at 70 seems ironclad.
Exceptions
Of course, there are plenty of exceptions — situations where you ought to take CPP before age 70. These include the following:
- Terminal illness
- Pressing liquidity needs
- Injury
- Inability to work
Any one of these reasons could justify taking CPP earlier than age 70. However, the general principle guiding your decision should be to delay taking CPP for as long as is reasonable.
How to invest to supplement your CPP
If you’re concerned that you can’t wait long enough to take CPP at age 70 and get the maximum possible benefit, a good idea is to invest in index funds to supplement your CPP. Such funds are diversified and charge low fees, making them great ways to get your feet wet in investing.
Consider Vanguard S&P 500 Index Fund (TSX:VFV), for example. It’s a Canadian exchange-traded fund (ETF) of U.S. stocks — basically the Canadian-listed version of the famous VOO ETF.
VFV has nearly 500 stocks, a 0.08% management expense ratio (MER) and a high amount of trading volume. The large number of stocks reduces the risk in the investment, while the low MER and high trading volume reduce your execution costs. And the fact that the S&P 500 — which this fund is based on — has some of the most innovative companies in the world probably doesn’t hurt either.
