If you plan on taking your Canada Pension Plan (CPP) benefits early, you should know a few basic things before you pull the trigger. The Federal government generally recommends that Canadians take CPP benefits at age 65 or later, as doing so maximizes cumulative lifetime benefits.
Taking CPP benefits is one of those rare actions that’s better taken later rather than sooner. There are some Canadians who can get away with taking CPP early, though they are an elite few. In this article, I will share three early warning signs that you are not one of them – most of which you can get from the Canada Revenue Agency (CRA) on CRAMyAccount.
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Not enough RRSP investments
Whether or not you can get away with taking CPP early depends largely on what assets you have apart from potential CPP income. If you have, let’s say, a fully paid off house, a few hundred thousand dollars in an RRSP, and an employer-sponsored pension, you can probably take CPP a bit earlier than other Canadians can afford to. On the other hand, if you are living paycheque to paycheque now, you’ll likely struggle trying to make ends meet on the sum CPP would pay you if you took it at age 60.
RRSP investments are worth paying particular attention to, because it is well within your power to maximize them.
Studies show that most Canadians believe they need about $600,000 in liquid assets to retire on – that is, $600,000 not including home equity. If you’re just a little bit shy of that amount now, you can grow your RRSP by investing in index funds. Provided you still have a little bit of time to go before you retire, such funds should perform reasonably well and maximize your wealth.
Take the iShares S&P/TSX 60 Index Fund (TSX: XIU), for example. It has averaged about a 10% annualized total return since inception. While past results don’t predict future results, XIU still has many of the characteristics that gave it a good performance track record in the past. It is a well-diversified fund holding 60 stocks. It has a very low management fee (about 0.15%). Finally, XIU holds stocks in many different industries, giving it the ability to do well in many different market conditions. Overall, an RRSP investor could do much worse than to have a sizable percentage of his/her money in XIU.
Owing back taxes
A second sign that you shouldn’t take CPP early is you owe back taxes to the CRA. If you do, then you probably should get those paid off before you even think about taking CPP. Trying to pay off a tax debt with just $650 per month in CPP coming in is likely to be a painful experience. Like your RRSP balance, information about taxes owed can be found on CRAMyAccount.
Struggling to make ends meet now
A third and final sign you shouldn’t take CPP early is struggling to make ends meet now, while you are employed. If you are in this boat, then it is unlikely that you will be able to make ends meet on CPP alone. The average CPP payout for someone taking benefits early (i.e., at age 60) is only a little over $600 per month. On the other hand, if you delay taking benefits until age 70, you can get north of $1,500 per month – not counting the future effects of CPP enhancement.
The bottom line is, unless you are in very unusual financial circumstances, don’t take CPP early. Waiting as long as possible to take benefits is usually the way to go.
