If you’re a Canadian nearing retirement age, you’ll soon have a big decision to make: whether to take CPP now or delay taking benefits to a later date. The government does not automatically contact you about drawing CPP when you turn 60, so you can choose to delay simply by not doing anything. If, on the other hand, you want to start taking CPP benefits ASAP, you’ll need to put the process in motion.
So, it’s good to know whether you will take CPP immediately when you turn 60, or whether you will delay taking benefits. It’s also important to know the reasons why you might prefer to delay taking them. The longer you wait to take CPP, the more benefits you get. On the other hand, the sooner you take CPP, the sooner you can retire (assuming your RRSPs and defined benefit (DB) pension plans don’t cover you).
While you can take CPP benefits at any age between 60 and 70 inclusive, it’s common to speak of Canadians drawing benefits at 60, 65, or 70. These are the three ages that the Federal government uses on its website to illustrate the impact of drawing CPP at different times. In this article, I’ll explore whether it’s better to take CPP at 60, 65 or 70, ultimately concluding that it depends on your unique circumstances.
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Basic terminology
Before going any further, we should lay down some CPP terms and concepts that we’ll use in making our decision about when to take benefits. They include:
- Standard retirement age: 65 years of age.
- Early retirement: taking benefits before 65.
- Postponed retirement: taking benefits after age 65.
- Maximum pensionable earnings (MPE): the maximum income upon which CPP premiums can be paid.
- CPP enhancement: a program that aims to take CPP benefits from 1/4 to 1/3 of working age income.
- Enhanced component: earnings from CPP enhancement.
With these established, we can begin to tackle our question:
“When to take CPP?”
The matter of when to take CPP ultimately comes down to the urgency of your financial needs. If you find yourself becoming ill or going through a divorce at age 60, you may need to take CPP early just to make ends meet. On the other hand, if you can delay taking benefits, you generally should, for as long as possible.
You get an extra 0.7% in benefits for each month of postponed retirements. The cumulative increase at age 70 is 42%! On the other hand, you get 0.6% month less for each month of early retirement. The maximum at age 60 is 36%. There’s also the effect of CPP enhancement. CPP enhancement started only recently, so the longer you delay taking CPP, the larger the enhanced component of your income. Lastly, if you earn the MPE amount or close to it, each year of extra contributions makes a large impact on your ultimate amount.
So, the bottom line is, delay taking CPP as long as you can, unless you have urgent needs.
What to do if you can’t take CPP now
If you can’t take CPP now, you can still start building up retirement income by investing in a tax free savings account (TFSA). By holding an index fund like the iShares S&P/TSX 60 Index ETF (TSX:XIU) in a TFSA, you can generate tax-free passive income that functions much like a “homemade pension.”
XIU is a great example to work with here because it’s one of Canada’s most popular, most diversified, and lowest-fee ETFs. It’s widely traded, which ensures good liquidity. The ETF has 60 stocks, a decent amount of diversification. It also has a low 0.15% management fee and a 0.18% management expense ratio (MER), meaning it’s pretty cheap. Finally, the fund’s 2.5% dividend yield can supply considerable amounts of passive income year in and year out.
Overall, holding XIU in a TFSA can be a wise financial decision. It can also give you an income buffer that makes drawing CPP early less necessary.
