The right time to take Canada Pension Plan benefits

Q. I’m 61 years old and fully employed, earning $71,000 annually. I have a mortgage of $250,000, outstanding debt of $20,000 and no RRSP or investments. Should I apply to draw CPP now and use the funds to invest or pay down my debt, or should I wait until I turn 65 or later?
– Steve

A. Hi, Steve. I see your line of thinking: If you should start your CPP retirement benefit now, while you’re still working, you’ll have more money coming in each month. Like many seemingly simple personal finance questions, the right answer for you depends on a variety of factors. In order to understand whether this might be a good option, we need to run through some basics so we can better evaluate the impacts of your decision.

As you you already know, Steve, Canadians who are eligible for a Canada Pension Plan (CPP) retirement benefit can opt to start receiving the benefit as early as age 60, even if they’re still working. (If you start your CPP retirement benefit before age 65, and you’re still working, you will continue to pay CPP premiums—which will go to the CPP “post-retirement benefit.”)

It’s important to keep in mind, though, that if you take your CPP retirement pension early, your benefit is reduced by 0.6% for each month you receive it before age 65, or 7.2% per year. This means that someone starting to receive their CPP retirement pension at the age of 60 will get 36% less than if they had taken it at 65. Your “full” retirement pension is available at age 65, although you might not qualify for the maximum monthly benefit of $1,154.58 (numbers as of January 2019).

On the other hand, if you postpone taking the benefit after age 65, it will be increased by 0.7% for each month you delay (or 8.4% per year), all the way to age 70. Keeping in mind that your CPP benefit will increase for each month you delay receiving it before the age of 70, one of your decisions is: Should you take some CPP now—or more CPP later?

In either case, CPP income is fully taxable, just like your employment income. If you take CPP now, while you’re still earning employment income, the CPP benefit you receive each month will be added to your employment income—and you’ll be taxed on both your work and pension income.

You’ve noted that you earn $71,000 at your job today. Let’s assume your CPP would add another $10,000 to your yearly income if you took it now. (The average monthly benefit for new retirement pension beneficiaries is $664.41 per month, or $7,973 per year, according to the federal government.)

Depending on where you live in Canada, the tax rate applied to that extra income before retirement would range from 27.5% (in Nunavut) to 37.9% (in Manitoba), meaning you’d keep something between $6,210 and $7,250 of $10,000 in CPP benefits after the tax bill.

On the other hand, if you delayed taking your CPP pension until you stopped working, the monthly payment would be larger—and, assuming you have no employer-sponsored pension plan to replace some of your employment income in retirement, the tax you’d pay on the monthly amount would likely be less.

If you were in Ontario, for example, and your retirement income was $21,000 (combining the maximum Old Age Security benefit of $7,217 and the maximum $13,855 from CPP), your marginal tax rate would be 20.05%, compared to 31.48% if you took $10,000 of CPP income at age 61 and added it to your employment income. In other words, although your income at age 65 would be much less, the rate of tax applied to that income would also be much less, meaning you’d keep much more of your CPP benefit.

There’s another side to your question, however, and that’s what you’d do with the extra funds if you take CPP early. You’ve said you might use these funds to “invest or pay down debt.” Here, my suggestion is for you to consider taking a long-term view, in the context of your personal financial plan.

For example, at the age of 61, you might expect to live about another 30 years. Viewed from this perspective, how much CPP income would you give up over 30 years if you take it early, compared to waiting until age 65? If you invested the “extra” money you’d receive from taking CPP early, what rate of return would you expect on the funds, compared with the guaranteed, longevity-protected and inflation-indexed CPP benefits you’d increase by waiting?

Without more information on your overall financial picture, including the interest rate or rates on your outstanding debts and the return you’d expect to receive on any funds you invest, it’s difficult to provide a clear-cut answer to what is inherently a complex question, requiring you to balance many different factors and considerations.

These are questions that could be answered with a financial plan which takes all of your assets and liabilities into consideration, and forecasts, year-by-year, your income, spending, tax and debt repayment. While the option to take CPP now for “instant” income may be appealing, a clear-eyed look at all the cards on the table might also pay you well in terms of financial security well into the future.

MORE FROM ASK A RETIREMENT EXPERT:

• How to make the right pension decision when longevity is so variable
• What to do when Manulife offers cash to leave its IncomePlus product
• Why the 17% drop-out rule is key to your CPP entitlement
• How Raj and Marie can net $80,000 annually—for life—from their nest egg