The upside to waiting until age 70 to take CPP benefits

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Q. I am retiring next year at age 65 and I don’t know if I should take my CPP immediately, or wait. My friends and other people I know from work took their CPP when they retired and they are telling me I should take it when I retire. Are they right? When is the best time to draw CPP? –Jit A. Hey Jit, ask one of your friends who waited until age 70 to take Canada Pension Plan benefits, and see what they say. I’m just having fun—I’d be surprised if you knew anyone who delayed their CPP to age 70. But, according to a new report by the Canadian Institute of Actuaries, most Canadians should start their CPP at age 70. These are the points from the report that really jumped out at me, and I’ve provided my thoughts below.

The only two factors to consider when making your CPP start decision are your life expectancy and expected investment returns. Taxes don’t come into play.
Use your RRSPs to bridge the income gap (CPP shortfall) between 65 and 70 using this formula: 7.35 x CPP at age 65 = RRSP bridge amount.
Thinking your CPP will increase by 8.4% per year, or 42% over 5 years, is wrong. It’s closer to a 50% increase.
Financial planners do a poor job of getting their clients to understand the real risks of inflation, investment returns, and mortality and outliving their money.

Only two factors matter: life expectancy and rates of return

Old Age Security (OAS), CPP, and RRSP/RIFFs are all taxed the same way, and also affect government benefits, supplements and credits the same way. In a recent article I compared different start dates of each; you see there is almost no difference. People often tell me they want to take CPP early in case they die early, to ensure they get some of their money back. That’s betting against the odds. If you’re a healthy 65-year-old, you’re probably going to live longer than the average age presented in the table below.

Longevity risk	Probability of survival to age…
Longevity risk	75	80	85	90	95
Female	90%	82%	69%	50%	26%
Male	86%	75%	59%	38%	17%

Most 65-year-olds are going to live beyond age 85 and there are still medical advances happening that could extend life expectancy even further. This next table shows you the probability of doing better by delaying your CPP versus starting at age 65 and earning 4% and 6% on your investments after inflation.

Net investment return	Age
Net investment return	75	80	85	90	95
4%	0%	25%	97%	100%	100%
6%	2%	28%	58%	75%	85%

Use your RRSPs to bridge the CPP gap years

I really like the concept of “bridging” in the Actuaries’ report. Their formula is:

Your projected CPP at age 65 x 7.35 = RRSP bridge amount

Following this formula, a person expecting $13,500 of CPP at age 65 would need an RRSP bridge of $13,500 x 7.35 = a $99,960 RRSP account. The best part of this bridging concept is it changes the mindset for younger investors. The strategy is to plan to draw CPP at 70 and separate your RRSP investments into two imaginary buckets: one to act as a bridge benefit and the other to support your retirement lifestyle. Of course, when you get to age 65, you have the option of changing your mind and there is no cost, no “oops”—it’s brilliant! (In contrast, with some other strategies, once you start down that path, there’s a cost if you change your mind.)

Your CPP benefit will increase by more than you think

After age 65, CPP benefits increase 0.7%/month, 8% a year, or 42% over 5 years. Simple, but have you thought about what your CPP is based on? CPP is based on maximum pensionable earnings (MPE), which have historically increased faster than the rate of inflation. There are two pieces to the puzzle: CPP monthly increases and the spread between the rate of inflation and the MPE. When both are taken into consideration, the report suggests the CPP increase from age 65 to 70 will be closer to 50%, not 42%.

Understanding risk

To help you make good financial decisions today, models and spreadsheets are built on today’s assumptions, projected into the future. The challenging part is things are constantly changing, so models and spreadsheets can hide risks. Think back over the last 25 or 30 years. What has changed? Inflation, interest rates, medical advances, things you enjoy? Do you know that with inflation at 2%, it takes about 36 years for $1.00 to be reduced in value to 50 cents? What do you think the chances are of inflation increasing during your retirement? What do you expect to earn on your investments? As you get older, what might cause that rate of return to reduce? What will happen if you live 10 years longer than you expect? What is your plan if you won’t have enough money? One role of a financial planner is to help get you positioned so you can maintain your lifestyle over your lifetime, no matter what happens. Delaying CPP helps take care of that second part, no matter what happens. Now, I don’t know if in your situation you should take CPP at 70, and the study does list some exceptions, particularly if your GIS or OAS is going to be affected. But for most people, if you have an investment account large enough to bridge you to age 70, then delaying makes sense if you want to build more guarantees into the later stages of your life. Finally, as always, I recommend you have your situation modelled before making your decision. Hopefully, your advisor will try to give you a little scare by changing assumptions and exploring different possible outcomes. Allan Norman is a Certified Financial Planner with Atlantis Financial Inc. and can be reached at www.atlantisfinancial.ca or [email protected]. MORE FROM ASK MONEYSENSE:

About Allan Norman, MSc, CFP, CIM

With over 30 years as a financial planner, Allan is an associate portfolio manager at Aligned Capital Partners Inc., where he helps Canadians maintain their lifestyles, without fear of running out of money.

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Comments Cancel reply

Mike H says:

October 3, 2020 at 7:46 am

The RRSP “bridge” till 70 is a great idea.

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Wayne Monaghan says:

October 4, 2020 at 10:04 am

I am curious why these discussions of when to take the CPP never mention the Post Retirement Benefit. I took the CPP at 67 when the post retirement started and by my calculations it returned most of what I lost by not waiting another three years, and still gave me the actuarial benefit of recovery at an admittedly slightly earlier date.

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Le ngoc thanh says:

October 5, 2020 at 3:17 pm

I am 66 year old..I am still working , still contributing cpp and same time I got money from cpp &oas…so i wondet what going on for my cpp in the future ?

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bruce higgs says:

October 13, 2020 at 10:40 am

Additional advantages to delaying CPP and using the bridging strategy is that you are exchanging market risk for a healty guaranteed return and your increased pension payments are inflation protected. There is also a saving in ongoing fees as there are fees associated to the administration of annuities but not with public pensions. Difficult to quantify these fees but they will exist.

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Mark Booker says:

February 17, 2021 at 4:16 pm

I agree with Wayne comments regarding PRB.
I plan to work until 68 and I created two scenarios
1) Start CPP at 65 and continue to contribute until 68
2) Start taking CPP at 70, I must contribute to CPP while I continue to work.

In may calculations when I include PRB amount I do not break even until the age of 85, said another way it is not until I reach the age of 85 that waiting until the age of 70 to receive CPP works to my benefit.

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