The best time to start CPP —if you don’t know when you will die

The last time we looked at the question of when to commence receipt of the Canada Pension Plan (CPP), we made the case for delaying as long as possible – ideally until 70 – while drawing down RRSP assets in your 60s when you’re in a lower tax bracket. (The piece is here.)
That’s a valid strategy for many but it does make a few assumptions, including that you have a large enough RRSP to withdraw from, have good alternative sources of income in the meantime, and that you’re not confident that the markets will deliver good returns if you were in a position to invest your CPP were it taken earlier.

But the biggest assumption is that you’ll live to enjoy those higher payouts once they commence. If your life expectancy is for some reason lower than average, all bets are off and you may be better off taking CPP between 60 and 65.

Jason Heath, of Toronto-based fee-only planners Objective Financial Partners, leans to advising clients to defer CPP/OAS to 70 for those whose life expectancy is average or longer than average. But he concedes that few do so, in part because Service Canada reaches out to people as their 65^th birthday approaches.

In practice, very few Canadians wait until 70. In fact, taking it as soon as it’s on offer at age 60 is the single most popular option: according to the federal government’s 2016 data, of the 312,251 who began collecting CPP that year, 126,954 did so right at age 60, with the second most popular start date being age 65, when 93,460 started to collect.  A paltry 4,844 waited until 70. To put that into context, in 2015 there were 13.98 million citizens still contributing to CPP. All told, as of 2016, there were 5.6 million CPP beneficiaries.

On its blog, Vancouver-based robo advisor WealthBar said that based on recent life expectancy data from Statistics Canada and changes in the CPP withdrawal rules, it estimates the average person will maximize their total CPP payout by starting closer to age 65. “Based on your personal health you may even want to wait as long as possible to maximize your total CPP payout.”

Ah but the critical phrase there is “personal health.” Personally, during my wealth accumulation years, I blithely assumed my genes and mostly positive diet and exercise regime meant I could expect to live well into my 90s or beyond. However, I am discovering that as your 60s progress, things can change, either for you or your spouse. I certainly believe you should get regular medical checkups every year at this age, with special attention to blood pressure and heart health.

Sun Life has a useful life expectancy calculator you can access here. It told me I can expect to live to age 86 (the year 2039), which conforms to a common rule of thumb that you can expect to live somewhere between the ages your parents passed away. And my wife, who is a year younger, can expect to live till age 87.

Toronto-based financial planner Ed Rempel says 15% of 60-79 year-olds have cardiac issues and 13% of 65-year-olds have dementia. “I’m sure there is some overlap. People with either would be 1 in 4 or 5.” So odds are almost even that at least one member of a couple will eventually have significant health issues.

That said, the biggest success of modern medicine has been to prolong lives. The average life expectancy of a 60-year-old is now up to 23 years (age 83). For couples, the average life expectancy of whichever one lives the longest is 32 years (age 92).

To plan for a 60-year-old couple, a 32-year time horizon still leaves a 50% chance of running out of money while one member of the couple is still alive. For Rempel, how you invest is an important part of the equation: “In general, equity investors should take it (CPP) early, while balanced and bond investors should not.”

For example, if an equity investor retires at age 60, taking CPP early means taking out that much less from investments. Allowing them to grow with typical equity returns should increase their future income more than delaying CPP would. “If they are still working and in a reasonably high tax bracket, then equity investors likely should delay as well, unless they can contribute the entire amount to their RRSP,” Rempel says.

Daryl Diamond, president of Winnipeg-based Diamond Retirement Planning Ltd., says the CPP start date is the most common question he is asked. But it’s NOT simply a case of getting less if you start early and more if you wait, says Diamond, who is also the author of Your Retirement Income Blueprint.

Sure, the timing decision is easy if you know for certain you’ll live to your 90s or, conversely, are fated to pass away in your 60s. This is where Service Canada’s “notional crossover” ages are often cited, which is the age beyond which it pays to have delayed CPP. Die before the crossover age and Ottawa “wins” the bet on your longevity. These range from 73.9 if CPP is taken at 60, to 77.9 if deferred till 64, and remains at 76.9 between ages 66 and 70, according to Diamond.

Even so, these should not be viewed as definitive numbers, he cautions. In part, that’s because the timing decision also impacts taxation and how other income streams will be affected: CPP and OAS both generate fully taxable income and once begun, you can’t control the amount of income those programs generate.

There is no one-size-fits-all answer but Diamond says for someone who is retired or already retired, his bias is to take advantage of CPP/OAS as they become available (i.e. 60 and 65, respectively). He likes to employ CPP and OAS as “the first layers” of retirement income, precisely because they are less tax efficient and less flexible.

Bear in mind that, like most pensions and annuities, CPP and OAS are income streams that “run out” or reduce upon the passing of a spouse, unlike personal assets that have both a survivor and estate benefits.

One thing the “delay CPP” crowd often forgets is the tricky issue of Survivor Benefits. We looked at this earlier this year but Diamond says that while you can receive both a CPP retirement pension and a survivor benefit, the sum of the two cannot exceed the maximum CPP retirement pension payable at age 65. So if both spouses wait until 65 or beyond and are at the maximum payout, there would be no CPP survivor benefit for the one who outlives the other. And OAS has no survivor benefit nor an estate value (CPP has a $2,500 death benefit).

Speaking personally, I have no regrets about my decision thus far to defer CPP until at least 65, which for me occurs in April of 2018. As I have written before here, I will then take OAS but as of this juncture, will probably defer CPP for another year or two, but probably before age 70.

As Diamond reminds us, retirement planning would be so much easier if you just knew the precise date of your departure from this planet.

Jonathan Chevreau is founder of the Financial Independence Hub and co-author of Victory Lap Retirement. He can be reached at [email protected]

About Jonathan Chevreau

As MoneySense’s Investing-Editor-at-Large, he is also author of Findependence Day and co-author of Victory Lap Retirement. Reach him at [email protected], where he is the founder of Financial Independence Hub.

Linkedin Twitter Facebook Website