What is the best age to take CPP? This is what the data shows.
If your goal is to maximize your Canada Pension Plan benefits in retirement, prepare to wait a little bit longer.
Three reasons you should wait to take CPP:
1. Higher benefits - you could add an extra 8.4% a year by waiting to take CPP after 65.
2. Income later in life - waiting will ensure you receive the benefits you need for the rest of your life.
3. Lower taxes - avoid OAS clawbacks and higher taxes by pulling from your RRSP earlier in retirement.
Are you planning for your retirement? One of the biggest choices you may need to make is at what age you should tap into your Canada Pension Plan benefits. Deciding whether or not to hold off on claiming your benefits until you are 60 vs 65 vs 70 will depend on your financial situation.
If your goal is to maximize your CPP benefits, the magic number you’re looking for is 70.
Why wait until 70?
With many people claiming their CPP at 60 or later at 65, choosing to defer your benefits until 70 can seem daunting. You might think it means a few more years in a job or pushing off retirement, but that isn't always the case.
If you can manage retirement on other sources of income — such as your RRSP or savings — waiting will result in a higher benefit which could improve your quality of life. The bottom line is: the longer the wait, the larger the benefits.
Here are a few reasons why deferring your benefits until 70 could be a good decision.
1. Your CPP cheque will be larger
You could lose up to 36% of your benefits if you decide to take CPP at 60, versus waiting until the standard age of 65.
If you decide to wait even longer, you will truly maximize your retirement income from CPP. For every year you wait beyond 65 until 70, you will receive an 8.4% credit to your CPP balance. That means if you wait until 70, you could grow your benefits by up to 42%!
This is a healthy amount that could make a difference in your quality of life. A rate of 8.4% per year is also typically more interest than you can expect from many financial products currently in the market.
Waiting until 70 will also increase survivor's benefits, but there is a catch. If you are not taking any CPP benefits yet, the survivor's benefit will equate to 60% of your deceased spouse's benefit. Therefore, a maxed out CPP will deliver a higher survivor's benefit.
If you are combining the survivor's benefit with your own CPP benefits, the total amount cannot exceed a set maximum, which in 2022 is $1257.13 per month. In this case, you may not need to wait until 70 to receive maximum benefits.
2. Life expectancy can impact your choices
There are many factors to consider in retirement planning. One of the biggest ones of late is life expectancy.
While no one can predict how long they will live, according to Statistics Canada, Canadian citizens who live to age 65 can expect to live another 20.2 years on average! With those averages, and Canadians living longer than before, some readjustments must be made to conventional retirement wisdom to ensure you receive the benefits you need for the rest of your life.
Many financial planners will recommend waiting as long as possbile to access your investments in your RRSP. However, that advice may not be in your best interest. After all, a financial planner's job is often to keep your investments intact for as long as possible. The truth is, there's no guarantee that the assets in your RRSP will grow to desired levels by the time you reach 70.
Do you know what is guaranteed to grow? You guessed it, your CPP benefits.
For that reason, you may want to make RRSP withdrawals earlier in retirement, say between 65 and 70, while your CPP benefits grow at a guaranteed rate of 8.4%. By the time you reach 70, your CPP benefits will have grown a healthy amount, and you will have more money to help you in old age.
3. Avoid taxes and OAS clawbacks
By the time you reach retirement, you may be relying on multiple income sources to support your lifestyle. One such benefit, the Old Age Security (OAS), is given to all Canadians starting on the first month after their 65th birthday.
During this time, if your yearly income surpasses the threshold set by the government ($81,761 for 2022), you will be required to return a portion or all of the OAS you received.
Since CPP is considered income, taking your benefits too early could put you over the threshold, and leave you with less income than you would have received otherwise.
Instead, between the ages of 60 and 70, you may want to consider pulling from your RRSP as a source of income, and keep your withdrawals below the threshold.
By the time you reach 70, you'll have a healthy CPP benefit plan to live off of, along with modestly reduced RRSP withdrawals which will be taxed at a lower rate.
Following the advice of waiting until 70 to take CPP won't just maximize its respective benefits — it will also maximize your OAS benefits, and reduce taxes on your retirement income.
When you claim your CPP benefits
Everyone’s financial situations are different. There is no clear-cut answer when it comes to planning for retirement or understanding when you should take your CPP benefits.
If your financial situation allows for it, waiting until you are 70 to claim your benefits could be in your favour. This is not only for the extra income in the long run but for the savings on taxable income.
For those who have already filed, you may be able to cancel your CPP benefit, and resume once your reach 70. Applications can be cancelled up to 12 months after you start receiving it. You will be required repay the amount you've received to date.
Again, there is no clear-cut answer for when to claim your CPP benefits. If it makes sense, waiting until you are 70 can make all the difference. If you are uncertain about which path to take, consider speaking with a financial professional. A professional can help you decide which CPP claiming strategy is best for your personal goals and financial situation.
Disclaimer: Information in this article is general in nature and not meant to be taken as financial advice, legal advice or any other sort of professional guidance. While information in this article is intended to be accurate at the time of publishing, the complexity and evolving nature of these subjects can mean that information is incorrect or out of date, or it may not apply to your jurisdiction. Please consult with a qualified professional to discuss your specific situation and confirm any information.