Joe Macek is a Cross Border Investment Advisor and Portfolio Manager with iA Private Wealth and iA Private Wealth USA, with over 25 years of expertise in the investment world. Based in Winnipeg, Manitoba, with offices in Toronto, Ontario, and Vancouver, British Columbia, he offers comprehensive advice across seven provinces ( BC, ALTA, SASK, MB, ONT, QB, NFLD), as well as cross-border services registered in Texas, USA.
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Three Crucial Reasons why I would take CPP benefits at 60 INSTEAD of 65
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Three Crucial Reasons why I would take CPP benefits at 60 INSTEAD of 65
The decision to take CPP at the age of 60 can pose a considerable reduction in lifelong income, a move I generally advise against due to its impact on long-term financial stability. Opting for early CPP reception results in up to a 36% reduction in income, a factor to be weighed against receiving payments for the rest of one’s life.
While I strongly advocate for delaying CPP claims until the age of 70 to mitigate longevity risk and bolster monthly retirement benefits, only a fraction of retirees opt to do so. Many choose to claim CPP as soon as they become eligible.
Nevertheless, there are situations where taking CPP at 60 may hold some merit. Here are three scenarios where taking CPP at age 60 might be justifiable:
1) Financial Necessity: In instances where meeting basic needs, such as sustenance and bill payments, becomes a pressing concern, taking CPP early might be the only available recourse. This situation might arise due to a late-career job loss or early retirement due to health issues. If personal savings or alternative income sources are inadequate to support you through your 60s, opting for CPP at 60, despite the 36% permanent reduction, could provide essential funds at the present moment.
For example, electing to take CPP benefits at the earliest possible date, one month after turning 60, ensures immediate financial support, albeit with a 36% reduction in the monthly benefit. Considering that the maximum payment at 65 amounts to $15,678.84 annually (in 2023), selecting CPP at 60 would lower this to $10,034.46 per year.
Choosing to take that $10,000 at age 60 could mean the difference between potentially bridging the gap in your expenses or failing to do so. This immediate financial relief should be weighed against the prospect of waiting five years for an extra $5,600 (approximately) per year.
Moreover, if you are certain about being eligible for the Guaranteed Income Supplement (GIS) at 65, opting for CPP at age 60 is generally advisable.
2) A Possible Shorter Life Expectancy: In retirement planning, the uncertainty of how long your funds need to last is a major challenge, primarily due to the unpredictable nature of life expectancy.
By the age of 60, you might have insights into your health or family history that suggest a potentially shortened life expectancy. In such cases, claiming CPP at 60 could align with prudent financial planning.
Understanding the breakeven point for taking CPP early is crucial. For instance, financially, you’ll benefit if you take CPP at 60 and do not live beyond age 69. On the other hand, if you live until 85, then the optimal age to claim CPP is 69.
On average, a 60-year-old Canadian can expect to live around 25 more years. If you are considering life expectancy based on these averages, delaying CPP might be more advantageous.
Additionally, if poor health is a significant factor for early CPP consideration, applying for a CPP disability pension might be more beneficial. If approved, the CPP disability amount is higher than a regular retirement pension and converts to a full retirement pension at 65.
3) You Had No Contributions from Age 55 to 60: Should you have ceased work at 55 or transitioned from a salaried role to managing a business, leading to no contributions to the CPP during this period, it will have an impact on your CPP retirement benefit.
When electing to claim CPP at 60, your benefits are determined based on your most profitable 35 years of earnings, in contrast to the best 39 years if claimed at age 65. Depending on your earnings from ages 18 to 54, opting for CPP at 60 might still yield payments nearing the maximum amount.However, delaying until 65 could potentially diminish these payments.
Bonus: There are two compelling reasons not to claim CPP at the age of 60:
1) Disregard the idea of taking CPP early and investing. While it may sound appealing in theory, in practice, it can lead to disappointing outcomes.
It’s crucial to recognize that CPP is considered taxable income, so the full amount won’t be available for investment unless within an RRSP. When accounting for investment fees, one must carefully assess how much return is required to surpass the 7.2% return that comes with delaying CPP by a year.
In reality, it’s wiser to defer and receive a larger pension that has some protection against inflation throughout your life.
2) Concerns about CPP’s Sustainability: Rest assured, if you have concerns about the continuity of CPP or the government’s potential use of the fund for other purposes, those worries can be put to rest.
The Canada Pension Plan Investment Board (CPPIB) operates independently of the CPP and is managed at arm’s length from federal and provincial governments. The fund’s sustainability has been rigorously assessed by an independent actuary, and it has been deemed sustainable for a minimum of the next 75 years, using conservative projections.
CPP should be available for your retirement. The real consideration lies in determining when you intend to claim your benefits.
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