Personal Finance

Winnipeg Free Press - PRINT EDITION

Deciding when to take CPP

Starting earlier or later affects pension payout

By: Fred Vettese

Posted: 02/8/2012 1:00 AM | Comments: 0 (including replies)

SONIA plans to retire when she turns 60. Her mortgage will be paid off by then and she will have substantial savings in her RRSP. Should she start her Canada Pension Plan (CPP) pension at age 60 or wait?

Like many Canadians, there is a very good chance Sonia will start her CPP early. About 40 per cent of all CPP recipients get their first cheque at age 60, the earliest age possible under the plan. This is a surprisingly high take-up rate, considering they incur a 36 per cent penalty by starting their pension at 60 instead of 65.

Is early CPP the best strategy? After health concerns, Canadians' biggest retirement fear is running out of money at some point. In a Canadian Institute of Actuaries survey, 62 per cent of pre-retirees acknowledged this fear. We can expect this to remain a top concern as retirees rely increasingly on RRSP savings instead of defined-benefit pensions.

Measured from age 60, Canadian males can expect to live 24.5 more years and females another 27.3 years. Expect to see a lot more centenarians in the decades to come. The fear of outliving one's savings helps explain the frugality of seniors. Statistics show they are still saving well over 10 per cent of their after-tax retirement income well into their 70s and 80s, a time when they should be spending rather than saving. Many of them obviously feel they need to build a cushion in case they do live longer than they expected, but that cushion might never get spent.

For retirees with significant savings in RRSPs, there may be a better way. By delaying their CPP start date, they'll get a bigger pension, which means more of the retirement income will be predictable and reliable. Not only is the CPP pension unaffected by stock market gyrations, it is payable for life and is fully indexed to inflation.

The more pension people can derive from the CPP, the less they have to worry about longevity risk.

Even if Sonia retires at 60, she can postpone starting her CPP until age 65 or even 70. The longer she waits, the larger the benefit. Under new adjustment factors being phased in between 2012 and 2016, a CPP pension starting at age 70 is 42 per cent greater than one starting at age 65 and 121 per cent more than is payable from age 60! For example, assume Sonia would have been entitled to a CPP pension of $10,000 a year starting at 65. If she starts it at age 60, it reduces to just $6,400, but if she waits until 70, the amount payable for life is $14,200. That extra $7,800 buys a lot of peace of mind, especially considering it is indexed to inflation.

While the drop-out provision can complicate matters, the good news is that years of zero earnings after age 65 do not reduce CPP payments. Yet hardly anyone opts to postpone their pension after age 65. The CPP chief actuary expects only three per cent or so of Canadians will start their CPP between ages 66 and 70 in spite of the higher payments.

-- Postmedia News

Republished from the Winnipeg Free Press print edition February 8, 2012 E2

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