10 Reasons to AVOID Starting CPP at 60

Delaying your Canada Pension Plan (CPP) benefits can seem like an unconventional choice, but it might be the smartest one you make for your retirement. You might be tempted to start your CPP at age 60, but there’s a lot to consider before you make that decision.

By waiting, you can significantly increase your monthly benefits, providing more financial stability in your later years. If you have other income sources or you’re in good health, you might find that holding off could actually pay off big time. Delaying your CPP can also help protect against inflation and ensure that your retirement income keeps pace with the rising cost of living.

Key Takeaways

  • Delaying CPP increases your monthly benefits significantly.
  • Holding off on CPP can help your finances keep up with inflation.
  • Making strategic decisions about CPP benefits can secure a more stable retirement.

The Financial Benefits of Postponing CPP

Significant Boost in Benefits by Waiting

By delaying your CPP, you can significantly increase your monthly payments. For example, if you start CPP at age 65, you could receive around $1,000 per month. If you choose to start it at age 60, your monthly amount drops to about $640 due to a 36% reduction. On the other hand, waiting until age 70 can raise your payments to about $1,420 per month, which is 42% more compared to starting at age 65. Here’s a summary:

Start AgeMonthly Amount
60$640
65$1,000
70$1,420

Delaying to age 70 more than doubles your monthly benefit compared to starting at age 60.

Using Savings and Income Until Age 70

If you have enough savings or other income sources to last until age 70, delaying CPP could be a smart move. For instance, you might have a mix of RRSPs, TFSAs, or a workplace pension. You can use these funds to cover your living expenses from age 60 to 70. During this period, your other investments have the chance to grow, and you avoid a reduced CPP benefit. When you finally start your CPP at age 70, you receive a higher monthly amount, giving you more financial stability in your later years.

By waiting, you can draw from your existing savings first, letting your future CPP payments serve as a larger, more secure income stream for the rest of your retirement.

Health and Longer Life Considerations

More Benefits for Healthy Individuals

If you’re approaching retirement in good health, delaying your CPP payments might be a wise decision. People today are living longer than ever before. A 60-year-old in Canada can expect to live until around 85 years. Starting CPP at 60 locks you into a smaller monthly payment for life. If you think you’ll live longer than average, you may find that the reduced income doesn’t cover your future needs.

By waiting, you protect yourself from running out of other retirement savings. CPP provides monthly payments for the rest of your life. If you live into your 80s or 90s, delaying could be very beneficial. The break-even point, where delaying CPP results in more money, is around age 81 or 82. So, if you expect to live past that age, holding off on CPP could be a great choice for you.

Rising Prices and Retirement Expenses

Government Pensions Adjusted to Match Inflation

If you decide to delay starting your CPP, your payments will increase to match the future cost of living. This means your retirement money will be more valuable when prices go up. For example, in 2024, the CPP rate went up by 4.4% because of inflation. By waiting, you can ensure that your CPP payments are larger and better adjusted for inflation, helping you manage the high cost of living during retirement. There aren’t many investments guaranteed to adjust for inflation like the CPP, making it a special and reliable pension plan from the Canadian government.

CPP’s Financial Management and Sustainability

Grasping the CPP’s Firm Financial Standing

The financial stability of the Canada Pension Plan (CPP) is backed by solid contributions and wise investments. Contributions to the CPP are on track to grow significantly. From 2022 to 2050, the base CPP contributions are expected to rise from $61 billion to $177 billion. For the additional CPP, contributions should increase from $9.3 billion to $45 billion over the same period.

The CPP also boasts a good track record of investment returns. According to the 2023 annual report, the CPP’s investment portfolio achieved a 10-year annualized net real return of 7.4%. This shows the plan is not only growing in terms of contributions but also making smart investment choices to ensure its sustainability.

Independent peer reviews are conducted regularly on the CPP. These reviews ensure that its actuarial methods and assumptions are sound. The latest report concluded that the CPP is financially sustainable for at least the next 75 years. This extensive period of stability indicates that the CPP will remain a reliable source of income well into the future.

The management of the CPP also focuses on low risk. Despite economic challenges, the plan has shown resilience. During financial downturns, such as the 2008 crisis, several private pensions faced underfunding issues. However, the CPP’s design and management strategies safeguard against such risks, providing you with a secure and dependable retirement income.

Optimizing OAS and GIS Benefits

Reducing OAS Clawback Effects

To avoid losing some of your Old Age Security (OAS) payments due to high income, it’s important to manage your earnings carefully. If your income exceeds a certain limit, your OAS payments may be reduced or “clawed back.”

A good approach is to defer your Canada Pension Plan (CPP) benefits until age 70. By doing this, you can reduce your income during the initial retirement years and avoid pushing yourself over the OAS clawback threshold. Additionally, taking advantage of income-splitting strategies with your spouse can help keep your income below the clawback limit.

Strategies for GIS Eligibility

The Guaranteed Income Supplement (GIS) is designed to support low-income seniors. If you have a higher retirement income, you won’t qualify for GIS. One way to maximize your chances of receiving GIS is to ensure that your CPP benefits and other income sources are managed in such a way that they don’t exceed the eligibility threshold.

Consider delaying your CPP until the latest possible age, which helps maintain a lower income during the early retirement years, thus possibly qualifying for GIS. Also, carefully timing the withdrawals from your retirement accounts like RRSPs and TFSAs can help manage your annual income to stay within the GIS limits.

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AUTHOR

Christopher Liew, CFA

Christopher Liew is a CFA Charterholder with over 15 years of Canadian finance experience.