Deciding on when to start receiving your CPP is a constant dilemma for all soon to be retirees. Not knowing how much you may get and the impact of taking it early is usually where the question comes from. As it happens, the immediate quick math is if you take CPP at 60, there is a 36% reduction in income.
The math is simple, you have a reduction of 0.6% for every month prior to your 65th birthday. As such, taking CPP at 60 means a 36% monthly income reduction (60 months times 0.6% = 36%). That’s a significant drop in income.
The #1 reason to take CPP at 60 is because you need the money.
With that said, the CPP statistics for the starting age below do not indicate that so many retirees need the money in my opinion. It highlights how complex it is to plan for all the variables and health … I would say that when it comes to it, waiting and waiting is difficult when you have to think about health. “A bird in hand is worth two in the bush” comes to mind when I see the CPP statistics by age.
You Need The Money
If you have no choices and your other sources of income from RRSP, TFSA or work pension are no enough, you may want to request to receive early CPP. It may be that you expect to qualify for the Guaranteed Income Supplement (GIS) to help you out further.
Everyone’s situation is different but in general, when you work until your 60’s, you should have put a really good 30 to 35 years of work and you (and your employer) would have made CPP contributions along the way. It’s a pension plan and the longer you wait and let your money work the more you can get. While you don’t receive a guaranteed percentage like some of the government pension plan, you do have the expectation of receiving your Canada pension adjusted for inflation. While it would be great for all of us to receive the maximum CPP payments, the average monthly payment is $679.16 for 2020.
Aside from needing the money, there are a couple of considerations but it doesn’t change the 0.6% monthly reduction for every month you start before your are 65. It’s the impact on taking the money earlier.
Life Expectancy Consideration
Now, while not trying to become too morbid, life expectancy is also a factor to consider. The concept of break-even point exist when it comes to attempting to figure out when to start getting your CPP. This is an important factor for someone who may have a timeline on life. I know it’s not something we want to think about but it’s a reality.
If you have a timeline, there is a break-even point you can calculate in order to get the most out of your CPP.
Zero Earning Years Consideration
Another optimization consideration is to understand your zero earning years. Below is a table that shows how your earned income will contribute to the calculation of your CPP monthly payments.
Since 2014, 17% of your lowest earned months will be dropped from your CPP calculation. So the question for you is to figure out how many ZERO income months you have between 18 and 60. It may also be a reason to avoid completely stopping work in your 50’s and just do some part-time work and contribute to your CPP.
To understand the details, it’s best to request a Statement of Contributions and it will stop you from guessing and trying to build a complicated spreadsheet.
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