Michael James on Money: When to Start Taking CPP
With the change to the CPP penalty for taking your pension early, the calculation of what age is best to start collecting CPP changes as well. Most of these analyses to figure out the best age to start collecting CPP do not take into account possible investment returns.
The old rules used to penalize you 0.5% per month for each month before age 65 you start taking CPP. Now it is 0.6%. In addition, you can grow your CPP payments by 0.7% per month for each month you delay the start of payments past age 65.
So, if we call the CPP payments at age 65 a 100% pension, then if you start at age 60, your pension will be 64%, and if you start at age 70, your pension will be 142%. Note that these percentages stay fixed for the rest of your life. You'll get cost of living increases, but that's it.
For most people, the most logical method of determining when to start taking CPP is by the sophisticated when-you-need-the-money method. If you can't stand the thought of working past age 60 and you think you can get by with a reduced pension, then age 60 it is. Otherwise some other age between 60 and 70 will likely be dictated by when you need the money.
For a lucky few of us who have (or will have) enough money to optimize a little, the choice is more complicated. The usual analysis involves just adding the CPP amounts to figure out what starting age makes you the most money.
With this simple method, if you won't make it to age 74, start taking your pension at age 60. If you will make it to some age between 74 and 82, take your pension at age 65. If you will live longer than age 82, start taking your pension at age 70. You need a crystal ball to follow this advice, but at least it gives some useful idea.
This analysis took into account inflation Because CPP payments rise with inflation, but it didn't take into account investment returns. Suppose that a retiree can afford to wait until age 70, but wants to know whether it makes sense to take CPP early and save the money. In this case, investment returns affect the decision.
The following chart shows how the age break points vary with investment returns (after tax and above inflation).
If our retiree expects to make no excess return above inflation, then we get the break points at ages 74 and 82 as in the earlier analysis. However, at 5% real return, the break points jump up to ages 79 and 92.
All this means that positive investment returns make taking CPP early even more attractive than in the simpler analysis.
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