CPP Pensioners: Should You Take CPP Payments at 60, 65, or 70?

Your circumstances and high-yield securities like BMO Covered Call Utilities ETF (TSX:ZWU) should play a role in determining the perfect time to start collecting CPP payments.

| More on:

The million-dollar question on the minds of many older Canadians is whether they should collect CPP payments sooner at the age of 60 or later at 70. The answer differs for everybody and depends on a wide range of factors that must carefully be considered.

First, the obvious: if you collect at the moment you hit 60, you’re going to get less per month than if you delayed it to 70.

“For every month that you start receiving payments before age 65, you will lose 0.6% per month, or 7.2% per year, of your CPP payment. That’s a 36% reduction. For every month that you defer payments after age 65, you will gain 0.7% per month, or 8.4% per year, of your CPP payment. That’s an increase up to 42%.” said fellow Fool Christopher Liew.

That’s a pretty decent return for holding out!

In essence, the annual pension amount you’ll get by receiving at 60 will be less than half the amount that you’ll receive at 70. Given the average life expectancy in Canada is 82 years, though, it’s not always good to delay, especially if you’re likely to be under financial stress through your 60s.

Thus, the answer to the “sooner or later” problem should be about maximizing one’s total utility (the closest quantifiable metric for gauging happiness) that CPP payments will provide you over a lifetime.

As you may know, The Motley Fool’s motto is to “make the world smarter, happier, and richer.” While you may be wealthier down the road by opting to collect pension payments later rather than sooner, it may not make you the happiest, especially if you live frugally through your “youthful 60s” only to have more money in the bank in your 70s.

Before deciding on whether to collect CPP payments now or later, you must consider your other sources of income, your health (to gauge life expectancy), your investment ability, and the financial footing of your family members or dependents.

For example, if you’re a baby boomer with several millennial children who are burdened with student debt, no other sources of income, a small nest egg, and ample expenditures, you may want to consider taking CPP payments sooner rather than later to relieve your financial stress and increase your total utility.

If you’re making ample income from your investments, and additional CPP payments won’t make a tonne of difference with your present lifestyle, you should consider delaying your CPP unless you’re in dire health and know for a fact that you have a low life expectancy.

For most investors who have a sizeable nest egg, one should strive to invest in safe dividend stocksor one-stop-shop income ETFs like BMO Covered Call Utilities ETF (TSX:ZWU) to meet their income needs.

ZWU is a 6.3%-yielding basket of stable utility businesses that naturally have a low correlated to the broader markets (ZWU has a 0.8 beta), a large dividend (or distribution) payout, and a covered call strategy that results in consistent premium income over time.

I’m a massive fan of BMO’s line of covered call ETFs, and the value proposition offered to retired investors. They have a relatively low 0.71% management expense ratio (MER) and allow retirees to increase their income without compromising on safety. The additional income provided by the covered call strategy lowers one’s downside risk at the expense of a ceiling on share price upside.

In everything but up markets, a covered call ETF like ZWU will outperform a non-covered-call counterpart. But for retirees who care less about capital gains, ZWU is well worth the price of admission.

If you find that a 6% yield isn’t enough to live comfortably, you may want to consider taking CPP payments sooner rather than later, as stretching your yield even farther could put your principal at risk.

Foolish takeaway

There is no “one-size-fits-all” solution like there is for income investors who abide by the “4% rule” for their investment income. If you’re facing financial hardship or limited financial flexibility, there’s no shame in opting to collect payments sooner rather than later.

This article represents the opinion of the writer, who may disagree with the “official” recommendation position of a Motley Fool premium service or advisor. We’re Motley! Questioning an investing thesis — even one of our own — helps us all think critically about investing and make decisions that help us become smarter, happier, and richer, so we sometimes publish articles that may not be in line with recommendations, rankings or other content.

Fool contributor Joey Frenette has no position in any of the stocks mentioned.

More on Investing

A data center engineer works on a laptop at a server farm.
Tech Stocks

3 No-Brainer Data Centre Stocks to Buy With $500 Right Now

Data centres are going to be a huge growth opportunity in the next decade. And these are the top buys.

Read more »

Paper Canadian currency of various denominations
Bank Stocks

1 Magnificent Canadian Dividend Stock Down 28% to Buy and Hold for Decades

This top Canadian dividend stock is underperforming its large peers this year, but a turnaround could be on the horizon.

Read more »

TFSA (Tax-Free Savings Account) on wooden blocks and Canadian one hundred dollar bills.
Dividend Stocks

Where to Invest Your $7,000 TFSA Contribution

The TFSA is attractive for investors who want to generate tax-free passive income.

Read more »

The TFSA is a powerful savings vehicle for Canadians who are saving for retirement.
Dividend Stocks

TFSA Investors: 3 Dividend Stocks Worth Holding Forever

These TSX stocks have the potential to grow their dividends over the next decade, making them top investments for TFSA…

Read more »

hand stacks coins
Investing

Secure a Wealthy Future With These 3 Canadian Stocks

These Canadian stocks have the potential to appreciate substantially over time and may also enhance returns through dividend payments.

Read more »

Tractor spraying a field of wheat
Dividend Stocks

Is Nutrien Stock a Buy for its Dividend Yield?

Nutrien is down more than 50% form the 2022 highs. Is NTR stock now oversold?

Read more »

analyze data
Investing

3 Blue-Chip Stocks Every Canadian Should Own

These blue-chip stocks are backed by large-cap companies with well-established businesses, solid fundamentals, and a growing earnings base.

Read more »

dividends grow over time
Stocks for Beginners

The Smartest Growth Stock to Buy With $2,000 Right Now

Do you have $2,000 to invest for the long term? These three TSX stocks have and will continue to deliver…

Read more »