Should you take the Canada Pension Plan (CPP) at age 60, 65, or 70?
For Canadians nearing retirement age, it’s a critical question. Once you start receiving CPP benefits, you only have 12 months in which to change your mind. After that, your decision becomes irrevocable. If you realize you made a mistake about when to take benefits at that point, you’re out of luck.
So, the decision about when to take CPP benefits is one worth getting right the first time. This raises an important question: “Is it worth waiting until age 70 to take CPP?” It’s well known that you get 0.7% more in benefits for each year you delay taking CPP past age 65. However, when you consider average life expectancies, it’s not clear that delaying until age 70 is optimal.
If you live to 80 years of age, your lifetime benefits are maximized by taking CPP at age 65
The average Canadian who takes CPP at age 65 receives $816.52 in benefits per month. That’s $9,798.24 per year. Using the CPP formula, the average Canadian who takes CPP at 70 should receive about $1,159.42 per month, based on the totals for someone taking CPP at 65 plus 42%. That’s $13,913.50 per year. The cumulative amounts for somebody living to age 80 taking CPP at 65 and 70 are shown below.
As you can see, a person starting at age 65 actually ends up with more cumulative benefits than a person starting at age 70 if both live until age 80.
In a past article, I wrote that a person taking benefits at 65 gets more cumulative benefits than a person starting at 70 if they live to 81.75 years old (the average Canadian life expectancy). After re-checking that article, I found that I made a slight calculation error: the person taking benefits at 70 steps into the lead at the age of 81. However, when you consider the time value of money (a dollar now is worth more than a dollar in the future), there is a case to be made that taking CPP at age 65 is optimal anyway.
When it can make sense to wait until age 70
It follows from the logic above that it makes sense to take CPP at age 70 in two scenarios:
- Interest rates are very high. When interest rates are high, the present value of money is lower, meaning it makes more sense to receive more money in the future.
- You expect to live past age 80.
So, if you are living in a high interest rate world and your parents both lived to age 90, you might benefit by taking CPP at age 70.
Investing in an RRSP
Whether you take CPP at age 65 or age 70, it makes sense to supplement your benefits with Registered Retirement Savings Plan (RRSP) investments. Investments pay regular cash money to your account, and the RRSP spares you taxation.
Consider Fortis (TSX:FTS) stock. It’s a dividend stock with a 4.41% yield at today’s prices. So, a $100,000 position in it yields $4,410 per year. The dividend might grow with time, too. Fortis has increased its dividend for 50 consecutive years, so that’s not a terribly unlikely proposition. So, this stock has the potential to add considerably to your CPP income.
Of course, there are risks with stocks like Fortis. Markets are always volatile, and Fortis itself has a lot of debt, meaning it’s vulnerable to interest rate hikes. Nevertheless, this example serves to illustrate how collecting dividends tax-free in an RRSP can boost your retirement income.
