It is well documented that the number of people with defined benefit (DB) pension plans is much lower today – particularly in the private sector. This increases the importance of careful planning around the retirement income provided through the Canada Pension Plan (CPP).
In the “good old days” when DB plans were the norm, you could afford to use what I would refer to as the “take the money and run” approach to CPP benefits. Simply put, this approach can be summarized along the following lines:
“I don’t know when I’m going to die, so I’m going to start my CPP as early as possible and get what I can.”
In situations where a retiree had a strong DB pension – particularly where it was supplemented by private savings through RSPs, for example, it was quite likely that CPP income was not needed for the essentials in the retirement budget.
CPP benefits in that situation were for the extras. Furthermore, life expectancies then were not what they are now.
Today, however, people are living longer, therefore, longevity must be an important consideration in your retirement planning. The first step in making the right decision around CPP income is understanding the basic mechanics of the program. The baseline age for receiving CPP benefits is 65. This is the earliest age at which you are eligible to receive an unreduced CPP pension. Benefits are reduced by 0.6% for each month prior to age 65 at which they commence. The earliest age at which CPP benefits can begin is age 60.
By contrast, CPP benefits are increased by 0.7% per month for each month after age 65 they commence. The latest age at which CPP benefits can begin is 70. In dollar terms, the maximum unreduced pension at age 65 as of January 1, 2018 is $1,134.17.
The actual CPP pension you are entitled to will be calculated at the time of your application. The calculation involves the contributions made to CPP during your “contributory period” (basically between ages 18 and 65) adjusted for allowable adjustments for periods of low income. For example, everyone has their lowest 8 years of income dropped out of the calculation. CPP benefits are payable as long as you live, and are indexed to the cost of living.
The lower the amount of defined benefit income you have in retirement, the more valuable a marginal dollar of CPP income becomes. In the situation where CPP is deferred until age 70, the annual pension amount would be 42% higher as compared to starting it at 65. Furthermore, by the time one reaches the age of 86, the aggregate amount of CPP pension received by deferring to age 70 would exceed the amount received by starting prior to age 70. While this is slightly later than the average life expectancy for a 65-year-old Ontario male (19 years), it is slightly earlier than the 21.89 years of life expectancy for a 65-year-old Ontario female.
The above paragraph is not meant to suggest that everyone should endeavour to defer CPP to age 70. The answer will be different for each person – and for some (particularly those with a high probability of a shorter life expectancy) age 60 may still be appropriate.
The best way to determine the answer is to work with a Financial Planner to develop a personalized retirement plan. By going through the planning process, all strategies can be considered, including potentially drawing down other sources of retirement income before commencing CPP.