When To start taking the CPP and old age security

Did you know that the age you decide to start drawing from the Canadian Pension Plan and Old Age Security (I HATE that name) actually makes a big difference in terms of the tax you’ll pay and how much you receive?

It’s true…yes, you can apply for these benefits when you’re 60…but sometimes delaying can mean more money in your pocket. That is why I think it is so important to map out the different financial scenarios of taking your benefits at age 60, 65, 70…whenever you’re thinking you might want to and then weighing your options.

Listen to my latest podcast now to learn more about why running ALL the numbers will set you up for retirement success.

Hello, and welcome to another round of our “Heart of Money Talks”. Today I’m going to talk about one of the top questions I get asked, “When should I be taking my CPP?”

I’ll share with you today what to expect from your CPP, which is the Canadian Pension Plan and the other government benefit, old age security.

Isn’t that just a nasty name, old age security? We need to come up with a new name for it, I feel like 65 is the new 55. Okay. Wishful thinking there for me and old age comes much later, that name has got to change. Okay. So let’s jump in with the first one, CPP, which is the Canadian Pension Plan. It’s a Canadian benefit that we contribute to during our working years.

You’ll see this amount come off your pay cheque and you might be a little bit cranky when you see it come off. It goes to the government, into the CPP pool for you to receive later. The amount that we see come off our pay cheque is based on how much you make up to a maximum amount this year. If you make over $61,000, you’ll be maxing out your Canadian Pension Plan contributions off your pay cheque.

So for the next few years, you’re going to see this amount increased slightly. The government has asked us to – maybe it’s not asking and more like voluntold us – that we will be having more come off and contributing more into this pot. It’s managed very well and it’s to make sure that it’s there for us down the road.

You’ll have access to receive these benefits starting at age 60. And in fact, you can decide when you want to start them. It can be from age 60, but all the way to age 70. If you delay past 70, there’s no real benefit. So the question, when should you start taking this benefit? That’s the one that gets asked all the time.

As soon as someone turns 60, they are talking with friends, having water cooler conversations or they talk to a buddy and the buddy says, “Yeah, I started mine right away and I get however much per month.”

So most people think, “Yeah, 60, I want that amount too.” But should you really be starting it?

Generally, you need to wait until age 65. It also depends if you’re still working. So if you’re still working and it’s 60, yes, you could apply for your Canadian Pension Plan and get a reduced amount. But because you’re working, what’s the point? You might as well delay it. You’re just going to end up having to pay tax on it.

So generally the answer is no, do not start your CPP early. One, it’ll just be taxed and you have to pay the government back based on your tax rate because you’re still working. And two, you can still contribute to it and not receive a penalty, therefore, leaving you more later at age 65, there’s no penalty.

They do penalize you by decreasing. It’s a formula based on how early you’re taking it by each month. If you wait till you are 63, you get more than if you were at age 60. So it does increase there, and 65 is the point where you get the full hundred percent. Now, if you delay and wait until anytime between 66, 67, 68, 69 to 70, you actually get more in your pocket and they give you a bonus.

It’s a fantastic thing for us because it is like a life annuity, it’s guaranteed income for your life, paid each month, and it increases with inflation. This is fantastic. It can be a different amount for everyone based on your contributions, your working years and what you’ve earned. If you’ve always maxed out your Canadian Pension Plan at age 65, right now you could be paid $1,100 gross per month.

If you take it earlier, there’s that formula there that decreases it. Your CRA online access is where you should go. You should log in, go to My Account with CRA and you can pull it up there and see your contributions over your lifetime and what to expect. It makes an impact on your financial plan.

It might not feel like a lot and you certainly couldn’t just live off of just CPP. But it is a little piece of that puzzle there that has a locked-in life, annuity indexed for inflation. It’s fantastic. Now, some people at age 60, just take it, they don’t crunch the numbers, they just say, “Nope, I’m entitled to it, I might not live forever. So I want to take it now.”

This is generally a mistake unless of course you have health issues and know for a fact that you’re not going to live a long prosperous life. The National Institute on Aging and FP Canada completed a research paper just recently on December 8th, 2020.

So that’s just this past winter and it proved that it’s best to wait as long as you can for CPP. Now a financial planner goes through the math scenarios for you and will prove this for you.

When I do apply for clients, I’ll do the different scenarios, so I’ll put it in there at 60 or 62, 63, 64, or 65 and I’ll actually run the numbers and compare it. For example, if we wait to age 65 and then we can quantify and qualify that decision, and I can actually say, “No based on this, you should be waiting,” because we’re actually in that financial plan. We’re mapping out your retirement income, your taxes, right to age 95.

So I could actually follow the chart and look and say, “Ooh, look at age 70. Before then you’re going to be in this tax bracket, you’re going to be pulling from these buckets, and here’s where your CPP is.”

So it really does help to crunch the numbers – a big takeaway on CPP.

Most people don’t know that you can defer and wait to take it and get a bonus if you wait after age 65. So anytime between 65 and 70, and this is really helpful for people that are still working. Because there are people still having income after age 65, whether it’s employment income, or you might be a business owner and you’re still drawing out dividends and you’ve decided to decrease those dividends at age 70, and then you can replace it in there with your Canadian Pension Plan and receive more just for waiting.

So it all is about that income, whether you’re taking income or not.

Now the other monthly benefit I wanted to just quickly touch on is the old age security called OAS. Yes. That nasty word. Old age. Oh, we really do need to come up with a new name for that. I don’t like it. It’s a benefit paid to you from the government and it pays right now $615 a month, gross.

At age 65 now, similar to the CPP, there’s a small benefit for delaying this as well, past age 65. I don’t think very many people know that the only time I think the OAS should be delayed is again, that scenario if you’re working or you already have employment income, or you’re taking income from your business still.

It does have a clawback feature. That means if, while you are taking it, you make more than $77,000 a year, you’re going to have to start to repay a part of that back. If you make over $130,000 a year, you won’t receive any of it. It’ll all be clawed. So this is where that income planning really makes sense, knowing where you stand with your income and when to expect your old age security and how it plays into your taxes.

That retirement income, that financial plan that we do with the retirement income mapped out over your lifetime – it’s how we structure your income and know ahead of time if you’re going to be in that clawback or not. We can do all those tax scenarios because it does make a difference. The last thing you want to do is pay more to CRA or not have a benefit that you’re actually entitled to.

So these two benefits, CPP and old age security are not enough to live off solely, but they are an amazing guaranteed portion of your lifetime income. I get cranky sometimes just like you, because while working, you see the CPP amount come off your pay cheque and that it increases each year.

You’re paying more into this pot for your future self right now. It’s going to thank you, but your present self isn’t feeling the benefit of it because you’re just actually having less in your pocket on payday, but it’s a necessary force that Canadians will need in retirement. The CPP pension is managed extremely well.

It has great returns and it’s going to be there for you. I love it. It’s a love/hate relationship. I hate when I see the money go, but I love knowing that it’s going to be there in retirement for me. So to wrap it up, my general advice is to wait until at least age 65 to take these benefits to lock in the full amount you can receive.

And if you’re still working past age 65 to, for even longer and wait to take the benefit, put more in your pocket. Okay. That’s it. Email me your questions at [email protected]. I’d love to help until next week. Take care.