The Canada Pension Plan (CPP) is a cornerstone of retirement income for Canadians, but deciding when to start collecting these benefits is a significant financial decision.
While many people opt to begin CPP at age 65 for the maximum payout, there are solid reasons to take CPP at age 60 that can be beneficial depending on your unique circumstances.
This article explores the key factors to consider when deciding whether to start collecting CPP early, along with the pros and cons of this decision.
Reasons to Take CPP at Age 60
Taking CPP at age 60 comes with certain trade-offs, primarily a reduction in the monthly payment amount. However, for many Canadians, the immediate financial benefits outweigh the long-term reduction.
Let’s delve into the main reasons why taking CPP at 60 might be the right choice for you.
Immediate Financial Necessity
For some, financial necessity becomes the primary factor in deciding when to take CPP. Life events such as job loss, health problems, or unexpected costs can create financial pressure.
Starting CPP at age 60 allows for immediate access to funds, which can be critical when other savings or income streams fall short. While this results in a 36% reduction in monthly payments, it can provide a much-needed income boost.
Here’s a comparison of yearly CPP payouts at different ages:
| Age | Monthly CPP Payment | Annual Payment | Reduction Percentage |
|---|---|---|---|
| 60 | $873.34 | $10,480.13 | 36% |
| 65 | $1,362.11 | $16,375.20 | – |
| 70 | $1,881.69 | $22,580.25 | 42% |
For instance, starting CPP at 60 can secure an annual payout of $10,480.13, which can make a significant difference if you are no longer working or in need of financial support.
Reduced Life Expectancy
Health issues or a family history of shortened life expectancy might make taking CPP at 60 a wise decision. The break-even point analysis suggests that if you don’t live past age 69, you may benefit financially from taking CPP early.
On average, Canadians who are 60 can expect to live another 25 years, but if health concerns are prevalent, accessing benefits sooner may be the better financial move.
Career and Contribution Gaps
Many Canadians face career gaps or periods of low earnings that impact their CPP contributions. Self-employed individuals, or those who took breaks from work or earned less during certain years, may find that starting CPP at 60 helps maximize their benefits based on their top 35 years of earnings.
By taking CPP early, individuals may still receive near-maximum benefits despite contributing less over their lifetime.
Reasons to Delay CPP
While there are valid reasons to take CPP at 60, it’s also important to consider the potential advantages of waiting until age 65 or 70.
Delaying CPP allows you to maximize your monthly benefits, which can provide a stronger financial foundation in your later years.
Financial Optimization
Delaying CPP provides a guaranteed increase in monthly payments, as the pension grows by 7.2% annually for every year you delay up until age 70.
This can result in a significantly higher monthly payout, providing a cushion against inflation and rising living costs. For those who are financially stable and not in urgent need of funds, this strategy can optimize long-term retirement income.
Investment Considerations
While some may consider taking CPP at 60 and investing the money to earn higher returns, investment risks must be considered.
Taxes, investment fees, and market volatility can affect returns, and it’s challenging to consistently outperform the guaranteed returns provided by delaying CPP. The guaranteed 7.2% increase per year is a relatively low-risk way to grow your retirement income.
Long-Term Sustainability
One common concern about CPP is its long-term sustainability. However, Canadians can be reassured by the Canada Pension Plan Investment Board (CPPIB), which ensures the plan remains financially sustainable for at least 75 years based on current projections.
The CPP is unlikely to be affected by short-term market fluctuations or government budget issues, making it a reliable source of income for Canadians in retirement.
The decision of when to take Canada Pension Plan benefits is deeply personal and depends on individual circumstances such as financial need, life expectancy, and career history.
For some, taking CPP at age 60 provides immediate financial relief and addresses urgent needs. Others may prefer to delay CPP for a larger payout in the future.
Regardless of the choice, it’s essential to weigh both the immediate and long-term implications, and consulting a financial advisor can help guide this important decision.
FAQs
1. What is the reduction in CPP if I take it at age 60?
Taking CPP at age 60 results in a 36% reduction in the monthly payment compared to starting at age 65.
2. Can I take CPP at age 60 and still work?
Yes, you can start taking CPP at age 60 and continue working. However, your CPP benefits may be subject to a work income deduction if you earn more than a certain threshold.
3. How does delaying CPP increase my benefits?
Each year you delay CPP between age 60 and 70, your monthly payment increases by 7.2%, providing a higher income later in life.
4. Will my CPP benefits increase if I continue working?
Yes, if you continue working, your contributions may increase, which could result in higher CPP benefits when you start collecting.
5. Is it better to take CPP early or delay it?
It depends on your financial situation and health condition. If you need income immediately or have a shorter life expectancy, taking CPP at 60 might be the better option.
