With RRSP Season coming to a close many people are thinking about retirement. This winter has been cold and miserable so why not take our thoughts to the days when we no longer have to work for a living, can sleep in whenever we want, and maybe even go somewhere warm (if we can afford to, of course).
I’ve recently had many conversations with people who are turning, or about to turn, 60. Most ask, “Should I apply for and start collecting my Canada Pension Plan (CPP) now or wait until I’m 65.” This is a good question and the best way to answer it is by getting the information you need to make an informed decision. How to start? Well how about you pick up the phone, dial 800-277-9914, and talk to an agent at the CPP (hit*0 at the appropriate time and you’ll get to speak to a real live person!). There are two key questions to ask. For example, if you were turning 60 on April 1st, your first question would be, “What would my CPP payments be as of April 1st, 2014, if I decided to retire then?”
The answer you get will be based on a couple of things. The first is that once you retire you stop paying into CPP. And this impacts how much you could collect in the future—say when you’re 65 and there are no more penalties.
Penalties? There are penalties? I didn’t even do anything!
Calm down, here’s the deal. Given the new rules that are currently being phased into the CPP, for every month you take your CPP early there is a .6 reduction in your payment (it used to be .5 for you trivia buffs out there).
So if you decide to take your CPP the moment you turned 60, you could have a 36% reduction in your CPP. Currently the maximum amount of CPP you could collect at the age of 65 is approximately $1,000/m (it’s actually $1,038/m but I’m keeping things simple for all our sakes). A 36% reduction at the age of 60, assuming you qualified for the maximum amount of CPP, means you would actually receive $640 a month.
So now you might be thinking—“I’m going to wait until I am 65. No 36% reduction for me!”
This leads to the second question you should ask the kind CPP agent, which is, “Given I won’t be contributing for the next 5 years, what is my pension amount at age 65?” You might be surprised how small the difference is, even though you’ll be contributing for 5 less years.
Now, with these numbers in hand, you can start to make an informed decision on when it would be best to start taking your CPP.
However, there are other life factors that can also impact your decision:
- Do you have a spouse? Will you be splitting your CPP credits with your spouse?
- Do either you or your spouse (if you have one) have a pension plan? If so, what are the Survivor benefits for that pension plan?
- Do you have other money invested inside an RRSP, Open Portfolio, or TFSA that you can draw on to supplement your income as an alternative to collecting your CPP early?
- Do you have a pension plan that is “integrated” with CPP so that when you turn 65 your other pension will be reduced?
- Can you manage financially without starting to collect your CPP early?
The two questions you asked the CPP agent are your starting point, then you need to delve deeper into your own personal situation. Of course a Financial Planner can always help you out with this process.
Or you might just say, “I’ve paid into it, I want it as soon as I can get it, because who knows how long I will live and get to collect it!”
I hear that a lot!