Deciding when to start taking Canada Pension Plan (CPP) benefits is a big decision for many Canadians approaching retirement. While you can start receiving CPP as early as 60, this choice has advantages and drawbacks. The timing of when you begin your CPP can have a lasting impact on your retirement income and overall financial well-being.
In this blog post, I’ll explore 9 critical factors to consider when deciding if taking CPP at age 60 is the right choice for you.
Reduced Benefit Amount
Taking CPP at 60 means your monthly payments will be lower than if you wait until 65. The reduction is 0.6% for each month before your 65th birthday, which adds up to a 36% reduction if you start at 60. This permanent reduction can significantly impact your long-term retirement income. Consider whether you can afford lower payments over the long term.
Life Expectancy
Your expected lifespan plays a crucial role in this decision. If you have health issues or a family history of shorter lifespans, taking CPP early might make sense. You’ll receive payments for more years, potentially getting more money overall. However, if you expect to live well into your 80s or beyond, waiting could result in higher total benefits over your lifetime.
Current Financial Needs
Assess your immediate financial situation. If you’re struggling financially or facing unemployment, taking CPP at 60 could provide needed income. This extra money might help you avoid debt or drawing down your savings too quickly. Consider whether the reduced benefit is worth the immediate financial relief.
Other Income Sources
Look at your other retirement income sources, such as workplace pensions, RRSPs, or TFSAs. If you have sufficient income from other sources, you might be able to delay CPP to get higher payments later. Alternatively, starting CPP at 60 could provide essential financial support if you lack other income.
Continued Employment
If you plan to work past 60, consider the impact on your CPP. Working while receiving CPP before 65 means you’ll continue making contributions, which can increase your future benefits. However, your employment income might put you in a higher tax bracket when combined with CPP. Think about how working will affect your overall financial picture.
Tax Implications
Starting CPP at 60 could affect your tax situation. If you’re still working, CPP benefits are taxable income, and taking them early might push you into a higher tax bracket. On the other hand, spreading out your CPP income over more years could result in paying less tax overall. Consider consulting a tax professional to understand the implications for your specific situation.
Impact on Other Benefits
Taking CPP early could affect your eligibility for other income-tested benefits. For example, it might reduce the amount of Guaranteed Income Supplement (GIS) you receive later. If you’re likely to qualify for GIS, waiting to take CPP could result in higher overall government benefits. Consider how early CPP might impact your total retirement income package.
Spousal Considerations
Consider how your CPP decision affects your spouse if you’re married or in a common-law relationship. If one spouse has a lower CPP entitlement, it might make sense for the higher-earning spouse to delay CPP. This could potentially increase the survivor’s benefit if one partner passes away. Discuss the options with your partner to find the best strategy for your household.
Inflation Protection
CPP benefits are indexed to inflation, which helps maintain your purchasing power over time. By taking CPP early, you start with a lower base amount for these inflation adjustments. This means your payments will increase from a lower starting point each year. Consider whether you’re comfortable with potentially lower inflation-adjusted payments in the future if you start at 60.
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