The standard age to start collecting CPP benefits is 65, but you may get a reduced pension as early as age 60, or get a larger pension by starting as late as age 70. A factor affecting the decision of when to start collecting CPP that I hadn’t considered before is the penalty that comes with years when you make no CPP contributions.
Most descriptions of how to calculate your CPP benefits are too hand-wavy to be useful. However, Doug Runchey wrote a great post at the Retire Happy Blog on how to calculate your CPP retirement pension. I used this post to work out my own projected CPP benefits.
I worked out 3 scenarios: collecting at age 60, 65, and 70. When you take your CPP before age 65, your benefits are reduced, and if you postpose benefits until after age 65, your benefits increase. We’re working through a transition period right now, but by 2016 and beyond, the reduction before age 65 is 0.6% per month and the increase after age 65 is 0.7% per month.
This means that if payments start at age 60, the payment amount is reduced 36%, and if they start at age 70, they are increased 42%. It’s important to understand that any reduction or increase is permanent. If you take early CPP at age 60, you won’t get back to normal payments at age 65; the 36% reduction applies for the rest of your life.
In each of my scenarios, I assumed that I wouldn’t be working past age 60. The only variable was the start date of collecting CPP. This means that the longer I delay collecting CPP, the more years I will have without making any CPP contributions. Unfortunately, this reduces CPP benefits more and more the longer I delay CPP benefits.
A very simple analysis of CPP payments takes the 36% penalty for starting at 60 and the 42% bonus for starting at age 70 and declares the benefits at ages 60, 65, and 70 to be in the ratio 64:100:142. However, when I did the full calculations for my situation, which included the penalty for years without contributing, the ratio was 72:100:129.
Based on just these factors, I should take CPP at age 60 if I don’t expect to make it to age 78, should take CPP at 65 if I expect to live to between 78 and 88, and should wait until age 70 if I expect to live past 88. However, another important factor in the timing of starting CPP benefits is the return I expect to make on my savings.
If I expect to make a positive real return on my savings, then the age cut-off ages of 78 and 88 rise. The bottom line for me is that unless the CPP rules change or my working plans change, I’m likely to start collecting CPP benefits at age 60. Each person’s situation is different, though. Your mileage may vary.