There are good reasons why some people start collecting CPP and OAS benefits as early as possible. However, many people start collecting CPP and OAS early for emotional reasons that don’t hold up under scrutiny. The main reason to delay benefits until age 70 is simple enough: most of us need to plan for the possibility of a long life.
Let’s start with some basics about CPP and OAS payments. Old Age Security (OAS) can start anywhere from age 65 to 70. Most Canadians at age 65 are eligible for the maximum pension (currently $578.53/month and rising with inflation). However, waiting until age 70 gives the payments a 36% boost (0.6% for each month of delay). A 70-year old just starting OAS today would get $786.80/month.
Canada Pension Plan (CPP) benefits are more complex to calculate. Doug Runchey has a great description of how to calculate your CPP pension. The biggest CPP retirement pension a 65-year old can collect today is $1114.17/month, rising with inflation. However, the average is $644.35/month. Whatever amount you’re entitled to, you’re allowed to start payments as early as age 60 or as late as age 70. The penalty for starting at age 60 is a 36% reduction, and the benefit for waiting from 65 to 70 is a 42% boost. So, the maximum payment at age 60 is $713.07/month, and the maximum starting at age 70 is $1582.12/month. That’s quite a big difference.
One technicality about CPP is that delaying benefits from age 60 to 65 can reduce your calculated pension a little if you’re not working past age 60 because you’ll have more years with no CPP contributions. (There is a special “dropout” that allows you to not count the years from 65 to 70.) So, depending on your exact circumstances, the dramatic difference between CPP at age 60 and at age 70 can be a little smaller than I showed, but it doesn’t affect the rest of the discussion much.
There are some good reasons to start collecting CPP and OAS as soon as possible. If you have much lower than normal life expectancy for any reason, it makes sense to collect some money while you’re still alive. If you have no savings and you plan to live only on just the total of your pensions (including the lower CPP and OAS payments that come from taking them early), then it makes no sense to delay CPP and OAS.
Suppose you have a normal life expectancy and have at least enough savings to be able to make it to age 70 without collecting CPP or OAS. This means that if you calculate the boosted payments you’ll get from CPP and OAS at age 70, your savings will cover withdrawals of at least this amount for the years from when you retire until you’re 70. So, you have a real choice: take CPP and OAS sooner or later?
There are some strong emotional reasons to take CPP and OAS sooner. One is that we discount the future too much. Another is that we sometimes use the fact that CPP is available at age 60 to justify retiring at 60, whether we have enough savings or not. Yet another is that it’s psychologically hard to spend down one’s savings, and as Frederick Vettese explained, you’ll have to do that faster if you delay CPP and OAS.
I’ve heard people try to justify taking CPP at age 60 saying that they want to have some money to spend while they’re still young enough to enjoy it. However, they could just spend more from their savings to achieve this. If delaying CPP and OAS to age 70 has a net benefit, then doing so will allow you to spend a little more during your early years of retirement than if you took CPP and OAS as early as possible.
We only need to consider one dominant fact to see that delaying CPP and OAS is a big win: you might live a long life. The scenario that puts the most strain on your finances is living a long time. If your financial plan works for a long life, then you won’t have financial trouble if you don’t live so long.
If you do live a long time, you’ll get the most value from CPP and OAS if you wait until age 70 to get larger payments. Knowing that you’ll be better covered after age 85 with big CPP and OAS payments makes it possible to spend more early on. The problem with longevity risk is that we are forced to plan for living to 95 even if we expect to only live to 85. The great thing about large CPP and OAS payments is that they keep growing with inflation as long as you live. This eliminates part of your longevity risk.
If you live a long life, the math overwhelmingly supports taking CPP and OAS at age 70. Doing so makes it possible to spend more in your 60s than you could do safely if you take CPP and OAS early. But what if you don’t live long? You’re still better off delaying CPP and OAS. You don’t know in advance that you won’t live long, so you’re still forced to plan for the possibility of a long life.
You may see some analyses with detailed calculations to decide when to take CPP and OAS. These often use normal life expectancy to make the choice. These analyses just aren’t relevant to most of us because we have to plan for the possibility of a long life. An exception is if you’re wealthy enough that you plan to under-spend your assets and longevity risk matters little.
In many financial decisions, the truth is in the numbers, but only when you get all the facts right. If you get a fact wrong, such as not planning for the possibility of a long life, the math gives you an answer that is exactly wrong. It pays to think clearly about the gift of high CPP and OAS payments you can get by waiting until you’re 70 to collect.