Saturday, November 21, 2020

CPP Timing: A Case Study

There are many factors that can affect your decision on whether to take CPP at age 60 or 70 or somewhere in between.  Here I do a case study of my family’s CPP timing choice.

Both my wife and I are retired in our 50s and had periods of low CPP contributions because of child-rearing and several years of self-employment.  So, neither of us is in line for maximum CPP benefits.  If we both take CPP at age 60, our combined annual benefits will be $11,206 (based on inflation assumptions described below).  

The “standard” age to take CPP is 65.  If you take it early, your benefits are reduced by 0.6% for each month early.  This is a 36% reduction if you take CPP at 60.  If you wait past 65, your benefits increase by 0.7% for each month you wait.  This is a 42% increase if you wait until you’re 70.

However, there are other complications.  If you take CPP past age 60, any months of low CPP contributions between 60 and 65 count against you unless you can drop them out under a complex set of dropout rules.  If my wife and I take CPP past age 65, we won’t be able to use any dropouts for the months from 60 to 65, so we’ll get the largest benefits reduction possible for making no CPP contributions from 60 to 65.  Fortunately, CPP rules don’t penalize Canadians any further if they have no contributions from 65 to 70.

Another less well-known complication is that before you take CPP, your benefits rise based on wage inflation.  But after your CPP benefits start, the payments rise by inflation in the Consumer Price Index (CPI).  Over the long term, wage inflation has been higher than CPI inflation.  So, when you start taking CPP benefits, you lock in lower benefit inflation.

In this case study, I’ve assumed 2% CPI inflation and 3% wage inflation.  These assumptions along with the CPP rules and our contributions history led to our annual benefits of $11,206 if we take CPP at 60.

If we wait until we’re 70, our combined annual CPP benefits will be $29,901.  However, don’t compare this directly to the figure at age 60 because they are 10 years apart.  If we take CPP at 60, it will grow with CPI inflation for those 10 years.  The following table shows our annual CPP benefits in the two scenarios: early CPP at 60 and late CPP at 70.

Age    Early CPP    Late CPP              
Age    Early CPP    Late CPP
 60    $11,206   
 75    $15,081   $33,013
 61    $11,430   
 76    $15,383   $33,674
 62    $11,658   
 77    $15,690   $34,347
 63    $11,891   
 78    $16,004   $35,034
 64    $12,129   
 79    $16,324   $35,735
 65    $12,372   
 80    $16,651   $36,449
 66    $12,619   
 81    $16,984   $37,178
 67    $12,872   
 82    $17,324   $37,922
 68    $13,129   
 83    $17,670   $38,680
 69    $13,392   
 84    $18,023   $39,454
 70    $13,660   $29,901
 85    $18,384   $40,243
 71    $13,933   $30,499
 86    $18,752   $41,048
 72    $14,211   $31,109
 87    $19,127   $41,869
 73    $14,496   $31,731
 88    $19,509   $42,706
 74    $14,785   $32,366
 89    $19,899   $43,560

It would certainly feel good to start collecting CPP benefits when we’re 60, but by the time we’re 70, we’d never notice that our payments could have been 119% higher.  That’s why we plan to wait until we’re 70 for our CPP benefits.

A good question at this point is what we’ll do in our 60s without those payments.  We’ve already begun dipping into our RRSPs, and we’ll continue this through our 60s.  We’re happy to spend some of our savings early in exchange for much larger CPP benefits later.

To see why we’ll make this tradeoff, focus on our financial position at age 70.  The choice is to have either small CPP benefits and more savings or large CPP benefits and less savings.  The math says we’re better off with more guaranteed income indexed to inflation than we are to have more savings invested in risky assets.  In fact, when we do an analysis of how much we can safely spend, the decision to take CPP at 70 instead of 60 increases our safe spending level.  It seems counterintuitive, but we can spend more safely now in our 50s because of the decision to delay CPP to age 70.

You might wonder whether you could invest the smaller CPP payments in your 60s to do better than delaying CPP benefits.  In our case, if we live to 90, our investment return would have to beat CPI inflation by an average of 6.3% per year.  If we choose to manage our savings to make sure we have enough to make it all the way to 100 years old, the breakeven return rises to 7.4% above inflation.  There is no way we can be confident of such high investment returns, particularly because much of our assets would be in taxable accounts.  My planning assumption is that our stocks will beat inflation by 4% minus taxes and other costs.  It’s clear that delaying CPP to 70 is the better strategy.

What if the government changes the rules?  That’s certainly a possibility.  The government could choose to cap CPP benefits in the future, which would be bad for those who take CPP at 70.  The government could also bring in wealth taxes, which would be bad for those who take CPP at 60.  If the government ever becomes desperate enough to take away retiree benefits or charge wealth taxes on people who aren’t very rich, I suspect we’ll have much bigger problems than whether we took CPP at 60 or 70.

Although taking CPP at 70 is the right choice for us, there are some good reasons for others to take CPP early.  One reason is if you just don’t have enough savings to get through your 60s.  But, just not wanting to spend any savings isn’t a sound reason.  Another reason is if you’re in poor health and don’t expect to live long.  But just fearing you might die young isn’t a sound reason.  If you’re so sure you won’t make it to age 80 that you’d be willing to spend down all your savings before 80, then taking CPP at 60 is likely for you.  There are other narrow reasons to take CPP early that are mainly due to technical rules about taxes and certain government benefits.

The final conclusion is clear.  We’re better off delaying the start of CPP benefits despite the strong emotional reasons for taking them early.


  1. I always enjoy reading your comments and detailed analysis. Thanks for your blog.
    Personally my wife took CPP at 60 because she was retired for a few years already and I worried about the dropoff rules. I took it at 65 along with OAS after retiring at 64. Prior to retiring I did a complete income forecast analysis using FIMETRICS software and overall tax wise it was the optimum solution for us based on living to 95.

    Analysis on the benefits of delayed CPP while spending tax sheltered funds tends to ignore the value of delaying tax owed on registered accounts as long as possible. Also I don't trust our government to leave CPP benefits alone for future clawback so better to get as much as possible while we can.

    One issue I have never seen reviewed for delayed CPP is the impact of early death of one spouse on the maximum CPP entitlement by the other spouse. Perhaps you could review on your blog.

    1. Anonymous,

      Unless there are details about your situation you haven't mentioned, I have my doubts about the assumptions built into the FIMETRICS software. When I do an analysis for my wife and I based on living to 95, the decision isn't close; we're far better off waiting until 70 for both CPP and OAS. This analysis takes into account delayed taxation on tax-sheltered funds.

      When I discuss CPP with people in person and hear them say they don't trust the government not to cut CPP, it's not hard to see that they have emotional reasons to want to take CPP early and they are looking for good sounding reasons to justify it. (Obviously, I can't tell if this applies to you. I mention this for the benefit of others who haven't made a CPP timing choice yet.) The government might also bring in an annual RRSP/RRIF tax as was threatened more than a decade ago. We can't know whether future changes will favour early or late CPP.

      According to Doug Runchey (a CPP expert who has written excellent posts on the Retire Happy blog), whether you took CPP early or late makes no difference to the CPP survivor benefits you or your spouse would get because the rules do all calculations with amounts as though you took CPP at 65. Doug has said that there's a lot of misinformation out there claiming differently.

      I wrote about the possible death of a spouse a while back (see URL below). My conclusion for us is that either one of us would end up with more available spending (after fixed costs) than we have with both of us alive.

  2. I received the following comment from a reader by email:

    Many people took CPP at 60 but continued working and receive a PRB. I took mine early and regret it. I'm 67 now.

    Why are your CPP numbers higher than my CPP+PRB? I worked my entire life from 19 on, and missed 2 years max.

    My reply:

    I appreciate the feedback. Sadly, almost everyone who hasn't started CPP yet seems sure that taking it at 60 is right; it's some of those who've already started CPP who think they might not have made the right decision.

    The CPP figures in my post are combined benefits for myself and my wife. That should be enough to explain why they're higher than yours. Another smaller factor is that since you started your CPP, ours have been rising with wage inflation and yours have been rising with (typically lower) CPI inflation.

  3. I'm on cpp-d. I am 45. How does this affect my turning 65? Will I recieve anything? Or am I cutting off? I don't know how any of this works.

    1. Hi Beckamax,

      No problem -- I'm not a nitpicker. I just read on a Government of Canada website that CPP-D automatically switches to regular CPP at age 65. However, I'm not an expert in disability pensions, so you might want to seek out an expert such as Doug Runchey.

  4. Hi Trish,

    OAS only scales with CPI, whether you've started payments or not. But you're not penalized for not working -- payments are proportional to the number of years you've lived in Canada from age 18 to 65 (max of 40 years). The payments only go up by 0.6% per month you delay past 65. Overall, the clear decision for me is to delay OAS to age 70, and this would be true even if I had lived in Canada for less than 40 years. However, tax considerations can get complex for high income earners who will have OAS clawed back. In particular, if a huge RRSP will cause you to have all your OAS clawed back after the year you turn 71, and you're able to limit your income before then, you might be better to take OAS at 65 so you at least get to keep 6 years of it.

  5. WRT investing all your CPP, I'm not sure how you came up with needing an annual return of 6.3%. I copied your table into Excel and added cumulative columns including one where you get a 5% annual return. My result shows it being better to take CPP at age 60.

    Here's the table:

    Age Early Cumu 5% Late Cumu
    60 $11,206 $11,766
    61 $11,430 $24,356
    62 $11,658 $37,815
    63 $11,891 $52,191
    64 $12,129 $67,536
    65 $12,372 $83,904
    66 $12,619 $101,349
    67 $12,872 $119,932
    68 $13,129 $139,714
    69 $13,392 $160,761
    70 $13,660 $183,142 $29,901 $29,901
    71 $13,933 $206,929 $30,499 $60,400
    72 $14,211 $232,197 $31,109 $91,509
    73 $14,496 $259,027 $31,731 $123,240
    74 $14,785 $287,503 $32,366 $155,606
    75 $15,081 $317,713 $33,013 $188,619
    76 $15,383 $349,751 $33,674 $222,293
    77 $15,690 $383,713 $34,347 $256,640
    78 $16,004 $419,703 $35,034 $291,674
    79 $16,324 $457,828 $35,735 $327,409
    80 $16,651 $498,203 $36,449 $363,858
    81 $16,984 $540,947 $37,178 $401,036
    82 $17,324 $586,184 $37,922 $438,958
    83 $17,670 $634,047 $38,680 $477,638
    84 $18,023 $684,673 $39,454 $517,092
    85 $18,384 $738,210 $40,243 $557,335
    86 $18,752 $794,810 $41,048 $598,383
    87 $19,127 $854,634 $41,869 $640,252
    88 $19,509 $917,850 $42,706 $682,958
    89 $19,899 $984,637 $43,560 $726,518

    1. Anonymous,

      Your analysis is severely flawed. You didn't add 5% returns to the CPP payments in the Late scenario. Taking CPP late is clearly the better choice.

  6. Thanks for this Michael. Great article.

    I am 59 and wish to take CPP at age 70. By age 61 I believe I will have qualified for the maximum CPP payment. I would like to retire at age 61. My concern is the "Zero Years" between age 61-65. If I'm not working those years, and I want to take CPP at age 70, would I be penalized?

    Thanks again.

    1. Hi Jim,

      I will describe my understanding of the rules after reading Doug Runchey's posts. You might want to consult an expert to confirm my understanding.

      While I will get penalized the maximum possible from not working from 60-65, you will be penalized less, if at all. If you take CPP after age 65, your Number of Contributing Months (NCM) in 47 years from 18-65 is 564. You get to drop out 17% of those months, or 96. If you contributed zero to CPP from 61-65, that's 48 months, and you would have 48 more drop out months to eliminate other months where you contributed little to CPP. If you take CPP at 61, your NCM would be 516 months, and you get to drop out 88 of these months. This is 40 more months than you would have left in the previous case.

      How much you are penalized depends on what those 40 extra months look like. If you contributed the maximum to CPP the whole time from 18-61, you wouldn't be penalized at all. If you have more than 7 years between 18 and 61 where you contributed nothing to CPP, you would be penalized the most possible for working to 61 and taking CPP after 65.

      There are other possible dropouts for being the primary caregiver to children under 7 and for being disabled. If this applies to you, these dropouts would affect the calculation. After all the dropped out months, you take an average of the contribution level in the remaining months to calculate your CPP benefits.

      For my own case, even though I face the biggest possible penalty for not working from 60-65, it still makes sense for me to take CPP at 70 by a wide margin, so the penalty isn't too severe. For me the penalty is 10.7%, and for you it is somewhere between 0 and 8.5%. Contrast this with a CPP benefits payments more than doubling (before taking the penalty into account) from delaying from 61 to 70.