Thursday, March 31, 2022

A Conversation About CPP

Close Friend:  My wife and I are just a year away from being able to start our CPP benefits when we turn 60.  I’m not sure if we should start them right away or wait until we’re older to get bigger benefits.

Michael James: I don’t usually get involved with giving this kind of advice about people’s specific situations, but you’re a close enough friend that I’ll try to help.  Let’s go through a standard checklist of questions to help you decide.

CF:  Fire away!

Do you need the money?

MJ:  The first question is “Do you need the money?”

CF:  Of course I need money.  What kind of question is that?

MJ:  Hmmm.  You’re right.  That question isn’t very clear.  I think the idea is whether you need CPP benefits to be able to maintain your standard of living.

CF:  Well, I’m retiring in a few months, and I don’t really know what standard of living I can afford.

MJ:  Another good point.  Let’s try to make the question more precise.  If you don’t start your CPP until you’re 65 or 70, will you have less money available to spend before CPP starts than you’ll have after CPP starts?

CF:  I’m not sure.  My wife and I have $600,000 saved in our RRSPs that we could live on during our 60s.

MJ:  That’s more than enough to live on while you wait for larger CPP benefits at 65 or 70.

CF:  Okay, next question.

Life expectancy

MJ:  Do you have a shorter than normal life expectancy?

CF:  My dad died at 82, but my mother and both my wife’s parents are still kicking.  One of my uncles died in his 60s.  Maybe I should take CPP now in case that happens to me.

MJ:  We can all imagine dying young, but it’s more important to make sure you don’t run out of money if you live a long life.  Maybe a better way to phrase the question is “Are you willing to spend down all your savings before you turn 80 because you’re sure you won’t live that long?”

CF:  No, I’m not.

MJ:  So, even though you don’t know how long you’ll live, you’re going to have to use your savings sparingly in case you live a long life.

CF:  Does that mean I should take CPP at 60 so that I won’t spend as much of my savings in my 60s?

MJ:  No, it means the opposite.  When you spend some savings in your 60s, you’re buying a larger guaranteed CPP payment that is indexed to inflation.  You’re taking part of your savings that you spend over exactly 10 years and turn it into an income stream that could last for decades.  By making this choice, you’ll be able to safely spend more money each month starting today.

CF:  I’m starting to see a trend toward taking CPP at 70.

More money while young

MJ:  Let’s see.  The next question here is “Do you want more income available to spend while you’re young?”

CF:  I suppose so.  But can’t I just spend extra from the RRSPs during my 60s to boost my income over the next decade?

MJ:  Good point.  This question doesn’t make a lot of sense.  In fact, if you spend some of your RRSPs now in trade for higher guaranteed CPP benefits for the rest of your life, your safe spending level starting today will already be higher.  Choosing to spend even more during your 60s just means you need more savings to cover this spending.  Because you have enough savings to spend extra in your 60s, you’re still better off taking CPP at 70.

CF:  Sounds good to me.

Do you want the money now?

MJ:  The next question is “Do you want the money now?”  Seems like a weird question.  Of course it’s your choice to make, and you can do whatever you want.

CF:  I thought the point of these questions was to figure out what is best for me rather than just me going with my gut.

MJ:  I agree.  Of course people can do whatever they want.  But if they give nonsensical reasons for their choice, they have to expect others to point out that the reasons make no sense.

CPP contribution history

MJ:  Next question: “Do you have many years when you contributed little to CPP?”

CF:  I had some low income years, and my wife had even more because she took time off to look after our children.  What difference does this make?

MJ:  There’s a complex set of rules around calculating your CPP benefits.  You get to drop out a certain number of years of low contributions.  If you don’t work from 60 to 65, you’ll drop out those years, but that takes away from dropping out other low contribution years.  Fortunately, the primary caregiver gets an extra drop out for the years when the kids were under age 7.  And there’s also an extra provision allowing you to drop out the years from 65 to 70.

CF:  Does this mean I’d be penalized for delaying CPP?

MJ:  Yes, but not by very much.  In my own case, my wife and I will be penalized by close to the maximum possible amount, and we’re still better off delaying CPP.  The amount the benefits rise during the years from 60 to 65 is far more than the penalty from not working from 60 to 65.

CF:  So, things are still pointing toward delaying CPP.

Superpowered investments

MJ:  The next question is “Do you expect a high return on your investments in the future?”

CF:  Beats me.

MJ:  This question doesn’t make much sense, really.  It might as well ask “Are you unrealistic.”

CF:  What difference do my future investment returns make?

MJ:  The idea of this question is that you could take CPP at 60 and invest for a high return.  The hope is that you’d invest so well that a decade later, this CPP money would be more than the larger CPP benefits you’d get if you took CPP at 70.

CF:  I understand that stocks have gone up an average of around 10% per year during my lifetime.  Is that enough to keep up with the increase from delaying CPP?

MJ:  No, it isn’t.  The reason is that CPP benefits are indexed to inflation.  Stocks have only beaten inflation by 5-6% per year, and your portfolio has some bonds in it.  So, you can’t expect the eye-popping returns necessary to keep up with rising delayed CPP benefits.

Surviving Spouse

MJ:  Are you concerned about whether the surviving spouse would have enough money if one of you died young?

CF:  Of course I am!

MJ:  I think what this question is getting at is that if you delay CPP to age 70 and you happen to die just before you start to collect, you will have been spending down the savings left for your wife.

CF:  That sounds bad.

MJ:  It’s not as bad as it sounds.  Most of your savings would still be there, and if your wife doesn’t get a maximum CPP pension, she would get a modest survivor’s pension after you die.  This is a case where it makes sense to do the calculations necessary to see what your wife’s income would be like, and how much her needs would drop without having to feed and clothe you and pay for your golf trips and other expenses specific to you.  If there is a modest shortfall, you could buy a small amount of term life insurance on both of you to run from, say, age 65 to 75.

CF:  It’s hard to get the image of my wife being destitute out of my head.

MJ:  I understand.  This area can spark strong emotions.  That’s why it’s important to run the numbers to see how you or your wife would fare if one of you died around age 70.  In my case, if my wife and I take CPP at 70, my wife’s standard of living would rise if I died at 70.

CF:  How is that true?

MJ:  We worked out how much the family income would drop, and it turned out to be less than the portion of our family expenses that are spent on just me.


MJ:  “Are you concerned with how much money you’d leave your kids if both you and your wife die young?”

CF:  I’d like to leave something to my children whether I die young or old.

MJ:  This is another strange question.  Why is it okay to give no money at all to your children when they’re in their 30s if you don’t die young, but it’s suddenly important that they get a lot of money if you do die young?

CF:  Doesn’t make sense.

MJ:  Whatever you decide about bequests, you can set aside some of your savings or maybe get some life insurance.  You might even choose to give some money to your adult kids while you’re still alive, as long as you don’t jeopardize your retirement.  This whole area seems like something you should think about and make some plans rather than use it as a way to be fearful about spending some of your savings in your 60s.

Decision time

CF:  It sounds like waiting until we’re 70 to start CPP is the best choice for us.  Is it the same for most other people?

MJ:  Perhaps.  But there are definitely some who should start CPP sooner.  For example, some people have very little money saved, and sadly, others have compromised health.  Some low income people have complex situations where they’re trying to maximize their Guaranteed Income Supplement (GIS).  Some wealthier people have complex tax considerations where they’re trying to minimize the amount of their Old Age Security (OAS) that gets clawed back.

CF:  I’m lucky my decision is simpler.  Thanks for the help!


  1. Well done, Michael.

    You touched on what I think are the key points, and the ones that lead me to plan on deferring out CPP until 70.

    Yet each spring, tax season, I have to answer to my accountant who fully believe in the "get it at 60 because you might die" philosophy. I shake my head and question why I deal with him.

    Thank you for creating a very good reference piece that I'm sure I will link to in the future.

    1. Hi Jer,

      Glad you like it. I see a constant stream of arguments for taking CPP at 60 that just don't hold water.

  2. My husband died unexpectedly at 59. I was 56 so I got survivor's benefit based on his CPP contributions. When I approached 60, I asked my advisor if I should start my own CPP. Since I had retired at 55 and spent most of my working years paying less than the maximum, my benefits were going to be very reduced. He did the numbers and determined that in my case, since the combined benefit can't exceed the maximum payout, there was no benefit to me to postpone starting, so I took my CPP at 60. I often wonder if his calculations were correct, but once you make the decision to start, you can't change your mind. So really do a lot of research if you are in a position like I was. As soon as I started my CPP, my survivor's benefit was reduced and I think it will go down again when I hit 65.

    1. Hi Sandrider,

      Unfortunately, your advisor's reasoning doesn't make much sense to me. It's true that your CPP plus your CPP survivor's benefit is subject to a maximum, but that maximum adjusts if you didn't take CPP at 65. All the gory details are here:

      What you say about making sure what's best before starting CPP is very true. You can't change your mind.

  3. Hi Michael,
    I retired last August and will be 60 in October. I've read a lot of these articles and it seems most analysts believe 70 is the magic number to start drawing. A lot also say income for decades. Well, after 60, there really are not a lot of decades left. I paid into CPP all my working life and my employer matched it. We all know we will never get most of it back. I'm starting to entertain the idea of taking CPP at 60 and investing it, even if it is only going to earn me 4% in something like VRIF with DRIP, at least I'm getting more years of CPP in and will have added to my portfolio if I were to not be around much after 70 for example. What are your thoughts on this?


    1. Hi Greg,

      I'll have to disagree with "We all know we will never get most of it back." CPP is a well run system that invests far better than most Canadians do. The typical Canadian gets more back than they would have got by investing their CPP contributions themselves.

      Keep in mind that payments for CPP starting at 70 are more than double the size of CPP payments starting at 60. So, it doesn't take multiple decades for the larger payments to catch up.

      Another thing to keep in mind is that CPP payments are indexed to inflation. This means that the relevant investment return is whatever VRIF produces less inflation.

      The main reasons to take CPP early are that you don't have savings to live on now or you're sure you'll pass before you're 80. There are a few other less common reasons as well.

  4. Interesting. If I may suggest, at least a HEADS-UP for QC residents who get QPP instead of CPP. The regimes are similar but not identical. QPP does NOT have an extra provision for dropping out zero or low-income years between 65-70. Those years are included in the calculation, zero or not. And instead of 17% dropout , QC's Is 15%. Could make the "delay to 70" decision less attractive in QC, for those with insufficient dropout room. Needs number- crunching case by case, of course.

    1. Thanks for pointing out those material differences between CPP and QPP. I'm not up on QPP.