Jim Yeh, an advisor on wealth, retirement and personal finance, recently published some instructive commentary on the case for taking CPP early. Paraphrasing Mr. Yeh’s point of view, I agree with him that there’s a case for taking CPP early – in most instances. Here’s why:
Starting January 1, 2012, Canadians became entitled to start collecting CPP as soon as they turned 60 and – under the new rules – they no longer had to stop working. The catch is that as long as you’re working, you must keep paying into CPP even if you are collecting it. The good news is that paying into it will also increase your future benefit.
Do the math
Under the old rules, the decision to collect CPP early was based on a calculation of the break-even point. Before 2012, this break-even point was age 77. Mr. Yeh offers an example with the break-even point based on 2015 values:
Janet and Beth are twins, both qualifying for the same CPP of $502 per month at age 65. Beth decides to take CPP now at age 60 at a reduced amount while Janet decides she wants to wait till 65 because she will generate more revenue by deferring the income for 5 years.
Under CPP, Beth can take income at age 60 based on a reduction factor of 0.58% for each month prior to her 65th birthday. Thus Beth’s benefit will be reduced by 34.8% (0.58% x 60 months) for a monthly income of $327.30 starting on her 60th birthday.
Fast-forward 5 years. Beth and Janet are both 65. Over the last 5 years, Beth has collected $327.30 per month totaling $19,638. Beth has collected $19,638 before Janet has received a penny. Now Janet is will get $502 per month or $174.70 per month more than Beth’s $327.30.
The question is how many months does Janet need make up the $19,638? Answer: 113 months. Before age 74.4, Beth is ahead of Janet. After age 74.4, Janet is ahead of Beth.
Taking CPP early is an actuarial gamble, but probably one worth taking. Please contact me if you would like to discuss the issues raised further.
Geoff Funke, Senior Wealth Advisor, The Funke Group, 604.535.4721.