Taking CPP too early?

Couple of retirees walking in the sun

Why short-term gain can lead to long-term pain 


Is it worth the money to delay your Canadian Pension Plan (CPP) payments until the last possible moment? Respected Canadian Actuary and Author, Frederick Vettese believes that long-term gains make the wait worthwhile.

Age 65 seems like the right time to apply for CPP benefits because you should be eligible for the full amount after working so many years in the legal profession. However, Frederick Vettese, in his book, Retirement Income for Life, makes a compelling case for deferring CPP until the age of 70. He ought to know. Vettese is the Chief Actuary of Morneau Shepell. He’s a numbers guy by trade and here’s a quick summary of his conclusions. 

Defer payments and earn 42% more  

The Canada Pension Plan (CPP) formula is the same for everyone. If you have contributed to the plan and paid the maximum amount in 39 non-consecutive years, you qualify for the full benefit of $13,3701 a year, adjusted for inflation at the age of 65. However, if you defer your CPP payments until the age of 70, the government rewards you with a 42% increase in the amount of your payments. Even if you begin retirement at age 65 and rely on your savings for the first five years, the additional income that you receive by deferring your CPP payments should more than makes up that cost over time. 

Defer CPP payments and reduce risk

Investments held in personal accounts such as a Registered Retirement Income Fund (RRIF) or a Tax-Free Savings Account (TFSA) are subject to investment risk. In contrast, CPP benefits are guaranteed by the government for life. By starting to use up some of your savings between the age of 65 and 70, you effectively rebalance the risk level in your entire portfolio because the government is forced to assume more investment and longevity risk. 

Challenge your own assumptions

As a numbers guy, Vettese sees the deferral issue in black and white. In his book, Retirement Income for Life he calls it “a dream come true” because it “reduces the retiree’s risk and increases the actuarial value of the pension at the same time.” Yet, three persistent assumptions seem to be holding Canadians back when it comes to deferring CPP payments.

Knowledge. The notion that full CPP benefits begin at 65 is engrained in our national conversation. Many people simply don’t know that deferral is an option or how to calculate the advantages. 

Habit. Age 65 is often considered one of life’s unquestionable turning points. This is because this is when we are told to apply for CPP and it’s also when our Old Age Security (OAS) benefits kick in. It’s become more a matter of tradition that the outcome of smart planning. 

Bad advice. Sadly, some Canadians are convinced that taking government pension benefits early will allow more time for their personal investments to grow. While the logic is correct, the math is often flawed. Deferring CPP payments until age 70 can often result in a combination of payments from personal and government sources that may last significantly longer. 

Should you defer your CPP benefits until age 70?

Decisions about how to fund your retirement are critical and the consequences of your decisions will affect the rest of your life. 

Book a meeting today with your Lawyers Financial Advisor to discuss the best approach for you. While supplies last, we’ll even provide a free copy of Retirement Income for Life – Getting More Without Saving More so you can learn more about your retirement income options. 

September 6, 2018