The most basic financial goal for any individual is that you never want to outlive your savings. In your quest to build a nest egg for yourself and your family, you dedicate most of your lifetime to education, upskilling, building a career and creating financial stability for the present and future. However, the fact remains that as you near your retirement age, you may have to rely on your Registered Retirement Savings Plans (RRSPs) and Canada Pension Plan (CPP) for a substantial portion of your retirement income. In the case of CPP, your pension amount will depend on the amount and number of years you contributed to the plan, and your age when you start collecting CPP benefits.
While the standard age to begin receiving your pension is when you are 65, a large percentage of Canadians start collecting their CPP as soon as they turn 60.
- For every year of an early start, your retirement pension will be 36% lesser than the amount you would receive if you start collecting at 65.
- For every year of deferring your CPP benefits, you will receive 42% more pension than if you took it at 65 years of age.
As you head into your golden years, are you facing a dilemma about when to start collecting your CPP? The experienced and qualified financial planners at Thomson Schindle & Green (TSG) offer different perspectives and discuss both, early and late collection scenarios.
Take Your CPP When You Turn 60, or 65, or 70 or Beyond?
Like any government pension plan, the CPP computation is complicated; not only due to the changes in the average national wages, but also due to the many rules and dropout provisions in the plan. Simple math will tell you that you will enjoy a significantly higher pension amount, if you defer your CPP collection to 70 or 75 years of age. However, when it comes to retirement finances, a ‘mathematically correct’ scenario may not necessarily translate into a ‘financially wise’ strategy for every individual. Here are some aspects to consider, in order to decide what works best for you and your family.
- Lifestyle: If you ignore the pure mathematics of a deferred collection and think about your lifestyle choices as you age, you are more likely to spend on travel, dining out, or buying a new vehicle when you are 60, vis-a-vis when you are 80 or 85. Simply put, $1 is worth more to a younger, healthier individual, than an older adult with health or other challenges. If this resonates with you, starting your CPP early may make more financial sense than delaying the collection.
- Life Expectancy: The million dollar question here is, ‘Do you know how long you will live?’ While nobody can make an accurate estimation, your current health and family history may offer some indication. If you think you are not likely to make it till 75 or 80 or beyond, taking your CPP early, at 60 or 65 may be more beneficial.
- Savings and Cash Flow: What is the situation with your cash flow and savings? Are your daily needs under financial stress? Will you have an enriched lifestyle with the added cash flow from CPP? Depending on how you respond to this question, it may be wise to collect your CPP early or late.
- Linkage to OAS: Is there a possibility that the added CPP income will push you into the Old Age Security (OAS) clawback zone? Even if you do not fall under that taxable income bracket at present, consider the possibility that the passing away of a spouse could mean no income splitting, pushing you into that range by default. If you are certain that you will not reach that income bracket, then deferring CPP is a better bet than collecting early.
- Other Retirement Benefits: Do you have any other retirement benefits or pension plans that could balance off your CPP? If you are opting for an early collection for any of those plans, you may have the option to defer your CPP, without compromising your lifestyle.
Trusted Financial Planning Advice to Optimize Your Retirement Finances
At TSG, we understand that financial decisions are often emotional ones. While we may come to you with all the spreadsheets, data points and analysis that can help you take the right calls, we do not believe in a one-size-fits-all approach. Our experienced planners will take into consideration your individual financial goals, priorities and comfort levels and offer tailor-made advice to optimize your retirement finances. Our Alberta brokers have been serving residents in Calgary, Medicine Hat and Brooks with insurance services and financial planning services since 1985.
Want to sweeten your retirement years and make the most of your CPP benefits? Take control of your finances by speaking to an experienced and licensed professional from TSG Insurance.