silvergoldmagazine.ca
MONEY MATTERS
TAKING CPP EARLY: YES!
– By Jim Yih
January 1st, 2012 was an important date for Canada Pension Janet and Beth are twins. Let’s assume they both
Plan because that’s when the new CPP rules came into effect.
I’ve written extensively about the issues around taking CPP
early. It’s one of the big conundrums of Canada Pension Plan
and my conclusion is that it still makes sense to take CPP as
early as you can, in most cases. Here are four questions to ask
yourself in determining if it makes sense to take CPP early.
Will you still be working after 60?
Under the old rules, you had to stop working in order to
collect early CPP. The work cessation rules were confusing,
misinterpreted and difficult to enforce so it’s probably a good
thing they will be a thing of the past.
Since January 1, 2012, you could start collecting CPP as
soon as you turn 60 and you no longer had to stop working.
The catch is that as long as you’re working, you had to keep
paying into CPP even if you were collecting it. The good news
is that paying into it would also increase your future benefit.
What is the mathematical break-even point?
Under the old rules, the decision to collect CPP early was
really based on a mathematical calculation of the break-even
point. Before 2012, this break-even point was age 77. With
the new rules, every Canadian needs to understand the math.
Here’s the example of twins that I used before, with the
break-even point updated to 2015 values.
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This math alone is still a very powerful argument for taking
CPP early. Another way to phrase this question is, “How long
do you expect to live?”
If you want to see the new break-even points for 2012 to
2016, visit Taking CPP early: The new break-even points
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Let’s fast forward 5 years. Now, Beth and Janet are both
65. Over the last 5 years, Beth has collected $327.30 per
month totalling $19,638. In other words, Beth has made
$19,638 before Janet has collected a single CPP cheque. That
being said, Janet is now going to get $502 per month for
CPP or $174.70 per month more than Beth’s $327.30. The
question is how many months does Janet need to collect more
pension than Beth to make up the $19,638 Beth is ahead?
It will take Janet 113 months to make up the $19,638 at
$174.70 per month. In other words, before age 74.4, Beth
is ahead of Janet and after age 74.4, Janet is ahead of Beth.”
Note that under the new rules, the mathematical breakeven point will change again in 2016, when the reduction
factor will increase from 0.58% per month to 0.6%. So for
the above example, in 2016, Beth would get $321 instead
of $327.30 at age 60. This will move the break-even point
from age 74.4 to age 74.
A
Senior’s Advisor
Who Cares
Léony deGraaf Hastings, CFP, EPC
qualify for the same CPP of $502 per month at age 65. Let’s
further assume, 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 get more income by deferring the income
for 5 years.
Under Canada Pension Plan benefits, 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.
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When will you most enjoy the money?
When are you most likely to enjoy the money? Before
age 74 or after age 74? Even though the break-even point
is three years sooner, for most people, they live the best
years of their retirement in the early years. I call these the
‘go-go’ years (which is one of three phases of retirement:
See www.retirehappy.ca/three-phases-of-retirement).