Ottawa discourages taking early CPP

[Jon Chevreau]

http://www.nationalpost.com/news/story.html?id=1631145

Looks like those who opt for early CPP at 60 get benefit reduction of 36% instead of 30%. Waiting till 70 means 42% bump up compared to previous 30%.

Guess they want to keep us weary boomers in harness till we drop!

[Kathryn]

I read that this morning too.

Are there any advantages taking it early .. unless you've got a terminal illness and know you won't live well into your retirement years?

[steve41]

If you run the numbers, there will be a disadvantage to taking early CPP (even under the old rules). It relates, as mentioned, to your estate. Most people don't have the self control to delay taking CPP at 65, but the math argues they should. With these new rules, this will become even more apparent.

[CanadianCapitalist]

I wrote about this today on the blog.

Major Changes Coming to the Canada Pension Plan

I linked to the Department of Finance paper that explains the changes. It can be found here:

http://www.fin.gc.ca/n08/data/09-051_1-eng.asp

It looks like the Government isn't done with the tinkering. The Ottawa Citizen reported that more changes to the pension system may be coming.

[Ben]

Originally Posted by steve41

If you run the numbers, there will be a disadvantage to taking early CPP (even under the old rules). It relates, as mentioned, to your estate. Most people don't have the self control to delay taking CPP at 65, but the math argues they should. With these new rules, this will become even more apparent.

It seems that the major variable in determining whether to take CPP at 60 or 65 is how long you expect to live.

If you take it at age 60, and die at age 75, then you are probably further ahead financially.

If you take it at 65, and die at 95, then you are likely further ahead.

There is a breakeven age/life span (let's say 80) where the financial benefit of both options intersects.

Unfortunately, we cannot predict how long we will live (we can make educated estimations based on several factors).

I do believe there are calculators out there that can tell you what your breakeven age is, ie. what age you would have to live to in order for taking CPP at 65 to be the most valuable option. These models need a lot of assumptions on inflation/interest rates in order to compute the age.

Of course, we all like to think optimistically, so might be inclined to choose 65 option.

Grabbed the first link I found on the subject.
http://www.edmontoncga.com/images/site/chris.pdf

[steve41]

For an example.... a 59 yr old with 500K in his rsp who takes cpp at 65 will make it out to (die broke at) 95 with an after tax income of $29782. (based on BC taxes, inflation at 2% and a mkt growth rate of 4%)

If he opts to take his cpp at 60, he will run out of capital 2 years earlier at the same income level. The intersect point being roughly at age 79. In other words, if he opted for cpp at 60 and he died before age 79, his estate would net more... dying after 79 means his estate would suffer.

Mind you his life expectancy is 82 if he is a non-smoker, 77 if he is a smoker, so I guess the rule is: smokers should opt for cpp at 60, non-smokers at 65.

[apples]

well well well, just as most of us were told that the CPP is well and sound for the next few decades, here comes the change in rules...

in time, i wonder if this will also affect all the DB plans that are integrated with CPP - i.e. the bridge benefit one receives before 65 (usually 55-65) for most of the public sector pensions may change as a result...

on the note of break-even point of taking CPP early - 77 was the magic age we concluded in a pension seminar i attended, that is before all this is happening of course.

[Ben]

Originally Posted by apples

well well well, just as most of us were told that the CPP is well and sound for the next few decades, here comes the change in rules...

in time, i wonder if this will also affect all the DB plans that are integrated with CPP - i.e. the bridge benefit one receives before 65 (usually 55-65) for most of the public sector pensions may change as a result...

on the note of break-even point of taking CPP early - 77 was the magic age we concluded in a pension seminar i attended, that is before all this is happening of course.

There can be no one single magic age for the break even. It depends on, among other things, interest rate assumptions used in time-value of money calculations.

77 is only one output from the set of assumptions that were used for simplicity in your seminar. Probably quite reasonable assumptions, of course, but assumptions nonetheless.

The link I attached to my original reply seems to be a simplistic illustration that does not use time-value. There are probably better analyses out there.

[Spidey]

This is not good news for those of us who wished to retire early. It seems that the top end of the baby boomers had everything in their favour - cheap housing when they purchased, booming housing when they downsized, booming stock market while saving and if lucky they moved to mostly income investments before the latest crash, good job market, etc. etc. Meanwhile the bottom end of us baby boomers seem to be getting the shaft.

I know, I'm whining. I admit it.

[ethos1]

For what its worth for those who think waiting till they are 65 to collect

Two years ago at 60 I started to draw my CPP which at that time was just on $600/mth, I also chose not to have the feds take off any tax

Each month the $600 (now more) goes straight into my RRSP account & since I am still working (& plan to do so till 65 or beyond) I am also not paying the $2000+ per year in CPP premiums which I figure has given me a tax free $2000 year salary increase

On a rough calculation doing it this way the actual CPP on a yearly basis comes in at $600 x 12 = $7200 + the $2000 saved on the premiums = $9200/yr ($766/mth) + the net tax advantage on putting the lot into an RRSP

By taking it early I reckon the catch up age is about 85 & you never know, it may also be possible to get more GST credits as well possibly qualify for some GIS at 65 more than what someone who decided to wait till 65 to collect their CPP