The Canada Pension Plan (CPP) provides Canadians with a base of income for retirement. The standard age to begin receiving CPP is 65. However, you have the option to take CPP as early as age 60, often referred to as early CPP. While early CPP provides retirees with an income source sooner, it comes at a cost of reduced monthly payments. Understanding the key pros and cons can help you decide if early CPP is the right choice.
The Pros of Taking CPP Early
You Gain an Income Source Sooner
The main appeal of early CPP is the ability to collect payments up to 5 years sooner than the standard age. For those looking to fully retire before age 65, early CPP can provide you with a consistent monthly income instead of relying solely on personal savings. Even if you plan to work part-time, CPP can supplement other earnings.
It Can Bridge You Until Other Income Kicks In
Early CPP can also act as a temporary income source until other payments begin. For example, taking early CPP at 60 can give you an income boost until your private pension or other benefits are available at 65. This can be preferable to depleting personal assets.
You Have More Savings Preservation
With early CPP payments coming in, you can withdraw less from your savings and investments in those years leading up to 65. This allows your portfolio to continue growing rather than draining your principal. Even with a reduced CPP amount, you may receive more overall income than if you relied entirely on savings in your 60s.
It Allows You to Delay OAS Until Age 65
Another retirement benefit, Old Age Security (OAS), can also begin as early as 60. However, delaying OAS until 65 results in a higher monthly payment. By taking CPP early, you can let your OAS keep accruing while still having retirement income. This strategy allows you to maximize both benefits.
You May Get the Same Total Amount Depending on Longevity
Though early CPP results in lower monthly payments, you may receive the same total lifetime amount depending on how long you live. By getting payments earlier between ages 60 to 65, you make up for the reduced monthly amounts if you have an average or longer-than-average lifespan. Living longer means early CPP can lead to more total income.
It Can Provide Peace of Mind
For some retirees, having a guaranteed source of monthly income gives peace of mind. Knowing your fixed living expenses are covered takes pressure off personal savings and market-based investments. This assurance can be especially valuable during periods of market volatility and uncertainty.
The Cons of Taking CPP Early
Your Payments Are Reduced
The main trade-off of early CPP is receiving a reduced amount each month. For every month you take CPP before 65, your benefit is decreased by 0.6%. This actuarial adjustment is permanent, applying to all payments received over your retirement. By taking CPP at 60 you face a 30% reduction compared to if you waited until 65.
You May Receive Less Over Your Lifetime
While early CPP can give you the same total amount if you have average longevity, you run the risk of reduced lifetime income if you pass away earlier than expected. If you only live until 75 for example, the reduced monthly payments of early CPP can mean thousands less received over retirement.
It Could Hinder Travelling or Relocation
Since CPP is a Canadian federal program, payments are based on residing in Canada. If you take early CPP but then spend extended time abroad, travelling or living in another country, your payments could be impacted, suspended, or require repayment if the situation is not properly managed.
Future Payment Increases May Be Smaller
Even after starting CPP, your monthly amount can still rise each year based on the cost-of-living adjustment. However, since early CPP starts at a reduced level, the dollar amount of future increases will be lower compared to if you began receiving standard CPP at 65.
It Reduces Contribution Room for RRSPs
Having early CPP income can reduce the amount you are allowed to contribute to an RRSP. Since contribution room is based on earned income, CPP payments count against that amount. This could limit your ability to maximize RRSP contributions in early retirement years.
Higher Income in Your 60s Could Reduce Payments
If you have high earnings from employment or self-employment while collecting early CPP, your benefit payments may be further reduced. CPP is designed to replace pre-retirement income, so if you continue substantial earnings, payment amounts are impacted.
You Lose Compound Growth if Investing the Difference
If you invested the difference between standard and reduced CPP payments each month, it would have many years until age 65 to grow compounded. By taking early CPP, you miss out on this potential investment growth, which could counteract the value of receiving payments sooner.
It May Affect Qualification for Income-Tested Benefits
Receiving CPP before 65 could impact your eligibility for other income-tested benefits and credits you may qualify for such as the Guaranteed Income Supplement. The additional CPP income could reduce payments of other government programs.
You Need to Adjust Your Financial Plan
When planning for early retirement, you will have to account for both reduced CPP payments and potentially less room for RRSP contributions. This may require save and invest more diligently in your younger working years to have adequate assets.
Weighing the Pros and Cons of Early CPP
Deciding whether to take early CPP ultimately depends on your financial situation and retirement plans. Here are some key considerations when making the choice:
- If you can comfortably retire before 65 without requiring CPP, then waiting until the standard age to receive a higher amount may be preferable.
- If delaying the start of retirement is not an option, then early CPP provides a monthly income source you may highly value.
- Your life expectancy and health can influence if maximizing monthly or lifetime payments is ideal. Those in poor health may benefit more from early CPP.
- If you have significant personal assets saved up already, opting for standard CPP to receive greater monthly income may be affordable.
- Working longer and having additional earnings between 60 to 65 can change the early CPP advantage since payments are reduced.
- Your view on travelling abroad extensively while receiving CPP can impact the choice between early or standard start dates.
- Review all your retirement income sources to determine if reduced CPP will hinder your cash flow or if the trade-off is manageable.
- Consulting an experienced financial planner can help analyze your specific situation to decide if early CPP works for your retirement goals.
While early CPP has benefits, it is not ideal for everyone. But used strategically, it can be a key source of income in early retirement. Being aware of all the pros and cons allows you to make the most informed decision.
[saswp_tiny_multiple_faqheadline-0=”h4″ question-0=”Q1. What is the minimum age to take early CPP?” answer-0=”A1. The minimum age to take early CPP is 60 years old.”headline-1=”h4″ question-1=”Q2. How much is CPP reduced if taken early?” answer-1=”A2. CPP is reduced by 0.6% for each month taken before 65. This equals a 30% reduction if taken at age 60.” headline-2=”h4″ question-2=”Q3. Does early CPP affect OAS eligibility?” answer-2=”A3. No, taking early CPP does not impact eligibility for OAS, which can also be taken as early as 60.”headline-3=”h4″ question-3=”Q4. Can you return to work while collecting early CPP?” answer-3=”A4. Yes, you can continue working while receiving early CPP. However, high earnings can further reduce your CPP payments.” headline-4=”h4″ question-4=”Q5. Will early CPP reduce my RRSP room?” answer-4=”A5. Yes, CPP payments received before 65 reduce the amount you can contribute to an RRSP.” headline-5=”h4″ question-5=”Q6. How long do you need to live abroad to affect CPP?” answer-5=”A6. CPP payments can be impacted if you spend more than 6 months per year outside Canada.”
headline-6=”h4″ question-6=”Q7. Does early CPP change my OAS clawback?” answer-6=”A7. No, the OAS clawback threshold is not affected by when you choose to take CPP.”headline-7=”h4″ question-7=”Q8. Can I split CPP with my spouse?” answer-7=”A8. Yes, CPP payments can be shared between spouses to maximize both of your retirement benefits.” headline-8=”h4″ question-8=”Q9. Is it better for my wife to take CPP early?” answer-8=”A9. It depends on both your situations. A financial advisor can analyze how to optimize CPP for couples.” headline-9=”h4″ question-9=”Q10. Can I change my mind after applying for early CPP?” answer-9=”A10. In most cases, once you begin receiving early CPP you cannot revert your decision.”