Hey, this is Thomas!
the Canada Pension Plan or CPP is one of the
primary income sources
that people rely on for income.
So it makes sense some of
the most common questions
I get around for retirement is have to do with CPP.
Should I take out the cpp early at age 60?
Or should I wait until 65, which is the common age?
Or should i wait till 70 so I can get a larger payout?
In this video,
I'll be talking about when is the best time to take out
your Canada Pension Plan for maximum benefit
because the answer might surprise you.
first, let's do a quick recap
of what the Canada Pension Plan is.
I’ve talked about CPP in other videos
so for a more in-depth look,
please check out those videos.
CPP is a monthly,
taxable benefit deducted from your salary
by the Canadian government that is designed to
replace part of your income when you retire.
You can kind of think of it as a kind of forced
savings account the government sets up for you.
Now if you are employee,
each year, both you and your employer will each
contribute $3500 max to your CPP program.
If you are self-employed,
then you need to contribute both portion
which is $7000 from your pocket into the program.
The amount you get in CPP is going to depend
on how many years you have worked in Canada
and how much your annual salary is.
Now up until April 2022,
the average CPP pay out at age 65
is around $728 per month.
The Canadian government website has a free
retirement calculator that you can use to calculate
how much CPP you'll receive when you retire.
Keep in mind,
Your CPP doesn't just automatically
show up in your bank account.
You will usually receive a letter around
age 59 or 64 to give you an update.
Then you can follow the instruction
for the application.
Also if you are age 65 and above and still working.
You have the option of
not contributing into the CPP.
CPP only counts your best 39 years
of contribution in your career.
Alright, Now let's get into
when is the best time to take out your CPP.
If you wish to take your CPP
before your 65th birthday
for every month that you start early
you will get 0.6% less.
Say If you take your CPP one full year earlier at 64,
you're going to get 7.2% less,
and which means if you start at 60,
your will get 36% less.
For easy math purpose,
Let's say your CPP is supposed to be $1000 at 65.
However, if you start early at 60,
you'll receive around $640.
It sounds a lot less,
but don’t forget you get it 5 years earlier.
We will do a comparison later on.
Now on the flip side,
if you were to start any month
after your 65th birthday,
you would get 0.7% bonus for every month.
Again, let's say you take your CPP out at the age of 66,
then you receive an 8.4% increase.
This also means if your CPP is delayed to 70,
you would get a 42% more which would be $1,420.
This is a 42% guarantee.
Hard to find a 42% guarantee increase in this economy.
So in what scenario does taking CPP early
make sense or delay it until later dates.
The first thing and most important thing
you should ask yourself is:
what is your actual retirement income
and whether you need the CPP to start immediately
or you can live comfortably without it.
If your initial answer is yes,
you might consider getting CPP early right now,
Also, what is your current debt and expense.
Can you use the early CPP payment
to pay off the mortgage faster,
help with your rent payment.
Or clear some of the debt?
Especially in our generation, we are at age 60,
not only we have to still pay for the
mortgage, car, family expense.
We also have to pay for kid’s education.
Or maybe even our parent’s medical bill.
So having cpp benefits earlier,
not only able to pay off the debt faster,
but also can as a reserve
so you have more liquidity in your saving.
A quick comparison,
If we look at this chart,
you can see that the breakeven age
of a CPP taken at age 60 is 74.
That means if you starting withdrawing at 60 years old,
you are still ahead of the game before you reach 74.
And if you invest the money instead of spending it,
you can even delay the breakeven age.
A further spin on that
Because CPP is a taxable benefit,
what if I decide to take out the cpp earlier
and put it into the RRSP.
Since RRSP can reduce taxable income.
They will simply cancel each other out.
You might ask why bother doing it?
because this has to do with the next point.
the second thing you should be considering
is your health and life expectancy.
According to Stats Can,
the average life expectancy for a man is 85 years
and for a woman it’s 87 years.
So Using the previous example,
If your current health is poor,
like you're a heavy drinker or a smoker or
if your family has a history of heart problems
and don't live long lives,
then maybe taking your CPP out early is better
so you can enjoy the benefits earlier.
because the worst part of CPP is when you pass away.
Your spouse gets very little of
your CPP hare or even close to none.
Or the other hand if you are the remaining spouse,
once you pass away,
the government will not pay out
the rest of your CPP to your family.
That’s why sometimes it’s a good idea
to put into the RRSP. At least.
That money can definitely give it to
your beneficiary instead of the government.
alright let’s talk about what scenarios
should I take it out later at the age 70 then.
For obvious reason,
when you don’t need the CPP benefits in rush.
And in the meantime,
you are not an investment savy person.
With the current market volatility,
each year we delay CPP,
you get 8.4% guarantee return.
That’s better than a lot of investment nowadays.
Next reason is more complicated
and require a little more math work
And that is how many and how much
your taxable income will be during
between age 60 to age 70.
For example: most of the people nowadays
are still working in their 60s ,
so employment income is 100% taxable,
there could be rental income,
another 100% taxable.
What if they decide to take RRSP or pension out
early because they don’t want to get tax later.
So with the $1000 CPP,
it can be easily tax at 25% to even 40%
if they have the above income.
Tax is one issue. and let’s not forget at age 65,
we can also qualify for Old Age security,
which there is a claw back
OAS Clawback means the government asking you
to pay some of that money back to them if
personal income is more than $80,000 per year
Or some people did the
retirement planning well enough,
they only have non taxable income.
Like having a million dollars in their TFSA.
Because it’s not considered as income,
they can even be qualified for GIS,
guarantee income supplement,
which is additional money.
Therefore,
certain people might decide to delay their CPP,
collect their OAS and GIS between age 65 to 70
Then start taking out CPP to maximize their income.
You might think it’s unfair,
but this can be done with proper planning.
So again, this is why it's always good
to do some retirement projection,
just so you have an idea what
your clawback will likely be,
if there's any.
But let’s not forget,
say you able to take $1420 instead of $1000 at age 70,
if you pass away at age 75,
all the CPP is going back to the government.
So here you really have to ask,
what is your plan from now all the way
until retirement and what you want to accomplish.
Do you want to spend more time with
your family or do you want to sail the world?
what is on your retirement list?
These are questions only you can answer and will
help you decide when you need the money the most.
The next thing on the list is
how many additional streams of income do you have
to supplement your CPP?
The most common streams of revenue are your
active income, business dividends,
and savings like RRSP, TFSAs, pension, stocks,
and rental income are just some examples.
You should know all the income streams and
which one you want to prioritize and which one you
want to delay before you consider your CPP payment.
so to wrap it up, I want to throw you a scenario.
And leave your answer in the comment box below
Let’s say you are in a contest,
and you are at the last stage.
You were given two choices:
Where A is you get $10,000 and
you can walk out with that money.
Or B you can double it or nothing.
So my question to you is:
Would you rather take a guaranteed $10,000
or a 50/50 chance at $20,000?
Remember there is absolutely no right or wrong answer,
I just want to hear it from you.
Alright, This is Thomas!!
Thanks for spending the time with me!
I will see you in the next video!