Hey there! This is Thomas!
Better Mindset | Better Life!
Last week,
i got a huge support and feedback
about the government benefits
You guys been asking great questions
especially on the CPP payout.
And I really do appreciate it.
Thank you!
So in today’s video,
I am going to share
Whether if you should take Canada Pension Plan out early or later?
I will look at it in three different angles and then
share my thoughts on when should we apply for the CPP
Let's jump into it!
Canada Pension Plan, known as the CPP
is a pension benefit backed by the Canadian government
to provide a steady income for Canadian’s retirement
You can only receive payments
if you have worked and made contributions to the plan
The amount you receive depends on
how much and how long you contributed.
In 2020, the maximum CPP benefits is $1,175
The standard age to start taking CPP is at age 65
But you have the flexibility
to withdraw as early at age 60,
you will get 36% less compare getting it at age 65
vice versa,
you get 42% more if you delay the benefits to age 70
So the questions is
Should I take CPP early at age 60?
wait until the standard 65 years?
or defer CPP benefits until I’m 70 years old?
First thing to consider is
how urgent do you need the CPP benefits…
If you are in your 60’s,
still having a mortgage,
or having some high credit card debt that you trying to pay off
Then might be
it’s an advantage to take the CPP early,
because that 5 years of extra income
could help paying your debts faster
so when you are officially retire,
you have most of the debt paid off
Again,
even though there is a reduction on the payout
when you are taking pension plan early,
But you are collecting five years longer
Here is a chart you can compare.
As you can see,
the breakeven age to take CPP out at age 60 is at 74.
That means if you start 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.
Statistic Canada shows the average life expectancy
for male is at 80 years old where female is at age 84
so your health, family traits, lifestyle
are things to consider in the retirement.
And what happens to your CPP when you are gone then?
I will explain that in the later points.
The second thing I will consider is
the big picture of the entire retirement cashflow
What this means is
Canada pension plan is a source of income for retirement,
but should not be
the ONLY source of retirement income.
A well planned Canadian should have money in a three pillar system
Like a 3 legged stool where
leg #1 is the personal saving
such as RRSP, TFSA, real estate.
leg #2 is the workplace benefits
like the work pension and work rrsp
The last leg is the government benefits,
such as the Canada Pension Plan,
Old age security and Guarantee Income Supplement
The downside is most of them are consider as taxable income,
After all years of hardworking and saving,
You might end up be paying even more tax
than before without a proper planning.
And the taxable income might affect the OAS payout as well
A good retirement strategy should be able to fund your lifestyle
without giving too money back to the government
So getting the CPP early will have a better chance
to avoid OAS claw back
and a better chance to get GIS too
if your total taxable income is low
But Thomas
won’t I get taxed more
if I am both working and collecting CPP at same time.
That's true!
But if you don’t the need the cpp portion right away,
you can take the CPP out
and put it into the RRSP to even out the taxable income.
The last reason to consider is
What happen to the CPP money when you are dead?
I will share two stories to let you understand better:
First story, we have Andrew here
Andrew is single,
he worked very hard for the past 40 years and recently retired.
he been collecting CPP since then.
Fast forward, 10 years later, he passed away,
his asset which includes his work pension plan
and his rrsp will be paid in full,
100% going into his estate.
However, for his CPP,
the government will keep the remaining
and issue a one time $2,500 cheque to his estate.
Yes, his estate does not get to keep the unused portion
The second story is about Henry and Mary.
They are both retired as well and been collecting CPP
One day, Henry passes away,
Mary will get a portion of Henry’s CPP as a survivor benefit.
Notice I used the word: portion
Meaning the survivor benefits can only receive
60% of deceased person’s CPP payout.
And It cannot be more than the CPP maximum pay out.
In order words,
if Mary is collecting the max cpp payout already,
She could not get any extra when Henry is gone.
And by the time Mary passes away.
The governments stop paying CPP
and only issue a $2,500 cheque to the family
So base on the three reasons above,
I found it very compelling to withdraw CPP early at age 60
Spend it for your vacation when you are active,
Or save it for future use
The idea is you been work hard and save hard into the plan,
if you don’t use it, you don’t get to keep it
But remember, this is not a one size fit all solution.
Every one has their own definition of retirement,
Will you be joining a golf club?
Do you foresee downsizing your home?
Or are there health concerns?
best is to contact your financial planner for more accurate planning.
What do you think about this video?
Do you think it make sense to withdraw CPP early?
Leave your comment below
This is Thomas!
If you want more money related video like this one,
Click the subscribe button now
And I will see you next week!