If you’re thinking about retirement, and you’ve paid into the Canada Pension Plan (CPP) over time, you may be wondering when you should start taking your CPP retirement benefits: before age 65, at age 65 or after age 65.
Note: For residents of Quebec, the information in this article is equally applicable to the Quebec Pension Plan.
If you’re married or have a common-law partner, as a household you may be planning on receiving two CPP benefits. What’s the right choice for your situation? Here are some things you should take into account as you’re making your plan.
How is the CPP benefit calculated?
Your CPP retirement benefit is based on the contributions you’ve made from your employment income to the CPP over your working years.
In January 2022, the average monthly amount received by new recipients starting at age 65 was $779.32, and the maximum monthly amount for those who take the benefit at 65 is $1,253.59 for 2022. See the most up to date CPP payment table. The monthly amount is based on the number of years you’ve contributed and your annual “pensionable earnings” — most people don’t receive the maximum.
(Note that CPP contributions are payable only on salary income, so if you’re an incorporated physician who has received only dividend income, you will not have paid into the CPP and you won’t be able to collect it.)
How will my age affect the CPP benefit I receive?
If you’re eligible for a CPP retirement benefit, you can start collecting it as early as age 60, or delay all the way until age 70.
Once you’ve started your CPP benefit, it will increase each year with inflation as measured by the consumer price index, or CPI. If the CPI goes up from year to year, your CPP benefit will be increased as well (if the CPI goes down, your benefit will not be decreased).
Taking CPP at age 65
The CPP benefit calculation is based on the amount you’d receive if you started the benefit at age 65. That is, your age-65 amount is the reference point for decreases before age 65 and increases after age 65.
Taking CPP before age 65
If you start the benefit before age 65, you’ll get a smaller lifetime benefit. Each month you start the benefit before age 65 decreases the age-65 amount by 0.6%, or 7.2% per year. If you start the benefit at age 60, you’ll receive 36% (7.2% x 5 years) less than if you started it at age 65.
While the monthly benefit will increase with increases in the CPI over time, it will always be smaller than if you had opted to start at age 65 or later.
When should you consider taking the CPP earlier than at age 65? This might be the right option if you have a shortened life expectancy or if you require the income to meet daily spending needs.
Delaying CPP past age 65
Each month you delay taking the CPP benefit past age 65 increases your CPP benefit, in two ways:
- The benefit will increase for each month of deferral. You get 0.7% of the age-65 amount per month (8.4% per year of deferral), for a gain of up to 42% if you defer from 65 to 70.
- When your CPP benefit is calculated, all of your past earnings are updated to current values using what is known as the “yearly maximum pensionable earnings” (YMPE), a measure of Canadian wages each year. Earnings from previous years are updated to the YMPE in effect when your benefit starts.
Because wages tend to rise above the rate of yearly inflation, waiting to claim your retirement pension means you’ll benefit from these higher-than-inflation increases, too. In fact, research shows that adding wage increases to the 42% deferral increase can lead to a CPP benefit that’s nearly 50% larger at age 70, compared with taking it at age 65.
What is the best choice for physicians and their families?
Should you wait until age 70 to start your CPP? Keep in mind that many physicians have few other sources of guaranteed, indexed and lifetime retirement income, but instead will generate retirement income from investments whose value can fluctuate with market returns.
The CPP can provide a stable base of retirement income that’s not subject to market fluctuations. For physicians who want to increase the amount of secure, inflation-protected retirement income they receive, waiting until age 70 generally makes the most sense.
Another consideration is health. For physicians who expect to live to average life expectancy or beyond, deferring their CPP as long as possible usually makes the most financial sense because of the increase in the benefit they’ll experience, compared with taking it at age 65 or earlier.
The ability to choose when to start your CPP benefits gives you an opportunity to make this decision in concert with decisions about the rest of your retirement income options. It’s wise to include your CPP benefits in your personal retirement income plan.
Most physician families have multiple retirement income sources, including RRSPs, TFSAs, corporate distributions, other savings and Old Age Security. Coordinating these income streams based on your personal goals is integral to a solid retirement income strategy.
For a personalized retirement income plan that takes into account your goals, needs and circumstances — including the impact of CPP benefits on your household — contact an MD Advisor*.
*MD Advisor refers to an MD Management Limited Financial Consultant or Investment Advisor (in Quebec), or an MD Private Investment Counsel Portfolio Manager.
1 Bonnie-Jeanne MacDonald, Get the Most From the Canada & Quebec Pension Plans by Delaying Benefits: The Substantial (and Unrecognized) Value of Waiting to Claim CPP/QPP Benefits. Published in December 2020 by the National Institute on Ageing and the FP Canada Research Foundation.
The above information should not be construed as offering specific financial, investment, foreign or domestic taxation, legal, accounting or similar professional advice nor is it intended to replace the advice of independent tax, accounting or legal professionals.