Why I Won’t be Deferring CPP to Age 70
The latest trend in the financial media is to try to convince retirees to postpone taking their CPP payments until age 70. It is especially urged on women who, statistically, have a longer lifespan. The arguments may be sound. So, why would I give up a 42% payment increase? Because it doesn’t suit everyone.
Look at any financial site and you’ll see big debates about whether to take your CPP benefits early, at 65, or defer to 70.
Related: A Retirement Income Planning Tool
Why I didn’t take early benefits
As we know, eligible Canadians can opt to start receiving benefits as early as age 60 at a reduction of 0.6% each month.
Statistics tell you that a lot of people take it early.
CPP payments are based on your Pensionable Earnings.
Typicall for women my age, I had very few years of earning the maximum pensionable earnings (YMPE). There were several years of unemployment when my children were young and when I was attending school. I had years of lower income from part-time work and partial years.
My “normal” benefit at age 65 is not that high. Up to a 36% reduction would be a big hit – for the rest of my life. I was working part-time, and I could earn the same amount by working just a few more hours a week.
Early payments wouldn’t work for me.
Why I won’t defer benefits
If you postpone taking CPP benefits till after age 65, payments will be increased by 0.7% for each month you delay up to 42% at age 70.
That’s a strong incentive for deferring payments past 65.
There are several compelling reasons given by financial advisors for waiting.
Reason #1 – Longevity
Using longevity statistics retirees – especially women – will maximize their total CPP payments by waiting until age 70.
I guess statistics don’t lie, but I didn’t take longevity into account when I made my decision, even though my father passed away at age 93 and my mother is still kickin’ at age 90.
It’s just not persuasive enough to convince me to delay.
Reason #2 – Save tax and OAS clawbacks
Withdrawing from your RRSP/RRIF before age 70 fills the income gap. Using modest drawdowns incurs less tax and minimizes OAS clawbacks. When mandatory withdrawals must be made, your RRIF account will be much smaller and maybe almost depleted.
I don’t anticipate just living off the earnings from my retirement savings. I fully expect to dip into my capital at some point in the future. But, I’m not really willing to spend most of my nest egg before I turn 70. Maybe there’s a little fear there, but I’ve always needed to see a “cushion” for just-in-case.
To save on tax I can split my RRIF payments with hubby and the $2000 pension tax credit will be available for both of us.
Reason #3 – Risk of diminished mental faculties
What if your mental or physical health starts to deteriorate at age 80 or older?
The issue of survivorship is never mentioned in these discussions. If you are a couple and you draw down your RRSP/RRIF in the early years, the financial hit when one of you dies can be drastic.
There will be a complete loss of one person’s OAS, and a chance of a small top-up on the survivor’s CPP. The survivor’s total benefits can’t exceed the maximum payable (at age 65) which for 2019 is $1,154.58.
I have yet to receive a clear answer regarding whether the top up increases if you defer your CPP payments.
Related: The Retirement Income Puzzle
The bottom line
After a lot of thought I have decided to take my CPP payments next year instead of taking the suggestions (and warnings) being put forth recently in the financial media.
But it doesn’t matter what I think or do.
Your circumstances will be different and the decision of when to apply for your benefits is something only you can make.
If you’re already receiving CPP payments, at what age did you start? If you’re not, would you consider delaying them to age 70?