The Canada Pension Plan (CPP) is a crucial source of retirement income for many Canadians. While you can start receiving CPP payments as early as age 60, many opt to begin at age 65. However, deferring your CPP benefits beyond age 65 can lead to significant financial advantages that are worth considering.
Here’s why deferring your CPP can be a smart retirement strategy:
1. Increased Monthly Payments
The primary benefit of deferring CPP is the increase in your monthly payments. For every month you delay receiving your CPP after age 65, your pension increases by 0.7%. This means that for every year you defer, your payments rise by 8.4%. If you delay until age 70, you could see up to a 42% increase in your monthly benefits compared to taking CPP at 65.
Example:
- If your monthly CPP benefit at age 65 is $1,000, deferring to age 70 would result in a monthly payment of $1,420—a substantial increase.
This increase in payments can provide a larger, more reliable income during your later retirement years when you may need more financial security.
2. Longevity and Financial Security
People are living longer than ever before, and it’s not uncommon for retirees to live well into their 80s and 90s. Deferring your CPP until 70 ensures you receive a higher monthly payment for the rest of your life, which can be especially beneficial if you live longer than expected.
A higher income later in life can help cover rising healthcare costs, home maintenance, or other unexpected expenses. It also reduces the risk of outliving your savings, providing greater peace of mind in your advanced years.
3. Tax Efficiency in Early Retirement
If you retire before 65 but defer your CPP, you may benefit from a lower tax rate on other income sources, such as RRSP withdrawals, part-time work, or investment income. Since CPP payments are taxable, deferring them can help you avoid a higher tax bracket in the early years of your retirement.
By deferring CPP, you may be able to draw down other income sources in a more tax-efficient manner, preserving your overall wealth and ensuring you maximize the value of your retirement income.
4. Flexibility to Meet Your Retirement Needs
Deferring CPP gives you flexibility in designing your retirement plan. If you have other sources of income, such as savings, investments, or company pensions, deferring CPP allows you to maintain flexibility over your financial decisions and make the most of your various income streams.
For example, you might prioritize withdrawing from RRSPs in the early years of retirement while your tax rate is lower and defer CPP until age 70 to maximize your guaranteed income when other resources are depleting.
5. Protection Against Inflation
CPP payments are indexed to inflation, which means that they rise with the cost of living. By deferring your CPP, you lock in a higher starting benefit, and since it’s indexed to inflation, it grows every year, preserving your purchasing power over time.
This can be particularly important in times of rising inflation, as a larger, inflation-adjusted payment will help you maintain your lifestyle during retirement without losing ground to the rising cost of goods and services.
6. Survivor and Disability Benefits
If you’re eligible for CPP survivor benefits or CPP disability benefits, deferring your CPP could increase the value of these benefits as well. Survivor benefits are based on the CPP pension of the deceased contributor, so a higher pension will result in higher survivor benefits for your spouse or dependents.
By deferring your CPP and receiving higher payments, you indirectly increase the financial security of your loved ones should they need to depend on your survivor benefits in the future.
7. Maximizing Lifetime Income (Break-Even Age)
Although you receive larger monthly payments by deferring CPP, it’s important to consider your personal break-even age. This is the point at which the cumulative total of deferred payments exceeds the total you would have received if you had started earlier. For most people, the break-even age is typically between 76 and 80.
If you live past this break-even age, you will have received more money overall by deferring CPP. Since life expectancy is increasing, many retirees stand to benefit from this approach. However, those with shorter life expectancies may want to consider their personal health situation when deciding when to take CPP.
Conclusion
Deferring your CPP beyond age 65 can lead to significantly higher monthly payments, providing greater financial security as you age. The decision to delay should be based on a variety of factors, including your health, life expectancy, tax situation, and other sources of retirement income.
By deferring your CPP, you’re ensuring that you receive a higher, inflation-protected income for the rest of your life, giving you greater peace of mind and a more robust financial foundation during your retirement years.
Consider working with a financial advisor to determine whether deferring CPP is the best option for your individual retirement plan.
