A relative of mine recently received a letter from the Canada Pension Plan with two options.
Since he is pushing 60, he has the option of taking his CPP early at age 60, or waiting until later years.
That raises the question: which option is the best?
The favoured option depends on the individual and their financial position as they enter the so-called golden age and their prospects of longevity.
One of my friends took CPP early because “I don’t know how long I’m going to live” thus wanting to get back some of his contributions.
One rule of thumb on longevity is to add the ages of both parents and both sets of grandparents and divide by six to determine approximately how long you might live.
My friend invested the CPP payments. He could easily afford to invest as he and his wife have pretty decent pensions from their careers.
Taking CPP early and investing it is one option.
My relative has made good money and should qualify for the maximum CPP payment at 65 of $16,235 a year ($1,635 a month).
By taking CPP at 60 he loses 36 per cent of the total — $4,866 — or $400 a month plus the annual 1.5 to two per cent cost of living adjustment.
Investing his payments in an RRSP or tax-free savings account would require a return of 36 per cent a year to recoup the loss from taking an early payout. — not mentioning the annual cost of living increases.
Returns from the volatile stock market average eight per cent a year over the long term, leaving the person with an early CPP about $380 a month short of what the payment at age 65 would be.
That loss never comes back in the pension.
Unless the person taking the early pension has another pension plan or substantial RRSP/TFSA an early CPP doesn’t make financial sense.
If they are worried about dying early it might be an option.
From personal experience that extra pension at age 65 and the small annual increases make a huge difference after time elapses. Sixteen years ago when Yours Truly retired, the headlines predicted a loaf of bread would soon cost $1. Now the price is pushing $2.50.
A decent hotel/motel room cost between $90 and $120 a night versus today’s $150 to $200 plus a night.
A breakfast special was $5.99. Now it runs from $10 to $14.
Hamburger was $3 a pound now closing in on $6.
Our property taxes, around $1,900, are now just under $3,000.
For the first time since retirement Yours Truly thinks twice before buying anything. And I know others in the same financial boat.
One might ask why the CPP is informing eligible members about these options. Taking early pension benefits the plan.
About 900,000 people qualify for early pension every year. If these letters encourage enough to take early pension savings averaging $1,000 per applicant, CPP saves $900 million a year — or $4.5 billion over five years.
Ron Walter can be reached at [email protected]
