Did you know that delaying the start of your Canada Pension Plan (CPP) payments could significantly increase the total pension amount you receive in your lifetime? Yet most Canadians start collecting CPP before age 65. Why? New research from the National Institute on Ageing (NIA) explores this question and challenges three of the most common reasons people cite for taking their CPP early.
#1: You’ll lose money if you pass away before a certain age
There is a belief that if you die before a certain age, you won’t “break even” and will lose out on pension income, as compared to starting your CPP earlier. But according to the NIA research, this approach has flaws.
First, it requires you to predict how long you’ll live, which people tend to underestimate, and we don’t always appreciate that we may need retirement income to last 20 or 30 years – or even longer. Second, taking CPP early is often presented as the typical approach, without consideration for other options, including delaying your start date. Delaying is framed as a gamble, when in fact the program provides reliable income that is indexed to inflation for rest of your life. While there is a chance that you will pass away earlier than expected, the NIA report found that most Canadians would benefit from delaying their CPP.
Running out of money in retirement is a top financial concern for Canadians, and CPP offers security later in life when personal savings may run low.1 Before deciding when to start claiming your CPP, it’s important to consider the many realities of your financial life beyond lifespan, including income sources, lifestyle and more.
#2: Take advantage early in case the government changes its mind
Some Canadians worry that CPP isn’t financially sustainable or that the government could mismanage the program, and these narratives can influence the decision to start taking CPP early. The NIA report examines these concerns and concludes that “CPP is the safest element of Canada’s retirement income system.”
CPP is managed based on one objective: to pay pensions over the long term. And it was designed with checks and balances in place. For example, it can’t be changed by a single government acting alone.
#3: Take it early and invest it yourself — you’ll do better
One common rationale for taking CPP early is that it’s smarter: take your benefits as soon as possible to invest it and make more money.
Starting CPP early does create flexibility in the short term. The money is available to you immediately, which allows you to use it for day-to-day spending or put it in a registered account for tax advantages.
However, earning higher investment returns typically requires taking on more investment risk and the responsibility of managing the funds. Risk is a key factor, especially later in life when you may not want to worry about investment returns and market volatility. In fact, one study calculated that holding on to personal savings and CPP early comes with less reward and substantially more risk.2 In other words, spending some of your savings first so you can defer CPP for a few years may be a strategy worth considering.
Key takeaways
If you can afford to wait, by using personal savings or working longer, you could more than double your monthly pension by delaying CPP to age 70. Delaying may not be the right choice for everyone and waiting until age 70 may not be financially feasible. But even a shorter delay can help increase your overall CPP payments, which means it’s an important option that deserves careful consideration.
Do your research, avoid common myths and if you’re uncertain, seek advice from a financial professional. The timing of CPP is one of the most important financial decisions you’ll make for your retirement, and it can have a lasting impact on your financial security.
Read Right away or delay? When is the best time to claim your Canada Pension Plan benefits? to learn more about making the most of CPP.
1 Source: 2023 NIA Ageing in Canada Survey
2 Source: Paper published by the Canadian Institute of Actuaries and the Society of Actuaries, cited 7 Steps Toward Better CPP/QPP Claiming Decisions: Shifting the Paradigm on how we help Canadians, Step 3, page 28.