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When Should you Start Taking CPP?

A look at when to take CPP and the power it has to fight inflation for Canadians.

Andre DeGagne is the Founder and Managing Director of Calgary based Dentro Financial

In 1935, a litre of milk was $0.10, a dozen eggs were $0.31, and a pound of butter was $0.28. How is it that by 2008, milk rose to $2.04 a litre, eggs were $2.57 a carton, and butter was a whopping $4.25 per pound?[i] The reason that items cost more over time is due to something called inflation. According to the Oxford dictionary, inflation is: “A general increase in prices and fall in the purchasing value of money.”[ii] Simply, this means that as the cost of something rises, your ability to buy the same amount of that product falls. Inflation is a powerful economic force, and it seems to be all that we hear. You may even have noticed it when buying groceries or a cup of coffee. Whether skyrocketing prices have resulted from bottlenecks in global shipping and manufacturing, as a by-product of the reopening of the economy, or simply as a result of goods recovering the ground they lost throughout the pandemic, everything seems to have become more expensive.[iii]

Source: BrainyQuote.com, 2021

As an employed Canadian, inflation is not usually a major threat to your lifestyle. When you are employed, you typically receive or can negotiate regular wage increases that align with the effects of inflation. For example, if the cost of goods rises 1.5%, and you get a 2% raise, your lifestyle is not affected. The process of goods getting more expensive and wages increasing to match is considered healthy for the Canadian economy. It allows for increased prosperity for the nation. However, rapidly rising inflation can be a serious issue.

In that case, the Bank of Canada will typically step in to correct it. To do this, Canada’s Central Bank increases its key interest rate, which then trickles down, in one way or another, throughout the Canadian economy. The fear is that with a rapidly rising housing market and a significant amount of personal debt held by Canadians, a quick rise in rates could choke out the general economic recovery. As long as the Bank of Canada can keep inflation in line with rising wages, working Canadians will generally not feel its effects. So if working Canadians will see their wages rise to keep up with inflation, how do Canadians facing retirement do the same?

One way to help protect your retirement from the effects of inflation is by properly selecting when to take your Canadian Pension Plan (CPP) benefits. Selecting when to take your CPP benefits can be one of the most important retirement decisions you make, and it often gets rushed. As a working Canadian, you can begin to take CPP between the ages of 60 and 70, with 65 acting as the normal age. However, if you start taking CPP benefits before the age of 65, you will receive a 0.6% penalty for every month you take it early (7.2% per year), meaning that if you start at age 60, you are sacrificing 36% of your lifetime benefits. Instead, if you decide to wait, you will receive a 0.7% boost every month (8.4% per year). This means that if you start at 70, you will receive 42% more income from CPP for life.[iv] There is no upside to taking your benefits after 70 as the amount you receive will not get any larger.

At this point, you may be thinking: I understand that waiting can increase how much I receive, but if I wait, I am also missing out on years of cash. This thought is common and may be the right choice for you. However, you might also be missing out on over 50% of your retirement benefit if you do. In Canada, the average life expectancy for a man who has reached the age of retirement is 85.9 years, meaning that if a male, who was eligible to receive an annual benefit of $11,244 at 65, were to begin taking CPP benefits at age 60, he would now only receive about $6,773 a year.[v] Over his retirement, he would accumulate about $175,400 in benefits. However, if that same man differed his benefits until he reached 70, he would receive $16,726 per year or about $265,900 over his lifetime. This is a 52% increase in lifetime benefits. This increase is closer to 60% for women as their life expectancy is 88.5 years.[vi]

Source: FP Canada Research Foundation, 2020

Not only does taking CPP early reduce your ability to earn an income in retirement, but it can also reduce your protection against inflation. CPP benefits have a built-in feature known as indexing. Indexing means that the amount of benefit you receive will rise and fall according to a particular economic measure. For CPP benefits, that economic measure is the Consumer Price Index (CPI). The CPI measures, “… how much the average Canadian spends and how that changes over time.”[vii] This process should sound familiar as we referred to it by another name, inflation. Having your CPP benefits indexed to CPI means that as the price of goods rises, so too do your CPP benefits, making CPP a powerful tool to fight the effects of inflation. Simply put, like employed Canadians who get regular raises, inflation has minimal impact on the power of your CPP benefits.

Not only does CPP protect you against high inflation potential, but it also reduces your financial market risk and the risk of living longer than anticipated and running out of money. Despite these advantages, over 95% of Canadians continue to take their benefits at or before the age of 65.[viii] There are many things to consider before starting to take your CPP benefits. However, making a quick decision can be costly to both your wallet and peace of mind. Take the time to properly evaluate all of the pros and cons of taking CPP early versus taking it later. Even delaying a year has significant value. Overall, making the right decision could make all the difference, especially in a world where high inflation is a potential risk.

We hope that this article helped you begin to think through your CPP decision and that it has helped you understand the potential power in your CPP benefits. Although there are many factors to CPP, do not overlook its ability to help protect you from inflation during your retirement.

We are helping people take control of their finances and reach their financial goals, one day at a time. You can learn more about Dentro Financial at dentrofinancial.com.

This article is for informational purposes only. It should not be considered Financial or Legal Advice. Not all information will be right for you. Consult a financial professional before making any significant financial decisions.

Endnotes

[i] Statistics Canada, 2009

[ii] Oxford English Dictionary, 2021

[iii] Financial Times, 2021

[iv] Government of Canada, 2021

[v] FP Canada Research Foundation, 2020

[vi] FP Canada Research Foundation, 2020

[vii] Bank of Canada, 2021

[viii] FP Canada Research Foundation, 2020

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Dentro Financial is a Calgary based hybrid wealth management firm that pairs boutique financial planning with Canadian fintech.

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Andre DeGagne

Andre DeGagne

Andre DeGagne is the Founder and Managing Director of Dentro Financial, a boutique wealth management and financial planning firm located in Calgary, AB.

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