For most of our lives, our plan for retirement revolves around saving and investing. We make plans with our financial advisors and keep them up-to-date to ensure we are able to pay our own way through retirement.
But then we turn 60 and a surprise big decision hits: When should I start collecting CPP and OAS?
The Canadian Pensions Plan (CPP) and Old Age Security (OAS) offer guaranteed income to retired Canadians, nicely complimenting any nest egg, but deciding when to take advantage of that guaranteed retirement income is more complicated than it seems.
Before we go any further, we’ll quickly cover what CPP and OAS is before delving into the complicated math of when to best start collecting government pensions.
What are CPP and OAS?
CPP and OAS are government pensions that give stability to Canadians during their retirement years. Each pension is guaranteed for life, and indexed to inflation to give retirees some security.
How does CPP work?
While part of the workforce, you contribute a share of your earnings to CPP. Your employer then matches that amount unless you are self-employed, in which case you pay both shares. Some of this money goes to supporting those currently on CPP, while the rest is invested to maintain a pool of funds for the pension plan.
Because of that, CPP is available to every Canadian who has paid into it starting at the age of 60, though the payout can be put off to the age of 70 (which we’ll cover later in this article).
However, not everyone who is eligible receives the same payment.
CPP is largely calculated based on 3 criteria:
The age you start taking from the pension
The length and amount of time you’ve contributed to CPP
Your average earnings over the course of your working life
How does OAS work?
Unlike CPP, OAS has nothing to do with your work history. You don’t pay into it, and it’s not calculated based on past wages. Instead, OAS is focused on citizenship, ensuring every Canadian receives a pension. There are, however, a few requirements for receiving it, and a calculation that stipulate how much you will receive.
The two main criteria for OAS calculations are:
You must have lived in Canada for at least 10 years after the age of 18
The payout increases each year you live in Canada, maxing out at 40 years.
OAS is available to Canadians who meet the criteria at the age of 65, though the payout can be pushed to 70 (which we will address later in this article).
This is where things get more complicated.
What is the best age to collect CPP and OAS?
The rules around both CPP and OAS allow you to decide when you want to start receiving benefits.
CPP offers a decade-long window, from 60-70
OAS offers a five-year window, from 65-70
After 70, you will automatically receive your benefits based on the criteria stipulated by each pension.
Why not take my CPP early?
While the above criteria define your benefit for the most part, when you take your pension also affects your payout. The earlier you take your benefits, the less you get per month.
For CPP, the standard age to begin receiving benefits is 65. If you choose to receive benefits early, it reduces your payout.
Though it’s quite common for Canadians to get full OAS benefits, it is much less common to get full CPP benefits. As a result, we’ll use the average payout for CPP to help illustrate how receiving benefits early, or late affects your payout.
*As of March 2020, the average payout is $696.56.
How much will I get if I take my CPP at age 60?
For every month you take CPP before you turn 65, there is a reduction of 0.6% in your monthly payout, which is a 7.2% reduction yearly (0.6% x 12).
So at 60, the math looks like:
5 years x 7.2% = 36% reduction in rates
For the average monthly payout that looks like:
$696.56 - $250.76 = $445.80
That means, by taking your CPP 5 years early you face a decrease of $3,009.12/year.
How much CPP will I get at age 70?
On the other side, if you wait to take your benefit after 65, there’s an increase of 0.7% per month, or 8.4% yearly (0.7% x 12).
So at 70, the increase looks like:
5 years x 8.4 = 42% increase in benefits
For the average monthly payout, that’s an increase of $292.55/month, which makes your benefits:
$696.56 + $292.55 = $989.12
So, at the average payout, that’s an increase of $3,510.60/year.
How much do you get if you take OAS later?
Just like CPP, you can push off OAS until you are 70, resulting in an increase in monthly payouts. Because most Canadians receive full benefits from OAS, we’ll use that number, which is $613.53.
That increase is calculated at 0.6%/month or 7.2% yearly (0.6% x 12). So, if you take your OAS at 70, the calculation is:
5 years x 7.2 = 36%
So at a 36% increase, that looks like:
$613.53 + $220.87 = $834.40
That’s an increase of $2,650.44/year of retirement.
Is it worth it to delay your CPP and OAS benefits?
Those numbers don’t lie, but that doesn’t mean they tell the whole truth. For some, especially those who plan to continue working past 65, it may make sense to push off receiving CPP and OAS till after 65. But that’s not true for everyone.
Three major considerations to take into account when deciding are;
Your health – Perhaps the most difficult consideration will be your health. For those whose health is deteriorating at 60, it might make more sense to take CPP and OAS early.
Your other sources of income – Depending on your career, desire to work, and your investments, you may choose to take your CPP or OAS at a different time.
Your need for cash flow –Your fixed costs and living expenses will dictate how much money you need to live comfortably.
Making the right decision for retirement
If you’re unsure of what the right choice is for you, take the time to set up a meeting with your financial advisor well before you turn sixty. By being proactive, you’ll save yourself the stress and heartache of making a big decision in a small amount of time. You’ll also be able to better integrate CPP and OAS with your retirement plan. The earlier you take all factors into consideration, the better you can make your plan and your decision.