When to Take the CPP – Analysis


The two options for taking the Canada Pension Plan (CPP) retirement pension depend on when you stop working and when you decide to take the pension and are discussed in this post with an analysis of two examples using the spreadsheets. 

This post is one in a series to help you decide when to take the CPP pension. Click on Download Zipped Excel Spreadsheets which all of these posts refer to and that you can customize for your situation. Because each person’s circumstances are different it is hoped that these posts and the spreadsheets help you make a decision. (The posts below will be adjusted later or replaced when the enhanced CPP, due to be implemented starting in 2019, has been fully documented by the government.)

1. What is Involved2. The Rules3. Factors Involved
4. Analysis5. Spreadsheets

The Canada Pension Plan retirement pension payout has been structured to reward delaying by offering a greater percentage with increasing age.

Once you start taking the CPP, you do not have recourse to a “do-over”. You are stuck with your decision for the remainder of your lifetime, the duration of which is unknown.

This makes the decision on when to take the CPP more that just a simple exercise in looking at the numbers. It requires that you also make a decision on whether you will be around to collect the increased payments and if you want or need the pension early compared to later in your retirement.

Options

Before providing an analysis, here is a quick review of the options available. These are discussed in detail in the Spreadsheets post.

Option 1. Stop working before or at 60:

  • 1a) Take the pension at 60.
  • 1b) Delay taking the pension up to 65.
  • 1c) Delay taking the pension up to 70.

Option 2. Stop working after 60:

  • 2a) Take the pension on or after 60 but before you stop working using the Post-Retirement Benefit (PRB).
  • 2b) Take the pension when work stops up to 70.
  • 2c) Delay taking the pension up to 70.

Evaluation Criteria

When you evaluate these options you need to consider the following:

  • • When you want to stop working.
  • • When you want to take the pension as it can be delayed after you have stopped working or taken early if you are still working.
  • • Yearly payments for each option.
  • • Cumulative payments at some future age.
  • • Break-even age if you delay
  • • Your survival probability and the break-even and future ages.

Here are some other criteria you can use to determine when to take the CPP:

  • • If you need the money, take the pension as soon as possible.
  • • If you do not think you will not live to the break-even age if you delay, take the pension as soon as possible.
  • • If you need to work after 60 and need the pension money, take the pension as soon as possible using the Post Retirement Benefit (PRB).
  • • If you want to work after 60 and do not need the pension money, check the break-even age and decide if it is worth taking the PRB early.
  • • If you want to or need to work and have 100% of the YMPE for each include working year, seriously consider taking the PRB after checking the break-even age.

If you decide to delay taking the CPP once you have stopped working, you can decide at any age, up to 70, to start taking it. However, you better be comfortable with being alive when you start to take it, or you will receive nothing and your spouse will not be eligible for a spousal amount. Also, you should be comfortable that you will live long enough to reach the break-even age when cumulated payments for taking it early match those for delaying.

Analysis of a few examples has shown that if you live to close to the life-expectancy (50% survival probability) of age 85 for a male, you will have more accumulated payments by delaying.

However, you trade-off doing without the yearly payments early in retirement for a larger payment once the delay period is over.

Factors Involved

There are 5 key factors (see the Factors Involved post) that affect how much the CPP pension will be at any age:

  • 1) Your Average % of Maximum Pensionable Earnings during your working years compared to the Yearly Maximum Pensionable Earnings as given on your Statement of Contributions (SOC).
  • 2) Use of Drop-outs to remove low-earning years from the SOC calculation.
  • 3) The Age at which you decide to take the pension as it determines the percent loss or gain from the age 65 amount. If the pension is delayed, the break-even age can be determined compared to taking the pension early.
  • 4) The Inflation rate because it affects the payment you receive each year and the amount you start with in 3 above.
  • 5) Your Marginal tax rate as it reduces the payments left-over after taxes and increases the break-even age when the pension is delayed.

Examples Overview

The remainder of this post covers two examples that illustrate the use of the spreadsheets and how to analyze the results. The first will be applicable to a large percent of people as it deals with a person that exceeds the Yearly Maximum Pensionable Earnings for all working years. The second shows how the use of child-rearing drop-out provision can maximize the CPP pension.

A summary is provided first for each of the options, including an analysis, followed by the details that can be found on the accompanying spreadsheets. All of the numbers in the Summary and Analysis section come from the Spreadsheets Details section. In both examples, the inflation rate is 1.4%, the Marginal tax rate is 25%.

Delaying to age 70 is not included here to reduce the already long length of the post. If you are interested, download and examine the spreadsheets and see the charts at the end of each example.

Keep in mind that at the comparison age of 85 used in the examples, the cumulated amount will always be greater when the pension is delay to age 65 compared to when it is taken at age 60. That is, taking the pension early will always result in a smaller cumulated payment after the break-even age. The decision to be made is whether this loss is important or large enough to offset the probability of surviving to the break-even age.

Example 1 – Exceeding the Maximum Each Year

This example is for a (male) person who exceeds the Yearly Maximum Pensionable Earnings (YMPE) for all working years. Because the YMPE is based on the average industrial wage each year, this example will apply to about 50% of the working population. How many it applies to those that are about to retire this year is unknown.

Example 1 – Summary and Analysis

If Option 1 is considered:

1a) Taking at 60, yearly is $8,710. At 85 yearly payment is $12,331, cumulated payments are $270,923 and survival probabilty is 42.2%.

1b) Delaying to 65 the yearly increases by 56% and the cumulated amount at 85 by 30%. The break-even age is 72.1 with a survival probability of 83.4%. However, when adjusted for marginal taxes, the increases drop to 42% and 19%, respectively, the break-even age increases to 74.5 and the survival probability decreases to 78.9%.

Using Option 1, it makes a lot of sense to delay taking the pension to 65, if it is not needed earlier, as the increase is significant and the low break-even ages of 72.1 and 74.5 do not seem to be too late with not-too-low survival probabilities of 83.4% and 78.9%.

However, if the pension is taken at 60, the loss compared to delaying to age 65 is as follows: the yearly payments are less by $5,252 at age 65 increasing to $6,936 at age 85 and cumulated payments at 85 is less by $82,412, but surviving to age 65 or the break-even ages is not a issue.

If Option 2 is being considered:

2a) Taking the Post Retirement Benefit at 60, yearly payment is $8,710. At 85 yearly is $14,392, cumulated payments are $311,513 and survival probabilty is 42.2%.

2b) Work To/Take At age 65, compared to the PRB, the yearly increases by 34% and the cumulated amount at 85 by 13%. The break-even age is 75.9 with a survival probability of 76.5%. However, when adjusted for marginal taxes, the increases drop to 22% and 3%, respectively, the break-even age increases to 81.5 and the survival probability decreases to 57.8%.

Using Option 2, it makes sense to take the PRB while working to 65 considering the late break-even ages of 75.9 and 81.5 and the low survival probabilities of 76.5% and 57.8%, which do not have to be considered when taken at 60.

However, if the pension is taken at age 65 when work stops, the gain compared to taking the PRB at 60 is as follows: the yearly payments are more by $3,691 at age 65 increasing to $4,875 at age 85 and cumulated payments at 85 is more by $41,822. Now the late break-even ages and the low survival probabilities must be considered.

Examining the narratives below and the tables on the Options pages on the spreadsheet, the yearly payments and the cumulated payments for options 1b) and 2b) are exactly the same. This means that there is no advantage to working to 65, unless the PRB is taken. This is because the PRB adds one-fourtieth of the pension for the year to the PRB payment up to and including age 65.

Example 1 – Spreadsheet Details

You can examine the spreadsheets that have the information used in the above analysis by clicking on Download Zipped Maximum Spreadsheets. Once downloaded, double-click on the file to unzip it and then open each of the 3 spreadsheets.

A few of the details on the spreadsheets are given below to indicate what is available when you try your own circumstances.

This screenshot shows the Entry page for Option 1 for this example.

A very useful chart on the Entry page for each option shows the yearly payments with the break-even ages superimposed. This shows how much the delay adds to the “If Taken At” payment at any age.

The Options page organizes the data into the options discussed above. Here are the summary narratives for Option 1.

1a) Taking at 60, yearly is $8,710. At 85 yearly is $12,331, cumulated is $270,923 and survival probabilty is 42.2%.
1b) Delaying to 65, yearly is $14,590 (more by 56%). At 85, yearly is $19,267, cumulated is $353,335 (more by 30%). Break-even is 72.1 and survival probability is 83.4%.
1c) Delaying to 70, yearly is $22,209 (more by 122%). At 85, yearly is $27,359, cumulated is $395,206 (more by 46%). Break-even is 76.3 and survival probability is 73.8%.

The detailed narrative for Option 1b) is as follows:

1b) Delaying to age 65, the yearly payment is $14,590 (more by $5,252 or 56%) and the survival probability is 94.5%. At age 85, the yearly payment is $19,267 (more by $6,936 or 56%) and the cumulated amount is $353,335 (more by $82,412 or 30%). At the break-even age of 72.1, the yearly payment is $16,081 (more by $5,789 or 56%) and the survival probability is 83.4%. The Adjusted for Marginal Taxes values are: at age 85, the yearly payment is $17,533 (more by $5,202 or 42%) and the cumulated amount is $321,534 (more by $50,612 or 19%); the break-even age is 74.5 (2.4 years more), the yearly payment is $15,046 (more by $4,464 or 42%) and the survival probability is 78.9%.

For Option 2, here are the narratives.

2a) Taking the PRB at 60, yearly is $8,710. At 85 yearly is $14,392, cumulated is $311,513 and survival probability is 42.2%.
2b) Work To/Take At 65, yearly is $14,590 (more by 34%). At 85, yearly is $19,267, cumulated is $353,335 (more by 13%). Break-even is 75.9 and survival probability is 76.5%.
2c) Delaying to 70, yearly is $22,209 (more by 90%). At 85, yearly is $27,359, cumulated is $395,206 (more by 27%). Break-even is 78.3 and survival probability is 68.0%.
2b) Work To/Take At age 65, the yearly payment is $14,590 (more by $3,691 or 34%) and the survival probability is 94.5%. At age 85, the yearly payment is $19,267 (more by $4,875 or 34%) and the cumulated amount is $353,335 (more by $41,822 or 13%). At the break-even age of 75.9, the yearly payment is $12,524 (more by $4,242 or 34%) and the survival probability is 76.5%. The Adjusted for Marginal Taxes values are: at age 85, the yearly payment is $17,533 (more by $3,140 or 22%) and the cumulated amount is $321,534 (more by $10,022 or 3%); the break-even age is 81.5 (5.6 years more), the yearly payment is $13,614 (more by $8,711 or 64%) and the survival probability is 57.8%.

One comparison that is not available with the above options is whether there is any advantage to working to age 65 compared to stopping at age 60 and delaying to 65. You can get this by looking at the values in the narratives, but the 1vs2 spreadsheet provides its own narratives (note the 0% change in 1b versus 2b), tables and charts as follows.

1a) It Take At 60 versus 2a) If PRB At 60: Yearly payments of $8,710 start at 60 and are the same. At age 85, 1a) is $12,331 and 1b) is $14,392 (more by $2,062 or 17%) and the cumulated amounts are $270,923 and $311,513 (more by $40,590 or 15%).
1b) Delay To 65 versus 2b) Work To/Take At 65: Yearly payments at 65 are for 1b) $14,590 and for 2b) $14,590 (more by $0 or 0%). At age 85, yearly payments are for 1b) $19,267 and for 2b) $19,267 (more by $0 or 0%), and cumulated payments are for 1b) $353,335 and for 2b) $353,335 (more by $0 or 0%). The breakeven ages are 72.1 and 75.9. The Adjusted for Marginal Taxes values are: at age 85, the yearly payments are for 1b) $17,533 and for 2b) $17,533 (more by $0 or 0%) and the cumulated amounts are for 1b) $321,534 and for 2b) $321,534 (more by $0 or 0%); the break-even ages are 74.5 and 81.5.

Example 2 – Child-rearing

This example is for a (female) person that has a number of years of zero and low-earning due to child-rearing. It illustrates the use of both the child-rearing and general drop-out provisions.

Example 2 – Summary and Analysis

If Option 1 is considered:

1a) Taking at 60, yearly payment is $6,994. At 85 yearly payment is $9,902, cumulated payments are $217,550 and survival probability is 56.4%.

1b) Delaying to 65 the yearly increases by 40% and the cumulated amount at 85 by 17%. The break-even age is 75.1 with a survival probability of 84.3%. However, when adjusted for marginal taxes, the increases drop to 30% and 9%, respectively, the break-even age increases to 78.4 and the survival probability decreases to 78.1%.

Using Option 1, delaying taking the pension to 65 may not be a good decision as the increase in the cumulated amount is low and the break-even ages of 75.1 and 78.4 are becoming quite late, but the survival probabilities of 84.3% and 78.1% may be acceptable.

However, if the pension is taken at 60, the loss compared to delaying to age 65 is as follows: the yearly payments are less by $3,007 at age 65 increasing to $3,971 at age 85 and cumulated payments at 85 are less by $36,851, but surviving to age 65 or the break-even ages is not a issue.

There is no obvious choice for this option. The decision will likely be determined by whether the pension is needed early or if the survival probabilities are acceptable if delayed.

If Option 2 is being considered:

2a) Taking the PRB at 60, yearly payment is $6,994. At 85 yearly payment is $11,862, cumulated payments are $256,149 and survival probability is 56.4%.

2b) Work To/Take At age 65, compared to the PRB, the yearly increases by 34% and the cumulated amount at 85 by 14%. The break-even age is 75.6 with a survival probability of 84.3%. However, when adjusted for marginal taxes, the increases drop to 22% and 3%, respectively, the break-even age increases to 81.4 and the survival probability decreases to 70.1%.

Using Option 2, it makes sense to take the PRB while working to 65 considering the late break-even ages of 75.6 and 81.4 and the low survival probabilities of 84.3% and 70.1%, which do not have to be considered when taken at 60.

However, if the pension is taken at age 65 when work stops, the gain compared to taking the PRB at 60 is as follows: the yearly payments are more by $3,098 at age 65 increasing to $4,091 at age 85 and cumulated payments at 85 is more by $36,412. Now the late break-even ages and the low survival probabilities must be considered.

Examining the narratives below and the tables on the Options pages on the spreadsheet, the yearly payments and the cumulated payments for option 2b) are 15% more than for 1a). This means that there is an advantage to working to 65. This is because the PRB adds one-fourtieth of the pension for the year to the PRB payment up to and including age 65.

Example 2 – Spreadsheet Details

You can examine the spreadsheets that have the information used in the above analysis by clicking on Download Zipped Child-rearing Spreadsheets. Once downloaded, double-click on the file to unzip it and then open each of the 3 spreadsheets.

A few of the details on the spreadsheets are given below to indicate what is available when you try your own circumstances.

 

The Options page organizes the data into the options discussed above. Here are the summary narratives for Option 1.

1a) Taking the pension at age 60, the yearly payment is $6,994. At age 85 the yearly payment is $9,902, the cumulated amount is $217,550 and the survival probability is 56.4%.
1b) Delaying to 65, yearly is $10,505 (more by 40%). At 85, yearly is $13,872, cumulated is $254,401 (more by 17%). Break-even is 75.1 and survival probability is 84.3%.
1c) Delaying to 70, yearly is $16,368 (more by 104%). At 85, yearly is $20,163, cumulated is $291,267 (more by 34%). Break-even is 77.5 and survival probability is 80.3%.

The detailed narrative for Option 1b) is as follows:

1b) Delaying to age 65, the yearly payment is $10,505 (more by $3,007 or 40%) and the survival probability is 96.5%. At age 85, the yearly payment is $13,872 (more by $3,971 or 40%) and the cumulated amount is $254,401 (more by $36,851 or 17%). At the break-even age of 75.1, the yearly payment is $12,072 (more by $3,455 or 40%) and the survival probability is 84.3%. The Adjusted for Marginal Taxes values are: at age 85, the yearly payment is $12,879 (more by $2,978 or 30%) and the cumulated amount is $236,197 (more by $18,647 or 9%); the break-even age is 78.4 (3.3 years more), the yearly payment is $11,685 (more by $2,702 or 30%) and the survival probability is 78.1%.

For Option 2, here are the narratives.

2a) Taking the PRB at 60, yearly is $6,994. At 85 yearly is $11,862, cumulated is $256,149 and survival probability is 56.4%.
2b) Work To/Take At 65, yearly is $12,080 (more by 34%). At 85, yearly is $15,953, cumulated is $292,561 (more by 14%). Break-even is 75.6 and survival probability is 84.3%.
2c) Delaying to 70, yearly is $18,922 (more by 97%). At 85, yearly is $23,310, cumulated is $336,716 (more by 31%). Break-even is 77.7 and survival probability is 80.3%.
2b) Work To/Take At age 65, the yearly payment is $12,080 (more by $3,098 or 34%) and the survival probability is 96.5%. At age 85, the yearly payment is $15,953 (more by $4,091 or 34%) and the cumulated amount is $292,561 (more by $36,412 or 14%). At the break-even age of 75.6, the yearly payment is $10,322 (more by $3,560 or 34%) and the survival probability is 84.3%. The Adjusted for Marginal Taxes values are: at age 85, the yearly payment is $14,440 (more by $2,578 or 22%) and the cumulated amount is $264,817 (more by $8,668 or 3%); the break-even age is 81.4 (5.8 years more), the yearly payment is $11,220 (more by $7,658 or 68%) and the survival probability is 70.1%.

One comparison that is not available with the above options is whether there is any advantage to working to age 65 compared to stopping at age 60 and delaying to 65. You can get this by looking at the values in the narratives, but the 1vs2 spreadsheet provides its own narratives, tables and charts as follows.

1a) It Take At 60 versus 2a) If PRB At 60: Yearly payments of $6,994 start at 60 and are the same. At age 85, 1a) is $9,902 and 1b) is $11,862 (more by $1,960 or 20%) and the cumulated amounts are $217,550 and $256,149 (more by $38,598 or 18%).
1b) Delay To 65 versus 2b) Work To/Take At 65: Yearly payments at 65 are for 1b) $10,505 and for 2b) $12,080 (more by $1,576 or 15%). At age 85, yearly payments are for 1b) $13,872 and for 2b) $15,953 (more by $2,081 or 15%), and cumulated payments are for 1b) $254,401 and for 2b) $292,561 (more by $38,160 or 15%). The breakeven ages are 75.1 and 75.6. The Adjusted for Marginal Taxes values are: at age 85, the yearly payments are for 1b) $12,879 and for 2b) $14,440 (more by $1,561 or 12%) and the cumulated amounts are for 1b) $236,197 and for 2b) $264,817 (more by $28,620 or 12%); the break-even ages are 78.4 and 81.4.

Next: When To Take The CPP – Spreadsheets