Counterpoint: Why taking CPP at 60 can make sense, even when the hard math says otherwise

Ted Rechtshaffen | March 21, 2017 1:52 PM ET
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Earlier this week, Lisa Bjornson and Fred Vettese wrote an excellent article suggesting that one should wait to take the CPP until age 70. The pure math is hard to dispute, as the government provides a bit of an incentive to defer taking the funds.

While I do not disagree with their math (OK, I do think that they should have assumed 4 per cent or 5 per cent return on this money as opposed to the 1 per cent discount rate they used), my advice to clients on this issue is only partly to do with the math. Like many issues with people and money, it isn’t all about the return.  The “correct” decision isn’t necessarily the “wise” decision for many individuals.

One of the main differences between the “mathematically correct” and “wise” decision relates to the value of one dollar at different ages. I believe that in general, $1 is worth more to a young and healthy individual than it is worth to an older or unhealthy person. That bias would lead us to recommend taking an early CPP more often. The rationale is that in most cases, a 60 year old has higher expenses than an 85 year old, and most of those extra expenses relate to enjoying life — like travel, dining out, a new car, etc. For the 85 year old, they often don’t have the ability or desire to spend more money — so having a higher monthly CPP is great, but they may not be able to spend it.

We also believe that when it comes to Government Pension Plans, you never know for sure what changes are ahead, so there is some merit in taking money today.

Having the luxury of knowing our clients and their full situation makes it much easier to provide specific advice, but here are our general factors to consider when deciding to take CPP (and OAS) on a deferred basis:

  • Do you need the cash flow at all at the moment? Will the added cash flow make any difference to your month to month lifestyle? If yes, then +1 for an early CPP. If no, then -1.
  • How long do you think you will live? Obviously not the easiest question to answer, but your current health and family history will give you some clues. If you think you will not likely reach 75 years old, then +1 for early CPP. If you think you will live beyond age 80, then -1 for early CPP.
  • Will the added CPP income push you into the Old Age Security (OAS) clawback zone? If your taxable income is higher than $75,000 and lower than $120,000, every extra dollar of income will deduct 15 cents of OAS. Even if you are not in that taxable income bracket today, will you be in that bracket if a spouse dies and there is no income splitting? If so, then +1 for early CPP and -1 for late CPP. If you won’t be in that income range at all, then +1 for late CPP and -1 for early CPP.
  • How confident are you that the government will not make changes to adversely affect the CPP plan rules? We believe the CPP is in pretty good shape for many years to come (as opposed to the Old Age Security plan which we believe will see meaningful erosion over the next 30 years). If you are less confident in the stability of the CPP, you would want to take it early. If you think the plan is secure, then waiting another 5 to 10 years won’t hurt your overall results.
  • Do you have other pension plans that can balance off your CPP? Specifically, if you have another pension plan that you are taking earlier than expected, perhaps in that case it makes more sense to defer your CPP.
  • Will the CPP proceeds be spent or invested in a tax sheltered account or will the funds sit in a taxable account? +1 to take early CPP if the funds are in the first group, and -1 to take early CPP if the growth on the funds will now be taxable.

A few other tools and ideas might help with decisions around CPP and OAS.

It is worth keeping in mind that a full CPP at age 60 might be $9,800 a year. At age 65 it might be $13,300 a year. At age 70 it might be $19,000 a year.

One strategy to guarantee you don’t make the wrong decision is by using life insurance. This is especially effective if you defer CPP to age 70 and provided you will likely be leaving a decent sized estate. The big risk of someone deferring CPP is that they die shortly after starting the pension.

The strategy would be for the individual to wait to age 70 (or at least later than 65) to take CPP, but consider buying some personal life insurance as early as age 60, but possibly waiting until later. The extra $9,200 a year received by deferring CPP from age 60 to 70 can be used to fund a life insurance policy. If the person lives a long time, then they win on the CPP decision by collecting extra funds for many years. They may not have a great rate of return on the life insurance because of their longevity, but their family will still receive a lump sum payout at the end that would not have been received without the insurance.

On the other hand, if they die fairly young, they lose out on the CPP pension decision, but have a tremendous rate of return on their life insurance “investment.” Under either scenario, their family is in better financial position than if they took the CPP early and had no permanent life insurance.

Another simple idea is to defer your CPP past age 60, but use that time of deferring CPP to draw down money from your RRSP/RRIF when your income is otherwise quite low.

As for an online tool, for those thinking of taking the CPP early, we have developed a calculator that helps to see the impact of taking the CPP at any time from age 60 to 65, and what the breakeven life expectancy would be. It can be found here ( ).

If I have learned one thing in my time working with clients, it is that financial decisions are often emotional. You can build all the spreadsheets in the world, and they are an important part of reaching a decision, but if you ignore a clients’ comfort level or peace of mind, you may not really be providing wise advice after all.

Ted Rechtshaffen is President and Wealth Advisor at TriDelta Financial, a boutique wealth management firm focusing on investment counselling and estate planning.