When it comes to collecting CPP, is a bird in the hand truly better than two in the bush?
As Canadians, we have been contributing to the Canadian Pension Plan (CPP) for as long as we have been working. As most of us get closer to retirement, the thought starts to cross your mind that before too long, we will be receiving money out of this fund instead of paying into it. It might interest you to know that the balance of the CPP account as of September 2018 was $368 BILLION in investment assets.
The debate comes in … when do you start to pull money out of CPP?
Well, as of 2019, if you were to wait until you turn 65, the monthly payment is a fairly healthy $1158.54 per month. Every month you start earlier than age 65, the monthly amount will be 0.6% per month less than the age 65 amount. This means if you begin to take your payments on your 64th birthday, payments are 7.2% less than the “max” at 65 or $1075.12 ($1158.54 x .928). If you choose to take it on your 60th birthday (the earliest you can take it), payments are 36% less than the “max” or $741.47 a month.
Sooooooo, when is the best time to start pulling out the cash from the CPP fund?
As for ACTUAL dollars, by collecting benefits beginning at age 60 ($741.47), by age 74, (14 years of benefits or 168 monthly payments) you will have received $124,502.32. If you had waited until 65 to collect payments, your monthly benefits ($1158.54) by age 74, (9 years of payments or 108 payments) you would have received $124694.64.
In straight dollars, the crossover point when you earned more overall dollars is after your 74th birthday. If you don’t live past 74, it was certainly better to begin collecting at 60. I am going to leave tax implications off the table as each person’s tax differs so much.
But let’s look a little closer. You can make the argument that a dollar today is worth more than a dollar a year from now. With inflation, that is certainly a fair argument to make.
The other fact that shouldn’t be ignored to investors is “what can you do with the money?” If you were “handed” $741.47 a month, could you possibly leverage those funds effectively to earn you even more funds?
Based on this analysis, I plan to begin taking out the funds at age 60. Even though I totally expect to live well beyond 74 or 75, it still makes sense for me to start pulling out funds as soon as I am able, as I feel $1 in my hands can return me more than $1 in the CPP fund.
I’m curious what you think. Let me know in the comments.