By far, the most popular question I get on CPP is whether it makes sense to take CPP early. Let’s start by reviewing the rules.
Although the normal age of benefit for CPP is 65, you can take CPP as early as age 60 but if you take it early, you will receive a reduced amount.
A change in reduction amounts
Prior to 2012, the reduction was 0.5% for every month prior to your 65th birthday. Taking CPP at age 60 meant a 30% reduction in benefit (60 months times 0.5% = 30%). Under the new rules, the reduction rate will increase to 0.6% over the next 5 years:
- In 2012, the reduction is 0.52% for every month prior to your 65th birthday.
- In 2013, the reduction is 0.54% for every month prior to your 65th birthday.
- In 2014, the reduction is 0.56% for every month prior to your 65th birthday.
- In 2015, the reduction is 0.58% for every month prior to your 65th birthday.
- In 2016, the reduction is 0.60% for every month prior to your 65th birthday.
Those turning 60 in the next 5 years, need to pay attention because they have a big decision to make. They can apply to collect CPP even if they are still working. Many people can use the money in the short term and even it they don’t need it, they can invest it for the future.
If they choose not to take CPP income early, every year they delay up to age 65 will mean a bigger reduction because the rate of reduction is increasing accordingly.
Should you take CPP early?
For me, the starting point to answering the question is looking at the mathematical breakeven point. Here’s the chart for 2012
AS you can see from the data, taking income at age 60 this year (assuming you qualify for the maximum CPP at age 65) would give you $676.83 per month. By the time you turn 65, you will have collected $40,729.74 of income over the 5 years.
Alternatively, if you waited until 65 to collect a higher amount, you are foregoing the $40,729.74 to get more money in the future. It takes until age 76 to make up the $40,729.74 that you left on the table.
In other words, the mathematical breakeven point is age 76 this year. If you live past age 76, the one could argue the math says take CPP later. If you don’t live to 76, then you should have taken the money early. Unfortunately, no one knows when they are going to die.
Here’s the charts for 2013, 2014, 2015 and 2016 as CPP phases in a bigger reduction.