Recently a client asked for my help deciding when to take his Canada Pension Plan (CPP) retirement pension, and I found the calculations to be so interesting that I just had to share them.
Peter is currently age 55, and he had retired from working at the end of 2013. He had been self-employed for most of his life, and while he had some pensionable earnings most years, he had only a few years at the Year’s Maximum Pensionable Earnings (YMPE) level ($52,500 for 2014).
Peter had recently received his CPP Statement of Contributions (SOC), which showed that he would receive $320 monthly if he were age 60 today or $500 monthly if he were age 65 today.
Using these SOC estimates, he had calculated his “breakeven period” as 8.9 years, meaning that he would be further ahead by waiting until age 65 to start his CPP, as long as he lived to at least age 73.9.
Related article: The math on taking CPP early
The reality of the SOC estimates
The SOC estimates are calculated as though you’re eligible for a retirement pension on the date that the SOC is printed. That is, the estimates assume your future earnings will be the same as your current lifetime average earnings, projected through until age 60 or 65.
Related article: Understanding CPP Statement of Contributions (SOC)
Since Peter wasn’t planning to have any earnings after 2013, these results really didn’t apply to him.
When I did the actual CPP calculations for Peter, his real choices (in 2014 dollars) were a retirement pension of $280 at age 60 or a pension of $395 at age 65. This was a far cry from what Peter had expected based on his SOC.
This reality changed his breakeven period to 12.0 years, meaning that he would have to live until at least age 77 before he would be better off waiting until age 65 to start receiving his CPP retirement pension.
How the Guaranteed Income Supplement (GIS) comes into play
Peter doesn’t have a private pension or many RRSP savings, and he expects to be eligible for the Guaranteed Income Supplement (GIS) after he turns age 65.
Related article: Understanding GIS
The amount of GIS that Peter will be eligible for depends on the amount of other income that he has, including his CPP. For the most part, the GIS is reduced by 50 cents for every dollar of other income that a person has.
This means that if Peter waits until age 65 to receive his $395 CPP amount instead of taking $280 at age 60, his GIS at age 65 will be reduced by about $57.50 monthly. (This is half of the amount that he gains by waiting.) And it will double his breakeven period to approximately 24 years, which means that he must live until age 89 to be better off by waiting until age 65 to start his CPP, rather than starting it at age 60.
I don’t recommend that everyone should try to maximize their GIS eligibility, because it really is intended just for low-income seniors and maximizing it is not something to strive for.
I do recommend, though, that if you think you will be eligible for the GIS, don’t ignore how it is affected by your other income sources and how it should therefore affect your other retirement income decisions.