Many Canadians start drawing from the Canada Pension Plan as soon as they possibly can. According to Stats Canada, 44% of people who are eligible choose CPP early retirement at age 60, the earliest age possible. In fact, 98% of Canadians either take CPP at 65 or decide to take early CPP withdrawals.
But is claiming CPP early a wise move? Given that almost 90% of Canadians will rely on CPP to cover at least some of their retirement costs, it’s important to get it right regarding whether to take the CPP early retirement pension or delay drawing it. Both strategies have their advantages, but it’s important to know which is right for you.
In this CPP early retirement guide, we answer all the questions you’ll need to know to make an informed decision. Is CPP early retirement at age 55 feasible? Is there a CPP penalty for early retirement? What’s the earliest age to collect CPP? Is the early retirement age in Ontario the same as in other provinces? And how will a CPP early payout affect the amount you receive?
CPP benefits in early retirement: Taking CPP before 65
You are classed as taking early CPP withdrawals at any age below 65. There’s a CPP penalty for early retirement: for every month below the age of 65 that you receive CPP early payouts, CPP early retirement reductions come into play.
CPP early retirement reductions are 0.6% of the standard CPP payment, for each month you take CPP early retirement. So, for example, if you start withdrawing CPP at age 64, your CPP early retirement reduction would be minus 7.2%.
The CPP early retirement reductions become impactful if you start CPP early retirement at 60. This is the earliest age to collect CPP: the minimum early retirement age in Ontario and every other province for CPP is 60. Getting CPP this early means you would receive 36% less in your CPP early payout. Let’s say you would qualify for the maximum CPP monthly payout if you waited until you reached 65: for 2022 that amount is $1,253.59. However, if instead you chose CPP early retirement at age 60, your benefit would be reduced to just $802.30.
The fact is, however, most people don’t receive the full CPP possible, so taking an early CPP pension would reduce the amount even further. In 2022, the average CPP monthly payment was $702.77, if you didn’t take early CPP withdrawal and started drawing it at age 65. If you instead chose CPP early retirement at age 60, you would only draw $449.77. As you can see, CPP benefits in early retirement are substantially reduced.
CPP early retirement at age 55
Is CPP early retirement at age 55 possible? Given that the earliest age to collect CPP is 60, currently you can’t take CPP early retirement at age 55. You could take early retirement at 55 if you have sufficient savings, RRSPs and/or a company pension plan. While CPP benefits in early retirement only take effect at age 60 (at the earliest), you could then use your CPP payments to take some of the strain off your other retirement income sources. You should talk to a financial advisor to work out the earliest age you could retire comfortably.
Taking CPP at age 65
While the earliest age to collect CPP is 60, slightly more people reject CPP benefits in early retirement and instead start withdrawing them at age 65 (45% of Canadians, compared to 44% who take the CPP early retirement pension at age 60).
Unlike claiming CPP early, when you claim it at age 65, there are no penalties.
Delaying CPP: Benefits of drawing CPP up to age 70
While CPP early payouts mean that you begin drawing money at an earlier age, that amount is considerably less than if you waited until you were 65. In a similar way, if you delay drawing CPP, you can receive considerably higher CPP payments.
For each year you delay receiving your CPP benefits, you will receive an increase of 8.4%. If you delay taking CPP until your 70th birthday, your benefits increase by 42%. There is no advantage in delaying taking CPP past the age of 70.
Let’s take another look at those maximum and average CPP payments. If you qualified for the maximum monthly CPP amount of $1,253.59 at age 65, this would be worth $1,780.10 at age 70: well over $500 extra. If you only qualified for the average CPP monthly payment of $702.77 at age 65, this would be worth $997.93 at age 70: almost $300 extra.
And these larger payments stay with you for the rest of your life. In fact, they are tied to inflation, so they will increase each year, in line with the Consumer price index.
The break-even age for CPP early retirement pensions
One of the reasons only 2% of Canadians wait until they are 70 to draw CPP, even though the extra money is considerable, may be because of the “bird in the hand” syndrome. Many people would rather have some amount of money now, rather than a larger amount at some point in the future.
There is also a more methodical way of determining if you should take early CPP withdrawals or wait until you’re 70: the break-even age. If you take an early CPP pension at age 60, you’ll start losing out by the time you reach 74 (that is to say, you would receive more overall in CPP benefits if you’d waited to collect them at age 65).
If you wait until you’re 70 to receive CPP payments, you’ll start to gain financially if you live past 82. Therefore, if possible, you should take your anticipated life expectancy into account when deciding whether or not to take CPP benefits in early retirement.
Retroactive CPP payments
If you apply for CPP benefits after the age of 65, you can receive retroactive payments, up to 11 months in total (your payments would then be based on your age 11 months ago). Retroactive payments are not available when getting CPP early (before the age of 65).
Other considerations for timing your CPP benefits
When considering taking a CPP early retirement pension, there are other aspects to consider apart from the amount of money you’ll receive. These are some of the questions you should be asking yourself and/or your financial advisor before deciding on a CPP early retirement:
- When do you want to stop working, ideally?
- Can you afford to take early retirement?
- Will you have old age security clawbacks?
- Would investing your CPP benefits offset the smaller payments?
- What will your tax brackets be at different retirement ages?
- Have you taken into account the survivor’s pension?
What if your CPP early retirement pension just isn’t enough?
As we’ve seen, CPP early retirement withdrawals are considerably less than if you waited until you were 65 or older. What are your options, then, if CPP benefits in early retirement, plus other income, just aren’t enough to provide you with a comfortable standard of living, but you’ve set your heart on quitting work sooner rather than later?
If you’re a homeowner aged 55-plus, you could cash in up to 55% of your home’s equity with a CHIP Reverse Mortgage from HomeEquity Bank. You can receive the tax-free money in either a lump sum or in regular monthly payments, which can bring your retirement income up to a more comfortable level.
You qualify based on your age and your home’s location/value, rather than your income or credit score. And the best part is that you don’t have to pay back what you owe until you sell your home or move out, so you never have to worry about making regular mortgage payments.
Call us at 1-866-522-2447 today to find out how a CHIP Reverse Mortgage could help you to take CPP early retirement.