Should you, and how, enroll in the Canada Pension Plan (CPP) ahead of schedule?

A person must be at least 60 years old and have made at least one valid contribution (payment) to Canada Pension Plan in order to receive CPP benefits. How much money you receive from CPP is based on how much money you contributed and for how long.

Benefits under CPP are fully funded by financial contributions from both employees and employers. Taxpayer dollars are not used to pay for CPP. That is to say, the return on investment is proportional to the effort put forth.

Even though you become eligible for the standard retirement amount once you turn 65, you should know that the benefit does not begin immediately. You'll need to fill out an application to get it. It is recommended by Service Canada that you submit your pension application six months prior to the month in which you would like your CPP to start. Applying for CPP early requires you to do more than just reach the eligibility age of 62.

Must you now take a break?

Once upon a time, you had to quit your job to start collecting CPP early. In 2012, this shifted.

Many Canadians over the age of 60 who are still actively employed can thank CPP for this opportunity. The age at which these individuals can begin collecting CPP has been lowered to 60, and they can keep working while doing so. If you keep working, you'll have to keep making CPP payments, but those payments will eventually pay off in a larger retirement benefit.

Basically, you can apply to collect CPP if you are working You'll still have to pay into CPP, but doing so will increase your future payout.

Just how much will contributions to CPP be lowered

Before 2012, there had been no decrease at all. For every month before your 65th, you'll receive 5% off. When you start receiving CPP at age 60, your benefit is cut in half (60 months times 0). 5% = 30%)

Under the old rules, the decision to collect CPP early was really based on a mathematical calculation of the break-even point This point of no return was calculated as age 77 prior to 2012. In light of the new regulations, every Canadian must be proficient in mathematics.

There is currently no discount. 6% for each month before your 65th Taking Social Security at age 60 will reduce your benefits by 36% as of 2018. (Sixty Months x 0) 6% = 36%) The current age at which one can no longer afford to continue working is 74.

You may also be interested in: How Much Money Can You Expect to Receive from Social Security?

When to take CPP benefits Financial break-even

First, I think it's important to determine the break-even point in the numbers in order to answer the question. Take the case of Beth and Janet, who are identical twins.

In fact, Janet and Beth are identical twins. Assume that upon reaching age 65, they are both entitled to the same $1,000 monthly CPP benefit. Let's further assume that Janet wants to wait until age 65 to receive her CPP in order to increase her income by 5 years, while Beth wants to receive hers immediately at age 60 at a reduced amount.

At age 60, Beth is eligible to begin receiving income from the Canada Pension Plan with a zero reduction factor. 6% for every month until she turns 65 As a result, Beth's benefit will be lowered by 36% (from 100% to 0). beginning on her 60th birthday (6% x 60 months) for a total of 0 per month

Now, skip ahead 5 years. Both Beth and Janet are 65 years old now. Beth has received 0 per month, for a total of $38,400 over the past 5 years. What this means is that Beth has earned $38,400 before Janet has received any CPP payments. That being said, Janet is now going to get $1000 per month for CPP or $360 per month more than Beth’s 0

With Beth currently ahead by $38,400, how long would Janet have to collect a higher pension than Beth? Janet will need 106 months to earn $38,400 at $360/month. In other words, Beth outpaces Janet before age 74, but Janet outpaces Beth afterward.

If Beth or Janet could just tell us when they passed away, we'd be able to make the right choice. This could also be asked as, "What is your life expectancy?" ”

Here’s the breakeven chart to support the example

Age 60 Age 61 Age 62 Age 63 Age 64 Age 65 Paycheck from CPP Each Month 0 2 4 6 8 $1000 Discount for enrolling in CPP before the minimum age $360 $288 $216 $144 $0 As a whole, money that was advanced $38,400 $34,176 $28,224 $20,544 $11,136 $0 Payback Timeframe (in Months) 106.7 118.7 130.7 142.7 154.7 Payoff (in years) 73.9 74.9 75.9 76.9 77.9

It could be argued that, mathematically, you should delay taking your CPP if you live past age 74. Forget waiting until you're 74; if you don't take the money now, you'll regret it. The sad truth is that no one can predict when they will pass away.

When do you anticipate spending the cash?

There's no way to know for sure when you'll die, so another crucial consideration is when you'll get the most use out of the money. Time Period: Either Before or After Age 74 For most people, the early years of retirement are the most enjoyable, even though the break-even point is reached three years earlier. These are what I refer to as the "go-go" years.

In this connection: the three stages of retirement

Taking Social Security benefits before full retirement age is appealing to many people because they can be used immediately and, if they don't spend them, the money can be invested for the future.

Because of the ever-increasing price of medical care, some people argue that saving money now will benefit them more in the long run. You should make preparations based on your beliefs. To get a sense of how much people in their 70s, 80s, and 90s spend, it may be instructive to observe their spending habits. When compared to their active retirement years, do they spend more or less money now?

Is there a risk of losing out if profits are wasted?

Let's revisit Beth, the 60-year-old who stands to gain 0. Let's pretend she has second thoughts and puts off starting her CPP at age 62 instead of 61. That's because she "left money on the table," as the expression goes. ” In other words, she could have taken 80 from her CPP (0 x 12 months), but chose not to, to be able to get more money in the future OK, as long as she lives long enough to recoup her losses.

It all boils down to numbers once more. To recoup the money she lost by not taking Social Security when she was eligible to, she must live an extra year after retirement. To recover the ,680 she lost by postponing CPP by a year, she would need to live until she was 76 years old. To make up for the two years of lost benefits if she waits to start collecting CPP until age 62, she would have to live to be 76.

Why wouldn’t you take it early given this math You believe you will need more money and have a longer life expectancy as you get older, and this is the primary motivating factor. The proverb suggests that having one bird in hand is preferable to having two hidden away.

Alternate point of view

A simple calculation may be the deciding factor for some people when deciding whether or not to forego their CPP benefits. If you are age 60 and delay receiving CPP for a year, your CPP benefits will increase by 7 percent. 2% (0 (6% Per Annum) Most would agree that a 7 figure income is unlikely to be guaranteed in light of current interest rates, volatile stock markets, and low historical investment returns. Currently, one can expect a 2% rate of return

It's too late to increase your CPP benefit by waiting once you reach age 65. An annual rate of 7%, or 8% per An Annual Rate of 4 Percent Many people believe that postponing CPP is a wise financial move (if they live long enough). You can see that there are two mathematical perspectives on the same issue.

To what end do you continue to labor if you are still awake?

Keep in mind that if you continue to work while collecting CPP between the ages of 60 and 65, you will continue to make CPP contributions, which will ultimately increase your CPP payment.

To learn more about the CPP retirement benefit, check out the related article.

Early Retirement Credit (CRC): How to Apply

If you are over 60 years old, applying for CPP early is as easy as filling out an application. To contact Service Canada, go to their website or find a local office.

Please allow me to add my two cents

There have been rumors circulating that I favor CPP withdrawals in the early years. Honestly, it makes no difference what I think. You should keep in mind that this is your money and your choice. My goal is to simply present as much information as I can to help you make the decision

Every choice has an element of logic or mathematics to it. That's the point where I think things even out mathematically. However, in practice, most people choose rather than choose based on mathematical considerations alone. Many people, as you can see from the numbers, will start using it right away.

Every citizen of Canada must decide this. Good luck

For more information on this topic, visit my Online Guide for CPP and OAS.