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Jim Maroney Jim Maroney

:: Early retirement available at age 60 for Canadians who meet the criteria under the Canada Pension Plan (CPP) Act

:: In my last article, I reviewed provisions of the Canada Pension Plan Act that allow retirees to split CPP benefits with a spouse or common law partner. Sharing CPP benefits can often yield real tax savings, however, where CPP is at issue, there is actually a decision that needs to be addressed beforehand by soon-to-be retirees.

CPP benefits are “normally” payable starting in the first month after age 65. Although age 65 is a popular retirement age, it is possible to commence receiving CPP as early as age 60 or as late as age 70.

Certain conditions must be satisfied in order to receive CPP before age 65. To qualify for CPP benefits between the ages of 60 and 65 you must have either stopped working or have earnings below a specified income level.

The “stopped working” condition isn’t quite as final as it seems. You are considered to have stopped working if you are not working by the end of the month before the CPP retirement pension begins and during the month in which it begins. In other words, if you “stop working” for a two-month period you should be able to meet the test.

The “specified income level” test requires applicants to earn less than the current monthly maximum CPP retirement pension ($788.75 in 2002) in the month prior to the month your pension begins and in the month it begins. Notice, once again, that the test only covers a two-month period.

Regardless which test qualifies you for early receipt of CPP benefits (“stopped working” or “specified income level”), once you receive your CPP pension, you can work as much as you want without affecting your pension payment. However, you cannot contribute to CPP on any future earnings. So, except for cost-of-living adjustments along the way, CPP benefits are effectively cast in stone once you start collecting.

Of course, opting to receive CPP benefits before the age of 65 comes with a cost. CPP benefits are reduced by 0.5 per cent for each month you start collecting before age 65. For example, if you start collecting CPP at age 60 your monthly CPP pension will be reduced by 30 per cent (60 months at 0.5 per cent per month). The calculated reduction in benefits is permanent – don’t expect a recalculation of benefits at age 65 because it won’t happen.

Choosing to commence collecting CPP after age 65 is easier in that there are no income-based conditions to be satisfied. Once you turn 65 you’re in the driver’s seat and you are free to choose when you’d like your CPP benefits to start, however, payments must start in the month you turn 70 – no ifs ands or buts.

As in the case of collecting CPP early, there is a 0.5 per cent benefit adjustment, however, this time the adjustment is positive – CPP benefits increase by 0.5 per cent for each month after age 65.

With a decade spread between the earliest starting date (age 60) and the latest starting date (age 70) the question that frequently arises is when is the “best” time to start collecting CPP?

Unfortunately, I can’t answer this question for you – ultimately the decision is yours to make and only history will tell whether you made the correct choice. In reaching your decision you’ll need to consider your overall income currently and your expected income during your retirement years.

Expenses should also factor into your decision. Typically, the older retirees get the lower their expenses are. If you plan on traveling, for example, you’re more likely to do this in your 60s rather than your 90s so it’s logical to expect expenses to be higher in your early retirement years.

Your health and your family health history will need to be considered. If your grandparents attended your retirement party there’s a good chance you’ve got a few years yet to live so you may want to delay collecting until you’re 65 or older. If good health is not on your side, collecting early is probably where you want to be.

Fine and dandy but what about the numbers, after all, everyone likes to see numbers when making financial decisions. Let’s assume, for example, that Mr. Early, Mr. Ontime and Mr. Late each turned 60 years of age on January 1, 2003. After considering all the relevant factors, Mr. Early chose to collect his CPP at age 60, Mr. Ontime plans on collecting when he turns 65 and Mr. Late, being the patient type, intends on waiting until he is 70 years of age. If we use the maximum monthly CPP benefit in 2002 as our base, we calculate that Mr. Early will receive $551.12 per month, Mr. Ontime will receive $788.75 and Mr. Late $1,025.37. Assume further that each of our retirees invests every penny of CPP he receives earning 4 per cent interest per year on the invested funds.

Running the numbers we find that Mr. Early has more money in his fund until age 83 when Mr. Ontime’s fund becomes the larger investment. Mr. Early will be over 90 years of age before Mr. Late’s fund becomes the larger of the two. Comparing Mr. Ontime and Mr. Late, the crossover point is also reached when the two men are over 90 years of age.

This type of simplistic analysis suggests that collecting CPP starting at age 60 will yield a better result for those who do not anticipate living into their low-80s; starting at age 65 is the choice for those who expect to live well into their 80s and delaying is the choice for the chosen few who expect to see their 90s.

Of course, any analysis of this type is guesswork at best since nobody can accurately predict what will be 20 to 30 years hence. After all, it was only 20 years or so ago that mortgage rates were in the mid-teens and you’d have been thought a fool for suggesting that 5-year rates would be less than 5 per cent in 2003. The analysis also ignores the effect of income tax and who can possibly claim to know where tax rates will be in any given year?

Free Tax Advice Article Submitted to Income Tax exclusively by Jim Maroney
CA Canadian Chartered Accountant with Brown, Andrews & Maroney in Maple Ridge, BC, Canada

Official details about this and other topics on income taxes can be found in English & Francais at
Canada Revenue Agency (CRA) / l'Agence du revenu du Canada (ARC) offers bilingual information on its website for
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