One of the most common questions we get from those approaching retirement is, "when should I take my CPP & OAS benefits?" This page is dedicated specifically to that question and below you'll find a video featuring Loney Financial President, Dan Loney, discussing the subject with special guest Alex Chan - as well as a link to the Canadian Retirement Income Calculator, and our PDF Guide - CPP / OAS Fundamentals for Canadians.
The Canada Pension Plan (CPP) in a Nutshell
- As a worker in Canada between the ages of 18 and 65, 5.95% of your first $68,500 annual earnings must be allocated to the Canada Pension Plan. Earnings beyond $68,500 are not eligible.
- The CPP fund is currently worth $600 Billion and is estimated to reach $1 Trillion by 2031. As is the fund will be able to pay pension obligations for the next 75 years.
- At age 65 you are eligible to take CPP benefits - which are meant to be a base for your retirement income. The current maximum benefit is $1,365/month and is determined by how much you contributed between ages 18 and 65. Once you start you will receive benefits monthly until you die.
- Benefits are taxed as income.
- You can start taking CPP benefits as early as age 60, however, for every year you take benefits early your monthly benefit amount will be reduced by 7.2%
- For example - assuming that at age 65 you qualify for the max benefit of $1,356/month, but you decided to take benefits early at age 60, your monthly benefit would be reduced to $873.60/month and the math would look as follows:
- Maximum monthly benefit at 65: $1,365
- Reduction for taking CPP at 60: 7.2%/year x 5 years = 36%
- Amount of reduction: $1,365 x 0.36 = $491.40
- Monthly benefit at 60: $1,365 - $491.40 = $873.60
- Monthly benefit at 60: $1,365 - $491.40 = $873.60
- You also have the option to defer benefits until age 70, and for every year you defer, your monthly benefit will increase by 8.4%.
- For example - assuming that at age 65 you qualify for the max benefit of $1,356/month, but you decided to defer benefits to age 70, your monthly benefit would increase to $1,938.30/month and the math would look as follows:
- Maximum monthly benefit at 65: $1,365
- Increase for deferring CPP until age 70: 8.4%/year x 5 years = 42%
- Amount of increase: $1,365 x 0.42 = $573.30
- Monthly benefit at age 70: $1,365 + $573.30 = $1,938.30
When should I take CPP?
It's unique for every person and the following should be considered:
- What benefit amount will you be eligible for at age 65, and how much would that amount change if you a) took early or b) deferred? *Do the math yourself or check in with us, we are here to help.
- Can I afford to wait until age 65 or even defer?
- If you are desperate when you are 60 and need early benefits to make ends meet, it may be a no brainer to take them early.
- If you can make ends meet when you are 60 without CPP benefits, then you might consider the following...
- What are the tax implications of each scenario?
- What if you took benefits early and invested them? *There are some scenarios where taking benefits early and investing them plays out better than waiting, but it depends on a number of variables including your retirement plans, risk tolerance and rate of return. Again, it's possible to model different scenarios and we are here to help if you want to see what that looks like.
- What is your current health status?
- If you're healthy and feeling like your best years are still ahead of you, you might wait as long as possible to maximize your pension amount in your later years.
- If your health is in question and you're unsure, you might consider taking benefits early.
Old Age Security (OAS) in a Nutshell
- Like the CPP you are eligible to collect OAS at age 65 and you may defer benefits until age 70. Unlike CPP there is no option to collect OAS early.
- You must be a Canadian citizen or legal resident at the time of approval, and you must have resided in Canada for at least 10 years since age 18, or 20 years if outside Canada.
- If you have lived in Canada for at least 40 years after turning 18, you are eligible for the full pension amount which is currently $718.83/month if you are between age 65 – 74, and $790.16/month if you are 75+. If you have lived in Canada less than 40 years (but more than 10) the benefit is pro-rated accordingly.
- Benefit amounts are adjusted quarterly based on changes to the Consumer Price Index.
- If you earn more than $79,845 annually and are collecting OAS, a clawbackwill reduce your OAS benefits.
- Benefits are taxed as income.
- Since taking OAS early is not an option, the decision is, do you start taking benefits at age 65, or defer at a rate of 7.2% yearly.
- For example – assuming you qualify for the maximum benefit of $718.83/month, but decide to defer benefits until age 70, your monthly benefit would increase to $977.61, and the math would look as follows:
- Maximum monthly benefit at 65: $718.83
- Increase for deferring OAS until age 70: 7.2%/year x 5 years = 36%
- Amount of increase: $718.83 x 0.36 = $258.78
- Monthly benefit at age 70: $718.83 + $258.78 = $977.61
When Should I take OAS?
It's unique for every person and considerations would be the same the CPP decision:
- What benefit amount will you be eligible for at age 65, and how much would that amount change if you deferred? *Do the math yourself or check in with us, we are here to help.
- Can you afford to defer?
- What are the tax implications of each scenario?
- What if you took benefits ASAP and invested them?
- What is your current health status?
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