CPP at 70 - Makes Cents and Sense... but CPP at 60? Everyone seems to be doing it.

I came across a Kitces blog post about deferring Social Security income to 70, and how it is the best long term investment that money can buy. Akin to Social Security, is our Canada Pension Plan.

When considering retirement planning decisions, one of the biggest choices clients face is when to start Canada Pension Plan (CPP) benefits. Choosing between taking CPP at 60 or waiting until 70 can be daunting. Each option offers distinct advantages and disadvantages, so understanding them is crucial for making a decision that fits their financial goals and lifestyle.

Most planners or advisors will likely advise deferral of CPP to age 70. There are obvious reasons why - which we'll get to! - but this article isn't about convincing you as to why you SHOULD. It's about understanding that, even with the best laid advice, most people DON'T.

The Benefits of Delaying CPP

I'll start by stating the (obvious?) benefits of waiting until you're 70 to start a CPP pension, and why most advisors or planners will advise as such. This option make a lot of CENTS - as in dollars and cents - and also SENSE, if we're thinking, logically.

Higher Monthly Payments: Delaying your CPP can result in a much higher monthly payment. For example, if your estimated CPP benefit is $1,000 at 65, it could rise to approximately $1,420 by waiting until 70. This difference can significantly enhance your lifestyle, especially as healthcare costs rise with age. (In pure math terms - 8.2%/year increase in your CPP benefit for each month you defer past age 65. This is a guaranteed 'rate of return' on your pension, in essence).

Longevity Considerations: If you expect to live a long life, delaying CPP can pay off. Waiting until 70 means you'll receive more each month, which can help cover costs as you age. In fact, those who wait to claim CPP often have a much better financial situation in their late 80s and beyond, potentially increasing their total benefits over a lifetime.

Tax Efficiency: Delaying CPP can have tax benefits, especially if it allows you to withdraw from tax-deferred accounts during lower income years. This strategy can help lessen your tax burden and preserve savings longer.

Okay, now that we've gotten that out of the way - I'd like a show of hands please. How many people do you know that have waited until 70 to collect their CPP, even with all that terrific, and sensible, advice?

For me, it's 0.

However, in the construction of technical financial plans, we planners almost ALWAYS will 'math the math' to recommend the path that will increase our client's chance of financial success (read: probability of success, highest Monte Carlo simulation, etc). Why are we doing this? Is this what our job is, or is there more to it? (Hint - there is more to it).

We'll come back to this.

The Benefits of Taking CPP Early

Here, there are some individuals who would benefit, or NEED, to take CPP early. In some cases, there isn't much choice - financial hardship or lack of external resources make it a near impossibility for someone to wait to collect CPP benefits.

Opting to take your CPP at 60, which results in a 36% reduction (or 0.6% less for each month before turning 65), could be crucial for someone needing to cover their expenses.

Those who don't fall in the financial hardship category may fall into the shorter life expectancy category (counterpoint to point made above). Why not collect when you don't expect to live long? Enjoy life now, and make every dollar count.

But how about for those who DON'T fall into either category? Why are they opting to take CPP as soon as they can?

What is Really Going On?

True life client examples, stories, and situations. Why people are not opting for deferral, when it makes the most CENTS/SENSE?

• Take Janie, who just turned 60 this year. Janie and her husband Rick have no heirs and have enjoyed an affluent lifestyle. They have accrued a healthy nest egg and are enjoying retirement. Rick, being 8 years her senior, began collecting Social Security last year at full retirement age (yes, they live a cross border lifestyle). In asking Janie why now (she isn't a client!), her response was, "Why not? I can enjoy it now, and tomorrow isn't guaranteed. It's only a few hundred bucks (a drop in the bucket) and I can use that to go enjoy a few more dinners". Here - the matter of CPP income is not material to Janie. It's not going to change one iota of her lifestyle, so to her, the 'math' of waiting til 70 isn't mathing.

• Then there's Ian, a former client, who retired at 55. He had an excellent nest egg via an RCA package from his former employer. At 60, he opted to begin CPP right away. Again, why? Similar reasoning. "I don't know how long I'm going to live, so I want to collect it now." Although Ian wasn't as affluent as Janie and Rick, he was unconcerned by the math of the CPP argument.

• Then we have Jeanine, who has more confidence in her investments to generate a greater average rate of return than 8.2%/year, than deferring CPP to equal the same. As well, she wants to pass on her portfolio onto her heirs, whereas CPP has a meager $2,500 death benefit (taxable!) - which can't be passed on.

• Lastly, we have Jon, who is concerned that by deferring to 70, the CPP survivor benefits available to spouse Tanya are not helpful. Should Jon defer his CPP from 65 to 70 and pass away prematurely, there is NO difference in the enhancement to Tanya's CPP benefit as a surviving spouse (as in: Tanya receives some CPP on her own merit, but since you can only combine your CPP income with your deceased spouse's CPP up to the maximum of one full CPP benefit, it doesn't matter whether Jon takes his CPP at 65 or 70; it won't affect what she could receive.) *Sidenote - this does really need to get fixed.

What do these examples show? That MATH is not resonating (duh), and emotion is trumping logic. Affluent clients treat CPP as a 'nice to have', while they still can.

Time is currency; money is not.

Perhaps they've started to see their friends pass away, or they themselves have suffered with health challenges. The emotion of money and what it can do supercedes all the rationale that we give our clients on 'why to wait'.

As planners, we learn that our role is to perform the calculations, as clients engage us to optimize their wealth. However, what they may actually need from us is not merely to maximize their estate's net worth, but to understand their values and provide advice that aligns with what truly makes sense for them. This doesn't always mean leaving every possible penny behind—thanks to Die with Zero!

Who Really Needs to Listen to "Defer to 70?"

There are some clients that actually, dramatically, increase their likelihood of meeting their retirement lifestyle needs by deferring CPP to age 70.

• Consider Patricia as an example. She and her husband Tyler are low-income earners. Tyler is a small business owner facing challenges. Despite this, they have managed to save a few hundred thousand for retirement. Patricia has a modest defined benefit pension, and they both have some CPP entitlements, though not close to the maximum. By delaying their CPP until age 70, they increase the likelihood of meeting their basic lifestyle needs by over 50%. This is a substantial benefit for Patricia and Tyler. However, the downside is that they will significantly reduce their small savings between the ages of 65 and 70. This could lead to a sense of financial scarcity, as their pensions after 70 will make up almost all of their income. If they need additional funds after 70 for emergencies, long-term care, or even something as simple as replacing a car, it would be a major challenge. Although they own a home, the idea of incurring debt during retirement, such as through a reverse mortgage, does not align with their comfort level or risk tolerance.

As a planner, this presents as a difficult situation. Even though the math says that deferring to 70 makes a huge difference in their long term requirements, is that going to make them feel secure or confident should they need funds in their later years? Likely, it will lead to excessive financial stress, or the need to sell their modest home (and no, they did not profit in a huge real estate bubble).

In the box, yes, they should wait until 70 to meet their essential lifestyle needs. However, outside the box, we should explore other possibilities: part-time work, extending the period of full-time employment, or reassessing lifestyle needs to identify areas where discretionary spending can be reduced.

As you can see - even the 'defer to 70' option can be difficult.

Final Takeaways

How should we be approaching CPP decisions? I have these thoughts. You're welcome to agree or disagree.

1. We are all individual humans (I tell my kids this every day!). What may work for one person well does not work for all.

2. When clients hire advisors or planners, they are not JUST looking for the math. If that's the case, we will all be very soon replaced by AI.

3. Technical financial planning, as much as we want to geek out on it, does not always solve the problem.

4. Listening to the client, understanding their personal values and aligning the advice accordingly goes a long way.

5. In many cases, emotion trumps logic. Especially as we age, and the years get shorter.

6. We can do the math, but always encourage clients that they can change their minds (at any time).

7. Planning is a verb and not a noun, so we need to CONTINUE doing PLANNING and not present a plan like it is this stagnant document that will forever remain a Source of Truth. (Planners will know this, when a client will come with 'a plan' that was done 12 years ago with an 8% rate of return and are desperately clinging to an outdated net worth projection like a lifeline).

These truths go, by the way, well beyond the CPP conversation.

Want to run the math? Go nuts: https://my.freshplan.ca/calculators/cpp-take-early

Want to do values based planning? Talk to a financial planner. www.adviceonlyplanners.ca