Consider inflation when deciding when to begin CPP

Consider inflation when deciding when to begin CPP

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The author of this article is Lea Koiv, a tax, pension and retirement expert who has held senior roles at a national insurer and international accounting firms with a number of high level accreditations.

The topic of when to start taking Canada Pension Plan comes up during every retirement planning meeting. "Should we take it at age 60? What happens if we pass away, then we don't get that money we put into it all those years!" or "Could we wait until age 70 and then get more money?". There are of course many factors and variables that come into play when deciding. Canada Pension Plan is indexed to inflation. With inflation hitting highs not seen in decades, it is a great time to review how CPP works, and what role inflation plays in the decision.

Let's take a look at one of the first quotes and charts from the article.

People who begin drawing CPP before age 65 receive a discounted payment, while those who draw CPP after age 65 receive an enhanced payment.

For the decade ending in 2018, the average age at pension take-up was 62.5. Inflation is now increasing rapidly, which could lead to a significant future increase for a deferred pension.

By deferring your pension, you are either working longer or drawing from alternate sources (RRSPs or RRIFs) to supplement your income. The article reviews a case study in more detail to see if it makes sense to draw from alternate sources and delay drawing your CPP, so you can take advantage of a higher CPP payment in the future. There is no one size fits all solution here. The case study provide a good starting point though. The chart below shows if Cynthia began drawing CPP at age 60, she would receive $752.53. This monthly amount is indexed to inflation, based on the Bank of Canada's target inflation rate of 2%. If she defers drawing CPP to age 61, she would receive $857.07. If she defers drawing CPP to age 70, she would receive $2,254.97 a near 200% increase over the amount if she started at age 60.

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To illustrate these differences another way, we can look at the present value (PV) of the retirement pension. Using a life expectancy of 96 and a 4% discount rate, the PVs are as follow: Age 60 start – $239,000 / Age 65 start – $318,000 / Age 70 start – $377,000. As the calculations show, Cynthia’s eagerness disadvantaged her. Assuming Cynthia had sufficient retirement assets to draw on until she began CPP, waiting would have been more beneficial.

Very interesting piece on a topic that affects almost every Canadian, more specifically those approaching retirement. Before you decide, do your research, speak with a professional - reach out directly to us if you have any questions (click here).

The article linked and mentioned above was posted on June 28, 2022 by Advisor's Edge, written by Lea Koiv. Check out more from Advisor's Edge here.

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