Chuck Groot Financial Consulting

This has been a very controversial discussion for the last decade: “Should I collect my CPP before I retire or, more specifically, as soon as I turn 60?”

There are two main camps on this subject. Planners who say absolutely, and those who say wait till the very last moment. Let’s shed some light on this subject.

CPP and Social Security were designed to make sure that people will have funds to survive and live on after they retire. In Canada, it was instituted in 1952, and in the States, in 1935, Roosevelt created Social Security.

Let’s first look at the laws surrounding CPP

According to the Government of Canada Justice Laws Website, we see that every employee must have Canada Pension Plan deductions from their paycheck, and the employer must match this amount and send this to the government. If you make more than $3,500 per year and are over 18, you are required to pay into CPP. As of 2020, the rate is 5.25% for an employee and 10.5% for self-employed individuals, to a maximum annual pensionable earnings of $58,700 or a contribution level of $2,898 per year as of 2020.

CPP is designed to be taken out at 65 years of age but can be redeemed as early as 60 or as late as 70. The longer you wait, the more CPP you will receive per month. If you are collecting CPP and are still working, you must still pay into CPP till you are 70 years of age. It is also tied into a COLA clause; in other words, it is adjusted for rises in the cost of living.

Let’s look at the numbers: CPP is reduced by 0.6% for each month before you turn 65.

60	65	70
$7360/yr	$11,500/yr	$16,330/yr
$613.33/mth	$958.33	$1360

 

Social Security in the States is a multilayered arrangement between the employee, employer, the state, and the federal government. A good source of information is the Legal Information Institute at the Cornell Law School. The maximum earnings that can be computed on is $137,700 for 2020. The employee and the employer each contribute 7.65%, and self-employed individuals contribute 15.3% of their income.

Social Security is designed to be redeemed at 66 years and 10 months but can be redeemed as early as 62 and as late as 70 years of age. The longer you wait, the more you will receive per month. Your payments are calculated using the highest paid 35 years that you enjoyed. Like Canadian CPP, there is a variable cost-of-living adjustment most years. If you have already started to get your payments, you can stop them to get more later.

You can receive your social security while you are working, but if you make more than $18,240 part of your Social security may be clawed back. 

62	66 yrs 10 months	70
$8496/yr	$12,000/yr	$15,840/yr
$708/mth	$1000/mth	$1,320/mth

 

The Old Ben Franklin Close — What are the pros and cons?

Cons

• Losing up to 36% of the maximum hurts.
• CPP is taxable income and can put you into a higher tax bracket.
• You have an average a safer and guaranteed return over time.
• Using your RRSP to finance your spending is more efficient than using your CPP.
• If you collect CPP now, it reduces your joint survivor benefits for your spouse later.

Pros

• If you need to pay bills and get food, do it.
• If your genetics are such that your life expectancy is shorter, enjoy your time here.
• If you are self-employed and pay yourself dividends, your CPP is based on your best 35 years and you would get penalized if you don’t take it.
• You can invest the money into an RRSP or your TFSA, and the money you make should be more than enough to cover the lower payment later on.

As you can see, making the choice to collect or not collect is a tricky question and must be based on personal reasons. Each person’s situation is unique.

Possible investment scenario

Let’s just look at a possible scenario if you take out the money and are in a position to invest it wisely.

We need to accept some assumptions: The market cannot be accurately forecast, and what has happened will not guarantee that it will continue to happen. Nobody has a crystal ball.

But, over the last 10 years, the S&P 500 returned an average of 14%, and the top 10 ETFs had an average return of 338.4%.

So, just to be safe, let’s take a return of 10% per year on the money you invest from your CPP from the time you are 60 till you are 70, and let’s see what you might have approximately. We will not add in any COLA clause adjustments.

1. If we take $613.33 as a start and add $613.33 every month for 10 years and get a 10% return after 10 years, we would have $124,173.32.

2. Then let’s assume we keep the $124,173.32 and invest $100 per month for another 10 years and live to 80. We will have $342,060, as well as using the $513.33 for monthly expenses.

3. What happens if we keeping investing the full amount? If we wait till we are 70 to collect CPP, we would be receiving $1360 a month. If we live to 80, we will receive a total of $163,200. That is, if we don’t use any of the money for expenses.

5. This is the result if we have only a 5.15 return: We will break even with waiting till 70.

6. This is the result if we have only a 5.15 return: We will break even with waiting till 70 and going on to 80.

	Age	Starting amount	Monthly increase	Rate of interest	Time in years	What you will have	The use of money every year after 70
1	60	$613.33	$613.33	10%	10	$124,173.32
2	70	$124,173.32	$100.00	10%	10	$342,060.00	$513.33/mth or $5133.30/yr
3	70	$124,173.32	$613.33	10%	10	$444, 656.11
4	70	$1360.00	$1360.00	10%	10	$275,342,33
5	60	$613.33	$613.33	5.4%	10	$97669.59
6	70	$97669.59	$100	5.4%	10	$181,014.41	$513.33/mth or $5133.30/yr

 

Summary

If you start at 60 and invest the CPP at 10%, you will have $444,656.11. That is $169,313.80 more than waiting till starting to collect at 70.

If you start at 60 and then at 70 begin to invest only $100 of the $613.33, you will have $342,060. And it is still $66,717.67 more than waiting and you will have use of $ 513.33 a month. 

Finally, if you only get a 5.15% return, you will breakeven, but you would have had the use of $61,999.60 extra from the years of 70 till 80.

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