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How to apply for your CPP early, and should you?

To qualify for CPP, you must be over the age of 60 and you must have made at least one valid contribution (payment) into Canada Pension Plan. How much income you get depends on how much you put in and for how long you contributed into CPP.

Remember that CPP is a contributory plan which means that all benefits are funded by financial contributions made by employees and employers. CPP is not funded by general tax revenues. In other words, how much you get is dependent on how much you put in.

At the age of 65, you qualify for the normal retirement amount but it is important to note that the benefit does not start automatically. You must apply for it. Service Canada recommends that you apply for your pension six months before you want your CPP to begin. If you want to collect CPP before the age of 65, you must also apply.

Do you have to stop working?

At one time, in order to collect CPP early, you had to stop working. This has changed in 2012.

CPP has opened the door for many Canadians who are over the age of 60 and still working. All of these people can now collect CPP as early as age 60 and continue to work. If you continue to work, you will have to keep paying into CPP but every contribution you make will increase your benefit in the future.

Basically, you can apply to collect CPP if you are working. If you do, you will still pay into CPP but paying into it means a bigger benefit.

How much will CPP reduce?

Prior to 2012, the reduction was 0.5% for every month prior to your 65th birthday. Taking CPP at age 60 meant a 30% reduction in benefit (60 months times 0.5% = 30%).

Under the old rules, the decision to collect CPP early was really based on a mathematical calculation of the break-even point. Before 2012, this break-even point was age 77. With the new rules, every Canadian needs to understand the math.

Today, the reduction is 0.6% for every month prior to your 65th birthday. Taking CPP at 60 now means a 36% reduction in benefits. (60 months times 0.6% = 36%). Today, the break-even point is age 74.

Should you take CPP early? Break-even point

For me, the starting point to answering the question is looking at the mathematical break-even point. Here’s an example of twins Beth and Janet.

Janet and Beth are twins. Let’s assume they both qualify for the same CPP of $1000 per month at age 65. Let’s further assume, Beth decides to take CPP now at age 60 at a reduced amount while Janet decides she wants to wait till 65 because she will get more income by deferring the income for 5 years.

Under Canada Pension Plan benefits, Beth can take income at age 60 based on a reduction factor of 0.6% for each month prior to her 65th birthday. Thus Beth’s benefit will be reduced by 36% (0.6% x 60 months) for a monthly income of $640 starting on her 60th birthday.

Let’s fast forward 5 years. Now, Beth and Janet are both 65. Over the last 5 years, Beth has collected $640 per month totalling $38,400. In other words, Beth has made $38,400 before Janet has collected a single CPP cheque. That being said, Janet is now going to get $1000 per month for CPP or $360 per month more than Beth’s $640.

The question is how many months does Janet need to collect more pension than Beth to make up the $38,400 Beth is ahead? It will take Janet 106 months to make up the $38,400 at $360 per month. In other words, before age 74, Beth is ahead of Janet and after age 74, Janet is ahead of Beth.

If Beth or Janet can provide their date of death, making the right decision would be easy. Another way to phrase this question is, “How long do you expect to live?”

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