Is taking CPP a good option if I plan to keep working after 65?

Article content material

By Julie Cazzin with Allan Norman

Q: I can be 65 in December. I’m nonetheless working a full-time salaried job that I plan to proceed for 2 extra years. I do know I can decide out of paying Canada Pension Plan (CPP) at age 65, however provided that I gather my CPP. I earn $220,000 a yr and deliberate to start out accumulating CPP at age 67. Being within the prime tax bracket, I received’t gather Old Age Security (OAS) till age 67 as a result of it can all be clawed again.

Article content material

However I ponder if it’s price beginning to collect CPP at age 65, just because I may save on paying my portion of CPP contributions ($4,055.50 for 2024). I’d get to maintain 50 per cent of my full CPP, which is $7,000 a yr or so. I’d save $11,000 whole, which I might then spend money on a tax-free savings account (TFSA). Is taking CPP at 65 underneath these circumstances a superb choice for me? I appeared on the post-retirement profit (PRB) that I might pay into for 2 years if I maintain contributing to CPP, nevertheless it doesn’t look that enticing. — Charles

FP Solutions: Charles, earlier than I reply your query, bear in mind which you could cut up your CPP along with your spouse and if she is in a decrease tax bracket, you might be left with a better after-tax quantity to take a position. The quantity you’ll be able to cut up is predicated on the variety of months you reside collectively whereas contributing to CPP and there’s an software you will need to full.

The 2 variables to think about when deciding when to start out your CPP are how lengthy you’ll stay and the long run charge of return in your investments. An extended life suggests delaying CPP, whereas larger funding returns level to beginning CPP early. There’s a third and sometimes ignored variable, which I name the licence-to-spend idea.

Article content material

Article content material

The deciding variables don’t change with the addition of the post-retirement profit. Anybody working between the ages of 60 and 70 has the choice of incomes the PRB. Salaried staff between 60 and 65 who’re receiving CPP contribute to CPP and earn PRBs. At 65, you’ll be able to full a type and decide out of CPP contributions if you’re nonetheless working and accumulating your CPP.

Charles, you can be working past age 65, so you’ll be able to decide out of CPP contributions if you happen to begin your CPP. Doing this implies you received’t get the advantages of delaying CPP previous age 65, however, as you level out, you’ll be able to make investments the after-tax worth of CPP in your TFSA.

To earn the PRB, you’ll be able to both begin or delay your CPP, however decide to proceed making CPP contributions. Your CPP contributions for 2024 can be $4,055.50 based mostly on the brand new CPP contribution necessities: $3,867 for the conventional CPP and $188 for the improved CPP. The mixed contribution will earn PRB credit of $44.46 monthly or $534 per yr.

Is it price making the CPP contributions? Basic math exhibits it can take 7.6 years ($4,055.50/$534) to interrupt even, forgetting funding returns, inflation, the advantages of delaying CPP and the licence to spend.

Article content material

As a reminder, CPP will increase 0.7 per cent monthly for each month you delay previous age 65, or a 42 per cent enhance from age 65 to 70. As well as, the CPP profit quantity is adjusted to wage inflation previous to beginning CPP, that means the 42 per cent enhance could also be bigger as a result of wage inflation has grown at a quicker charge than the patron value index (CPI).

The opposite vital, however hard-to-measure cause for delaying CPP is your licence to spend, as described in a Might 2024 research paper, Assured Revenue: A License to Spend. The paper mentioned retirees desire to stay off an revenue moderately than promote their investments and spend the proceeds.

It mentioned that if an individual had further revenue of $10,000 per yr, they might comfortably spend that cash on nonessential gadgets equivalent to eating out or holidays. On the time of the analysis, $140,000 would buy an annuity paying $10,000 per yr. In different phrases, the $10,000 per yr was equal to having $140,000, and but the analysis individuals have been reluctant to attract $10,000 from the $140,000 to spend.

What about you? Would you be simply as completely happy to attract and spend $10,000 from a $140,000 funding? Or would you discover it simpler to spend $10,000 if you happen to obtained it as revenue every year?

Article content material

Charles, including up the monetary and behavioural advantages of delaying CPP makes arguing for early CPP robust except you aren’t wholesome or actually need the cash. Even if you happen to begin CPP early, make investments the proceeds and do effectively, it’s uncertain it can have the identical spending worth because the CPP revenue. Earlier than making the choice, you must overview it with a monetary planner.

Allan Norman, M.Sc., CFP, CIM, offers fee-only licensed monetary planning providers and insurance coverage merchandise by way of Atlantis Monetary Inc. and offers funding advisory providers by way of Aligned Capital Companions Inc., which is regulated by the Canadian Investment Regulatory Organization. He will be reached at alnorman@atlantisfinancial.ca.

Bookmark our web site and assist our journalism: Don’t miss the enterprise information it’s essential know — add financialpost.com to your bookmarks and join our newsletters here.

Article content material