When to Start Drawing Your CPP
For some, taking CPP sooner is an obvious choice if you need it to pay bills or have serious health issues that could shorten your life span. But those who can wait would be financially better off in the future. So, why don’t they?
An informal survey conducted by the Globe and Mail found that the most popular age to take CPP benefits is 60. Despite the CPP legislation stating that anyone who will be taking their pension before they reach age 65 will have their payments decrease by 0.6% every month, amounting to 7.2% annually and a maximum overall deduction of 36% if you start your CPP at age 60 vs. 65. Furthermore, if you withhold taking your CPP until after 65, you are benefited by an increase of 0.7% per month amounting to 8.4% per year with a maximum increase of 42% by age 70.
Many people take their CPP benefits early because they’re unsure of how long they’ll live and don’t like the idea of missing out. Right now, the breakeven point for waiting is roughly 74 years of age. Meaning that if you waited to draw your CPP until 65, vs taking it early at 60 you have now surpassed the income you received of starting 5 years early.
Having said that, there are many good reasons to take your CPP early. Limited or reduced life expectancy, not enough income to cover your expenses are a few good reasons. However, they don’t apply to everyone, with a large percentage of the population still working beyond age 60 and not requiring CPP or having saved enough so drawing the income early to cover expenses is not entirely necessary. So why is it that drawing CPP at age 60 is still the popular age to start?
It’s such a common phenomenon that it has a name in behavioural science: present bias. It’s the tendency to focus more on the present than the future when making decisions. It can lead us to overvalue immediate rewards and undervalue longer-term ones. Scientific studies show that most people prefer to receive money sooner, even if we know that we could get more if we wait.
We’re focusing on the CPP here, but where else does this come into play in our lives?
Most of us have some degree of impatience, and we see lots of evidence of it in financial contexts. You see it when working people are deciding how much money to set aside for retirement. Many people would rather put as little money away as they can so that they can enjoy their life today, and there are interesting reasons for that. There’s a concept called psychological distance, and one aspect of it is temporal distance. For example, a 20-year-old may find it hard to feel connected to the future version of themselves in retirement in 40 or so years. Even though someone in their 20s might know, conceptually, that if they put away $100 every month it will grow – and make for a much more comfortable retirement than if they didn’t save – they can’t connect very easily with that future version of themselves.
Present bias is really powerful. When it comes to the CPP, once someone turns 60, they’re eligible to receive it, and it’s just very tempting to take the money right away. As a society, we can do more to encourage financial literacy to help people understand the benefits of waiting. Of course, there are cases where it makes sense to take the money early. However, for many people, if they can find a way to make ends meet in the meantime, the benefits of waiting to take the CPP are compelling. We need to be a little more mindful that every dollar we spend today is many dollars that we won’t have access to in our retirement years.