Wednesday, 7 December 2016

Financial Studies 2 - Start CPP Earlier or Later than 65?


This is a long Blog post, so a summary of the results is in order, to keep your attention. 

The chart below are results calculated using my Retirement Forecaster spreadsheet and shows the optimum age to take CPP (blue line). The Retirement Forecaster spreadsheet takes into account effects of income tax, investment return and OAS clawback when determining the optimal strategy. You can estimate your life expectancy and use this chart to make an informed decision on when to start CPP. The red line is the result, just using a simple Total Cash calculation, only considering how much cash you receive as CPP payments. This comes to a different conclusion as the more accurate results from the Retirement Forecaster spreadsheet. 

Note that the assumptions that went into this calculation are specific and may not represent your situation. You can estimate the best age to start CPP by using my Retirement Forecaster spreadsheet for your specific situation. 

Okay, on with the Blog Post

Why should I write about this? Much has already been written on this subject, and by very competent and capable people. I want to look at this to see if it is possible to simplify the conclusions. 

Many of the articles do not address the tax implications or the OAS clawback of a lower or higher CPP benefit for a different period of time. Nor do many consider the time value of money. Using my Retirement Forecaster spreadsheet, we can account for these. 

Is it a good idea to take CPP early? If you start taking it earlier than 65, you get a smaller benefit amount. If you start it at 60, you only get 64% of the amount you would get if you had waited until starting it at 65. You get less, but you start receiving it earlier. The answer on whether this is a good idea depends on how long you live. There will be a break even age at which the total benefit received from starting it early is the same as waiting to start it at 65. If you start CPP early and you die before the break even point, you will have received more total CPP benefit payments. The opposite is also true, if you start CPP early and you die after the break even point, you will have received less total benefit. 

What is the question?

I have three questions I want to answer with this blog post. 
  1. For a simple total cash received calculation, what is the break even point for taking CPP early or later than 65? 
  2. Using the Retirement Forecaster spreadsheet and an assumption of life expectancy, what is the optimal age to start CPP?  Is it different than the calculation of breakeven?
  3. Does level of income during retirement change the break even point?

Total Cash Calculation

Just considering the total amount of cash you receive without considering the time value of the money, I will call a "Total Cash Calculation". This is a good calculation to consider, as it is relatively easy to calculate. I've done this calculation without consideration of inflation. Normally CPP benefits are inflated at CPI, but for this calculation I have not inflated the values. (In fact this does a small consideration of the time value of money equal to the inflation rate)

I've seen a number of people show the calculation using a spreadsheet. For example they show the CPP Benefit (income) when starting the CPP at 65 and also when starting it at 60 and see when the cumulative amount received becomes the same. See the example in the table below. If the person takes CPP beginning at 65, they receive $12,000 per year in this example. If they start at 60 the CPP benefit is discounted 36% so they receive $7,680 per year. The "Start at 60" case has more benefit received until the person reaches 73, then after that the "Start at 65" has more benefit.

You would conclude from this that if you expect to live past 73, then you should take CPP at 65, rather than 60. 

Annual Income ($)Cumulative Income ($)
AgeStart at 60Start at 65Start at 60Start at 65

What about considering whether to start the CPP beginning at 64 rather than 65? We could repeat the spreadsheet example above. 

There is Something Wrong with this

If you do a search for this type of calculation, you will find other people who have done the same calculation as I have done in the spreadsheet above. They may compare the amount of cash received in two cases, one being starting CPP at 65 and the other starting CPP at 60 and see when the breakeven occurs. Then they say that if you life expectancy is less than this breakeven, start CPP early, if it is later than this then defer it. 

This is the wrong question!

The question should not be: what is the breakeven? It should be: 

Given a life expectancy value, what is the optimum age at which to start CPP?  

To illustrate this, lets look at a spreadsheet of cash flows for starting CPP at all ages between 60 and 65. The values are shown in the table below, with different start years in the columns and the cumulative cash received listed downward in the table by age starting at 60. This example assumes the CPP benefit is $12,000 per year if started at 65. 

Compare the values in the row at age 73 (which is the amount received including the year you are 73). If CPP starts at 60, you receive $107,500 and if CPP starts at 65 you receive $108,000 which means the breakeven for comparing those two scenarios is that year. 

But look at the other values in that row closely. You will see that the maximum CPP received up to end of age 73, is actually to start CPP at 63. Just comparing the breakeven for starting at 60 to starting at 65, does not give us this information. 

Start CPP at606162636465
Annual Amount ($)768085449408102721113612000
AgeCumulative CPP Benefit Received ($)

We need to determine the optimum age to start CPP for all possible life expectancy, and show this in a table or chart. That way, once we estimate our life expectancy, we can easily select from the chart or table the optimum start age for CPP. 

We use the table above, complete it for all possible start ages (up to 70) and extend the table downward to about age 95. For each age we select the CPP start age that gives the maximum CPP benefit received. For age 73, the maximum occurs with starting CPP at age 63.  

The chart below shows the results for a range of life expectancy. If the life expectancy is 68 or less, then you should start CPP at age 60. For a life expectancy of 85 or higher you should start CPP at age 70. Between these values use the chart to determine the optimum. 

But just hold on. This was a simple calculation. It does not take into account the time value of money - the interest you could gain on the money received earlier (or interest on money not taken out or your accounts), and any tax implications of receiving a higher amount later.

Using the Retirement Forecaster

We can answer this question using the retirement forecaster spreadsheet. The spreadsheet is a pretty accurate cash flow forecaster that handles all the necessary details to make a retirement cash flow forecast and also to answer questions such as this one. You can get a copy of the spreadsheet and read about the capabilities and details at this blog post - Retirement Planning and Forecasting 2.0.

Basics of The Retirement Spreadsheet

The inputs to the spreadsheet include your current financial situation and some assumptions for creating a forecast. The spreadsheet creates a cash flow forecast during employment and during retirement. During retirement, income is sourced from any pension plans you have, CPP and also OAS. Additional funds above this to meet your required expenses, which you specify, are sourced from your different investment accounts (RRSP, TFSA and Taxable Investment). An accurate tax model is used to ensure the effects of differing tax rates are included.

The results of the spreadsheet is a cash flow forecast for one or two people, showing where the retirement income is sourced from and how much tax is paid. The spreadsheet will report if the assets will last long enough for your life expectancy, and if so will also calculate an Estate Value, accounting for taxes payable on death.

When trying to determine the best scenario, I use the Estate Value as a measure of the success of the scenario. I use Estate Value rather than account balance as it takes into account the differing tax rates on money left in an RRSP vs a Taxable Investment account.

Example Scenario

Consider the following example. Current age of 60, retiring immediately, life expectancy of 85, no DB pension plan, CPP at 65 in the amount of $12,456 per year, OAS at 67 in the amount of $6,846 per year, RRIF conversion age at 71, $500k RRSP, $50k TFSA and $450k Taxable Investment, Expenses of $50k per year. The results discussed below are for one person. 

The inputs to the spreadsheet and the cash flow forecast are shown below. 

Estate Value

For this example the person has received a total of $249,100 in CPP benefit payments (in current $). The Estate Value (EV) for Person1 is $415k in current $.  As I mentioned before, this is the measure I use to determine if a financial strategy is better than some other.  

In the spreadsheet, lets change the date we start CPP to 60 and see what happens. CPP starts earlier, but we receive 36% less per month. The person receives $199,296 in total CPP benefit, about $50,000 less than the case where they took CPP at 65. The Estate Value drops to $389k, $26k lower than before, but hasn't dropped as much as the drop in CPP benefit, mainly due to fact they paid less taxes over the same period of time. 

Change the date we start CPP to 70 and the Estate Value is slightly higher at $416k, just $1000 higher than the case for the where they started CPP at 65. 

Is there an optimum age?

To determine if there there is an optimum age to start taking CPP, we need to calculate the Estate Value for all possible start ages, and see if there is a maximum. 

In fact, for this example the maximum occurs when taking CPP at 67 years old with an Estate Value of $420k. The Chart below shows the Estate Value for all possible ages from 60 to 70. The difference for the years between 65 and 70 are small, but the maximum does occur at 67.

Impact of different financial position

To study the effect of different financial position impact on the optimum age to start taking CPP, I used the same scenarios I used in the Financial Studies 1 blog post. The scenarios, the basic assumptions and the results are shown below. The Case A is the example we have already discussed. Case B has a higher proportion of assets in the Taxable account and less in RRSP. Case C has retirement expenses of $75k per year and assets of $1.5 Million. Case D has retirement expenses of $100k per year and totat assets of $2.0 Million. 

For all cases the optimum year to start taking CPP is highlighted and is (almost) the same in all cases being either 67 or 68. 

Current Age60606060
Retirement Age60606060
Life Expectancy85858585
RRSP Balance ($k)500330500500
TFSA Balance ($k)50505050
Taxable Balance ($k)4506209501450
Retirement Expenses ($k/yr)505075100
Age to Start CPPEstate Value (Current $k)

Optimal CPP Age as a function of life expectancy

This example above shows that the optimal time to start taking CPP is 67, but this is for a specific life expectancy of 85. We need to see what the sensitivity is to life expectancy, then each person can make an informed decision based on their estimate of their life expectancy.

In the Retirement Forecaster, we change the life expectancy and repeat the calculation of the optimum age at which to start taking CPP. The results are shown on the chart below. If your financial situation is similar to the example I have used you can use this chart to provide an idea of the optimal time for you to start taking CPP. 

Comparison of Retirement Forecaster Results vs Total Cash Calculation

Earlier on in this Blog post I showed a simple calculation of when to start CPP, based on a simple Total Cash Calculation. Let's compare this to the results from the Retirement Forecaster Spreadsheet. The chart below shows both these calculations. In general the Retirement Forecaster based answer is to start CPP about 2 years earlier than the Total Cash based calculation.  

The difference is due to time value of money as manifested by investment returns.  If you receive the CPP cash earlier, you reduce the cash withdrawn from your investments, and it can continue to generate income. Also, there is likely some effect from income tax. If you take CPP earlier at a lower rate, average income tax will be lower as tax rate from investment income is lower than that from CPP income. 

One very interesting conclusion you can make is that no cases is the optimum to take CPP starting at 65. The results show it should be earlier or later depending on your life expectancy. This is due to the different (or more correctly the discontinuity in the) discount rates (0.6% vs 0.7%) for taking CPP early vs late. 

Other Articles On This Subject

Government Canada web page on CPP benefit.

Retire Happy has some articles on CPP and OAS.

Globe and Mail article on the subject.

Recent Financial Post article that says you should wait until 70 to take CPP.

If you want more articles, use Google!

Disclaimer:  These posts are not fully comprehensive financial advice.  You should seek your own qualified investment, tax and legal advice.


  1. Steve, thanks for the excellent summary. Very nicely explained. It's good to know that even if I make the wrong decision about when to start taking CPP, the lifetime value I'm giving up is probably limited to around $30k. Nice if I can perfectly optimize it, but not a disaster if I don't. Kevin.


    The link above states that the average 60 yo Canadian lives 25 more years. Based on Retirement Forecaster analysis, a person with a life expectancy of 85 years should take CPP at age 67.

    An argument for taking it early is that when you're 85 or older, your need for income decreases. At least in part, that is due to one's increased frailty.