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By Julie Cazzin with Allan Norman

Q: I will be 65 in December. I’m still working a full-time salaried job that I plan to continue for two more years. I know I can opt out of paying Canada Pension Plan (CPP) at age 65, but only if I collect my CPP. I earn $220,000 a year and planned to start collecting CPP at age 67. Being in the top tax bracket, I won’t collect Old Age Security (OAS) until age 67 because it will all be clawed back.

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But I wonder if it’s worth starting to collect CPP at age 65, simply because I could save on paying my portion of CPP contributions ($4,055.50 for 2024). I’d get to keep 50 per cent of my full CPP, which is $7,000 a year or so. I’d save $11,000 total, which I would then invest in a tax-free savings account (TFSA). Is taking CPP at 65 under these circumstances a good option for me? I looked at the post-retirement benefit (PRB) that I would pay into for two years if I keep contributing to CPP, but it doesn’t look that attractive. — Charles

FP Answers: Charles, before I answer your question, remember that you can split your CPP with your wife and if she is in a lower tax bracket, you may be left with a higher after-tax amount to invest. The amount you can split is based on the number of months you live together while contributing to CPP and there is an application you must complete.

The two variables to consider when deciding when to start your CPP are how long you are going to live and the future rate of return on your investments. A longer life suggests delaying CPP, while higher investment returns point to starting CPP early. There is a third and often ignored variable, which I call the licence-to-spend concept.

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The deciding variables don’t change with the addition of the post-retirement benefit. Anyone working between the ages of 60 and 70 has the option of earning the PRB. Salaried employees between 60 and 65 who are receiving CPP contribute to CPP and earn PRBs. At 65, you can complete a form and opt out of CPP contributions if you are still working and collecting your CPP.

Charles, you will be working beyond age 65, so you can opt out of CPP contributions if you start your CPP. Doing this means you won’t get the benefits of delaying CPP past age 65, but, as you point out, you can invest the after-tax value of CPP in your TFSA.

To earn the PRB, you can either start or delay your CPP, but opt to continue making CPP contributions. Your CPP contributions for 2024 will be $4,055.50 based on the new CPP contribution requirements: $3,867 for the normal CPP and $188 for the enhanced CPP. The combined contribution will earn PRB credits of $44.46 per month or $534 per year.

Is it worth making the CPP contributions? Simple math shows it will take 7.6 years ($4,055.50/$534) to break even, forgetting investment returns, inflation, the benefits of delaying CPP and the licence to spend.

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As a reminder, CPP increases 0.7 per cent per month for every month you delay past age 65, or a 42 per cent increase from age 65 to 70. In addition, the CPP benefit amount is adjusted to wage inflation prior to starting CPP, meaning the 42 per cent increase may be larger because wage inflation has grown at a faster rate than the consumer price index (CPI).

The other significant, but hard-to-measure reason for delaying CPP is your licence to spend, as described in a May 2024 research paper, Guaranteed Income: A License to Spend. The paper said retirees prefer to live off an income rather than sell their investments and spend the proceeds.

It said that if a person had additional income of $10,000 per year, they would comfortably spend that money on nonessential items such as dining out or vacations. At the time of the research, $140,000 would purchase an annuity paying $10,000 per year. In other words, the $10,000 per year was equivalent to having $140,000, and yet the research participants were reluctant to draw $10,000 from the $140,000 to spend.

What about you? Would you be just as happy to draw and spend $10,000 from a $140,000 investment? Or would you find it easier to spend $10,000 if you received it as income each year?

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Charles, adding up the financial and behavioural benefits of delaying CPP makes arguing for early CPP tough unless you aren’t healthy or really need the money. Even if you start CPP early, invest the proceeds and do well, it is doubtful it will have the same spending value as the CPP income. Before making the decision, you should review it with a financial planner.

Allan Norman, M.Sc., CFP, CIM, provides fee-only certified financial planning services and insurance products through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. He can be reached at alnorman@atlantisfinancial.ca.

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