When Should You Take Your CPP If You Have a Defined Benefit Pension?
When navigating the complex landscape of retirement planning, understanding how to optimize your Canada Pension Plan (CPP) benefits, particularly in conjunction with a Defined Benefit (DB) pension, is crucial. Both financial instruments serve distinct purposes and can profoundly affect your retirement income. Here’s a comprehensive look at when to take your CPP if you’re receiving a DB pension.
Understanding CPP and DB Pension
Canada Pension Plan (CPP): The CPP is a government-run program that provides retirement, disability, and survivor benefits. You can begin receiving CPP as early as 60 years old, but if taken before 65, your benefits will be reduced.
Defined Benefit Pension: A DB pension offers a predetermined payout at retirement based on your salary and years of service. This type of pension provides a stable income stream, making it easier to plan your finances.
Key Considerations for Timing Your CPP
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Financial Needs: Assess your immediate financial needs. If your DB pension covers your living expenses comfortably, you might consider delaying your CPP. Conversely, if you need additional income, starting CPP early can help bridge any gaps.
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Income Impact: Taking CPP early could affect the amount you receive from your DB pension, especially if it’s integrated. It’s essential to understand how your DB plan interacts with CPP. Some DB pensions are coordinated with CPP, meaning your pension payouts may be reduced if you start CPP before a certain age.
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Longevity and Health: Consider your health and family history. If longevity runs in your family, delaying CPP might be more beneficial, as the cumulative benefits can outweigh the reduction from early withdrawal. Conversely, if health issues are prevalent, taking CPP earlier might be prudent.
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Investment Opportunities: If you take CPP early, you might have the opportunity to invest that income. Evaluate the potential returns on investments against the guaranteed income you would receive from delaying CPP.
- Tax Considerations: Both CPP and your DB pension will be taxed as income. Take a close look at how the timing of your CPP withdrawal affects your tax bracket and overall tax liability.
Optimal Strategies
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Delayed CPP Start: If your DB pension is robust and sufficient to cover your living expenses, consider delaying CPP until age 70. This strategy maximizes your CPP benefits, resulting in a larger monthly payout.
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Staggered Withdrawal: If your retirement plans and financial situation allow, consider a staggered approach. For example, you could start CPP at 65 while still receiving your DB pension, effectively balancing income sources for a smoother transition into retirement.
- Consult a Financial Advisor: Given the complexity of pensions and potential tax implications, it’s advisable to consult a financial advisor who can help construct a personalized income plan.
Conclusion
Deciding when to take your CPP in conjunction with a defined benefit pension is a multifaceted decision that requires careful consideration of your unique circumstances. By evaluating your financial needs, understanding the interaction between these income sources, and potentially consulting with a financial expert, you can make an informed decision that minimizes risks and maximizes benefits for a secure retirement.
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I’d like to know if there is an advantage or disadvantage for me, as a woman, to file my taxes jointly with my husband. I understand the initial benefit to him of not paying so much tax ($60,000 gross) but is it also advantageous to me? ($21,000 gross)
I especially love the defined-benefit videos. I have one and hope to retire next year.
@parralelwealth Great video Adam. I love them all. Question for you: I have a large defined benefit pension when I retire in 10 years of 80k. My TFSA contributions have been maxed, as has my wifes. She retired early at 38 and has about 300k in RRSP. We have another 1.1million in non registered savings that we are using 250k in the fall of this year to pay off our home/farm. How should we be saving in order to have the greatest flexibility in retirement? We do not want to sell the house/farm in retirement but we do have a 250k annual spending goal as travel is very.important to us. Thoughts
Where do you get guaranteed return today of 5% with no risks ?
I have a good defined benefit pension. I will be 59 in December. I retired early the year I turned 55. I like your advice to delay CPP until 65 but I am wondering how the 10 years without contribution will affect the CPP amount. I know that it takes the 8 lowest contributory years out of the calculations but I didn't contribute much at the beginning ( 18 ) since I was studying at university. Are the extra years of non contribution affecting the CPP amount a lot? I also have some RRSP and am planning to do the meltdown strategy as well.
Good video- Why do you have to call to postpone CPP?
The tool, apparently does a fair analysis, however when run with different inputs , comes to totally different results. The sales pitch should emphasize that it is the tool that should be used, not the reccomended age when to take CPP. Each individual should start out with a model describing how much desposible income you would need to live comfortably, and of course those numbers over time , would be determined by spending needs/ wants. A lot of inputs will require some good forcasting such as inflation, life expectancy, health, long term care needs etc and a stuctural description of income . Some experts have described the stucture as a four legged stool. One leg, Defined Benefit Plan or Contribution Benefit Plan, the second leg , Registered Savings plan( RRSP} +(TFSA), The third leg , Government Plans (CPP), (OAS), and the fourth leg , Non registered savings Plan or investment portfolio. Depending on the circumstances and obviously one's company benefits , possible clawbacks on government benefits, plays an important calculation in the model. All of the advice on the UTube should focus on "TIME" . Start your planning early in your career. At least 10 – 15 years before your desired retirement age! I have a defined benefit plan , had a target retirement age of 55, and had good knowledge of Microsoft Excel , so built two models, one of spending projections, and another of income (Disposable) projectons. Both were invaluble tools to help making decisions. I am now 75 and have been retired for 18 years, still using the original models to decide investment scenarios, spending sources, inflation adjustments. The CPP decision was one of the least impact items!
Will the timelines change significantly if you don't have significant/any RRSP holdings and you are already at retirement age? I suspect this is a more common situation where people assume their pension was their retirement savings. Also, could you run the numbers for a small RRSP meltdown, of say, $50k? Should you be as aggressive; is is time-centric, or amount?
My numbers are about the same. I took cpp at 60, for various reasons concerning my government pension.
That makes a lot of sense, the only thing you didn't talk about is the 5 years you've been collecting from 60 to 65. That's a pile of money that you have already before you even start collecting at 65.
Hey Adam. I'm new to the channel and playing a bit of catch up. Really love your videos. Well explained. In this case would it make sense to take CPP at 60 PLUS meltdown your RRSP in 5 to 7 years to create the laddered income you talk about here and in a more recent video?
I wonder if my bank advisor will be okay or talk about rrsp meltdown.
You need to do some of these videos for folks that have a slight bit more money like earning after retirement 7000 bucks a month. All of your examples are people that are living off of 50 grand a year which makes no sense for current professional couples.
Wouldn't the client lose the bridge benifit ($21,000) after 65 (since the bridge is only from thier retiremnt until CPP starts at age 65?) Could not follow where the loss of the bridge is in the cacluation.
Yeah 95 will not happen. I think if you do not need the income and you are healthy hold off on CPP until 65 or later.
Hi. What is a bridge benefit? I heard of a defined benefit plan that says if you passed away, it will continue to pay for your wife at 60%.
Love the software. It is great to see the tax consequences of running various scenarios.
Lots of good information available elsewhere, but your software presentation is difficult to process. I recommend a graphical representation like they use for the Government of Canada retirement planners. The annual bar graph is much more easy to understand in terms of the options about when to start these benefits, and more importantly to see the transition as you age toward final accomodations and costs for travel / health care. Finally, one option not well covered are your plans for couples – and what happens when one pre-deceases the other – survivor benefits matter in planning, as does insurance. Insurance is a dirty word for most people, but it is part of the planning process too, as cash values can be accumulated and used, or left to the estate. You learn a lot when someone dies!
I agree. I also feel that taking CPP later helps to hedge against inflation.
Great
Agree and follow your summary, thanks for posting. Argument is if you were pass at 70 rather than 86, you would have passed up CPP and deprecated RRSP that would go to the spouse or estate albeit at a high tax hit. The estate would benefit less with CPP on passing. All assumptions bet on longevity. I think that’s why many prefer the bird in the hand and draw CPP at 60.
I'm turning 62 I'm in a wheelchair unable to walk how much is cpp
Can you do a video about Survivor Benefit and when to start CPP? Because of the maximum that CPP will be capped at does it really matter? In my case I will always get the maximum when they add my CPP benefits and what I’m currently receiving as a Survivor Benefit. So I’m not sure if there are any benefits to delaying the start of my own CPP Benefit. Thank you.
Hell ! 69k is rich ! ! ! . . . live on 50k, give the rest away.
I'm might be Dead at 65 maybe 55
Great video Thank you
Good information, thanks! I have a similar situation, however we have two defined benefit pensions (each spouse has one) upcoming- how might this affect our CPP (QPP in our case)?
Hi Adam. I am really enjoying your videos and like your enthusiasm for the subject. After I watched the video I had one burning question that your video did not adequately answer for me. Both my husband and I retired at at ages 56 (we are a year apart in age). We both have small pensions from work whereby one of us collected at age 56 with a bridge and the other will start collecting at age 59 also with a bridge. We have no other source of income others than from maxed out rrsps, tfsas and non registered savings. We wanted to know if it was better to collect CPP at 60 or 65. In your examples the individuals retire at 60 and likely have the correct number of years and maximum for CPP contributions and already have a sizeable pension and savings and therefore makes more sense to draw down rsp and defer CPP to age 65. However, if you retire at 56 there are clearly 9 years of 0 contribution to CPP. Also each of us have several years of 0 contribution years already from living abroad, school etc. As such by the time either of us reaches 65 we will be well in excess of 8 years with zero contribution years. In this case would it not be better to take CPP at 60 as the number of zero years would not add the 5 years from 60-65 age?
Hey Adam… Thank you for making people think about making a more perfect retirement plan. You explain concepts in broader strokes, and remind people that their individual situations always differ, so get personalized post-advice.
God bless, and long health.