Canada Pension at 60. Yes/No??

Who should start the Canada Pension retirement benefit at 60?   Being able to access money is attractive, but it may not be always in your best interest to do so.  By starting early you must take a substantial discount.

Here are six situations that indicate you may benefit by starting early:

  1. Your tax rate after retirement will be higher than it is now.  Usually because of the Old Age Security clawback.
  2. You are retired now, and in the next five years you will have no qualifying income.  The way the formula works will shrink your entitlement anyway.  Just arithmetic to see what it is worth.  You could lose 10% or so.
  3. You are already receiving a spousal survivor benefit.  There is a maximum monthly payment that is equal to the individual maximum.  It is likely that waiting will not increase your benefit.
  4. Your life expectancy is less than normal. A bird in the hand argument.
  5. You have already reached the maximum number of contribution years.  More contributions will not increase your pension even though you pay more in.
  6. You are self-employed and can alter the nature of your income.  Dividends from your business instead of salary will avoid future contributions and incidentally save some Employer Health Tax.

You probably should not start early if your tax rate is higher now, you cannot invest at 3% pretax or more, or your family has substantially longer than normal life expectancy.

On average, and where additional premiums can be avoided, by starting early males usually win and females usually are slightly disadvantaged.  Males don’t live as long, so they don’t quite give back the money through the discounted future pension. Something about maleness being a birth defect.

If you assume maximum eligibility, the ability to avoid more contributions,  a 40% tax rate throughout, inflation at 1% and riskless investment income at 3%, the breakeven is around age 84.

As with most financial things, clients want answers, cheap, quick and certain.  In the real world you can pick any two of cheap, fast and certain, but only two.  If you want certain, you will need to wait and pay the price.  Even that won’t work because you would need to be able to know the future.  How long will you live for example.

The quick, cheap, but probabilistic right answer is, “It probably won’t hurt you.”

There are many rules and situations not covered here.  Each case will differ and you should do some of the arithmetic before committing.

Don Shaughnessy is a retired partner in an international public accounting firm and is presently with The Protectors Group, a large personal insurance, employee benefits and investment agency in Peterborough Ontario. Contact: don@moneyfyi.com  

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