Early retirees, here’s how to get at least 39% more CPP

Two powerful forces collide in the decision about when to start Canada Pension Plan benefits as an early retiree.
To start, there’s the 36-per-cent reduction in benefits at 60 compared with 65. Can you fix this by retiring at 60 and waiting until 65 to start CPP? This brings us to the second powerful influence on CPP retirement benefits for early retirees.
The calculation used to determine your actual benefit reduces your payout if you have a certain number of years with zero earnings during your working life. If you retire at 60 and delay the start of CPP until 65, you add five zero-earning years to your CPP calculation. This in turn could work against your payout.
Pension consultant Doug Runchey recently dug into these numbers and came up with conclusions that support the idea of waiting until 65 to start CPP, even if you retire at 60.
“I can now say with confidence, that if you defer taking your CPP from age 60 to 65 and have no employment earnings during that period, your CPP will always increase by somewhere between approximately 39 per cent and 56 per cent,” Mr. Runchey wrote in a post on the RedFlagDeals financial forum.
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We’ll look at an example Mr. Runchey created for this column for people who retire at 60, but first some important background information. CPP retirement benefits are calculated using annual income between the ages of 18 and 65. You can drop out eight of your lowest-earning years, which means 39 of the 47 years from 18 to 65 are under consideration. You may also be able to drop up to seven or so years if you take time off to raise your children.
Mr. Runchey’s example involves someone who retires at 60 and had eight years of zero earnings in their working life. For simplicity, let’s say their current CPP statement of contributions (SOC) issued in the month that they turned 60 showed that they could receive $1,000 if they retired at 65 or $640 at 60.
Retiring at 60 and waiting until 65 to start CPP adds five more years of zero earnings into this person’s CPP calculation. This in turn results in a decrease from the SOC estimate of $1,000 to an actual amount of $893.
Even so, the monthly CPP payout at 65 is about 39 per cent more than the $640 that would have been paid out on retirement at 60. The explanation here is that you get additional CPP benefits for every month you delay from 60 to 65. The same applies if you wait until 70 to start your benefits.
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When considering whether to delay CPP, people often wonder how long it would take for them to offset the benefit of receiving benefits at an earlier age. In the example above, Mr. Runchey calculated the so-called break-even age is 78.
Here’s the math: Retiring at 60 and receiving $640 a month would produce accumulated benefits of $138,240 by age 78. That’s $640 multiplied by 12 months and multiplied again by 18. Note that these amounts are in 2024 dollars, which means no inflation adjustments. In real life, CPP payouts are adjusted annually for inflation.
Starting at 65 means accumulated CPP benefits reach $139,308 at 78 in Mr. Runchey’s example. That’s $893 a month multiplied by 12 months and then multiplied again by 13 years.
You can delay CPP to 70 and receive even more in benefits. In the example above, Mr. Runchey’s calculations show that the monthly payout would be $1,268 at 70, with a break-even age of 82. At that point, accumulated CPP benefits would amount to $182,592.
Mr. Runchey said it doesn’t matter what age you retire at – 55, 50 or even 25. If you forgo CPP at 60 and wait until 65, your benefits will always rise by between 39 per cent and 56 per cent.
Starting CPP at 60 is the right move if you have health issues that suggest a limited number of years in retirement, or you need the income pronto. But early retirees who wait until 65 or later are well rewarded.
Editor’s note: (July 11, 2024) This article has been updated to clarify the calculation used to determine benefits accumulated between retirement at 60, and age 77. (July 12, 2024) This article was further updated to show the calculation of accumulated benefits between retirement at 60, and the break-even age of 78.
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