Retirement planning is an important process. In Canada one of the components of this plan is the Canadian Pension Plan (CPP). Payment amounts are determined by the amount contributed towards the fund between the ages of 18 and 65. The lowest 8 years of earnings are dropped. You contribute 4.95% of gross salary up to a max that increases with cost of living.
For those approaching the age of 60 and retirement, a decision will have to be made when to elect to receive your eligible benefits. Age 65 is considered to base amount with each month earlier reducing payments by 0.006%. While delaying to elect CPP increases payments by 0.007% per month. 1
Not everyone will be in a position to try to optimize when to begin CPP benefits. If your retirement requires your CPP benefits to sustain itself, there isn’t a point in trying to get the most out of it. Just take the money. If the flexibility exists, it’s an interesting exercise to figure at what point you could optimize your benefits. 1
There multiple factors that need to be taken into account to make the decision on when to elect starting your payments. Start with your life expectancy. This can get very detailed but a simple range is probably good enough. Then you need to factor in your time value of money. A discount rate is used and shown below are the five different real rates of return. (Rate of return after taking inflation into account).
Your decision will then come down to how long you expect to live and what you’ll do with the money. If you intent to invest your payments on a regular basis in conservative assets that would just match inflation the 0% line would be your starting point. (An inflation amount of 2% was assumed, though it won’t have an impact for this exercise. Conversely, if you intend the just spend the money right away, then your time value of money would be different. You’re real discount rate is then -2%.
A different way of looking at it that is tougher to quantify is how much you value money now versus how much you’ll value it in the future. This would be the case where you would get more enjoyment from travel while you’re a healthy, vigorous 60 year old, versus the risk of not being able to use it in the future.
Retirement planning does have many components. This is one that you’ll have to think about and decide for yourself which is best.