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I am a self employed 63 year old Canadian divorced male in

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I am a self employed 63 year old Canadian divorced male in the top tax bracket who intends to work until age 75. Once I turn 65, will I still have to contribute to the Canada Pension Plan for both the employee and the employer if I don't take it? I am very healthy and active physically and fully expect to live to age 90. Am I better off to take the CPP at age 65 or wait to age 70?
Submitted: 6 years ago.
Category: Tax
Expert:  Ed Johnson replied 6 years ago.

Dear GRSearching,

 

Many Canadian fund mangers advise their customers that it is better to take the earlier deduction. the break even point for most scenarios is age 83 if you are taking the CPP at age 60 versus age 65. You are anticpating pushing the schedule up 5 years, so then now the break even point would be about age 88. So you will be caught up and actually a little bit ahead for the last two years of your life expectancy. However, this scenario only is more beneficial if you believe you can get more than 4% return on any savings. You would take an early benefit, and assuming you had no use for the money, would reinvest it at more than 4%.

 

References:

 

https://hermes.manulife.com/canada/repsrcfm-dir.nsf/Public/LittleKnownCPPFactswebcastslides/$File/LittleknownCPPfacts.ppt

 

Now then:

 

At age 65, in 2008, the maximum benefit is 884.58.

 

As you must know, you can increase the benefit by .5% for each month you delay the benefits, up to 5 years, which is to say, at age 70, your maximum benefit is 30% more: i estimate that to be: 1149.95.

 

The first example assumes you are able to reinvest the money. In this example, taking the benefit later reflects the norm, that you would no be able to reinvest the earlier withdrawals, and you would actually ave about 300 a month less. If you live to age 90, from age 70, your total benefit is: 275,988.

 

If you take the benefit early, now your total benefit at age 90, assuming no reinvestmetn would be: 159,224,

 

neither figure includes cost of living increase typically at 3% on average.

 

By the recommendation of the government based scenario, you would be better off waiting until age 70.

 

 

 

Ed Johnson, Tax Preparer
Category: Tax
Satisfied Customers: 10760
Experience: GPHR Cert; U.S. Treasury Tax Advocacy Panel appointee
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