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Ask the Expert: Taking CPP early

Do you have a financial question that's keeping you up at night? Ever wished you could get a second, or third, opinion on what to do with your money? Here's your chance: Bankrate.ca hosts a monthly feature whereby you submit a question, and we ask two industry experts to weigh in. The topics are up to you -- you ask the questions, and we'll get the answers.

Here's this month's question: "I understand the rules have changed when it comes to taking early Canada Pension Plan (CPP) benefits. I'm 63 and plan to work until I'm 65, but I want to reduce my hours. I'm looking for a way to replace that lost income. Can I still work and collect CPP? Is it a smart idea?"

Yes you can, but you receive reduced CPP benefits for every month you collect prior to your 65th birthday.

Here's how it works: under new federal rules that came into play on January 1, you can start collecting CPP as soon as you turn 60 and you can continue working. This is a huge change. Previously, you had to stop working or earn less than the current monthly maximum CPP benefit ($986.67) during the month you started collecting CPP and the month prior.

So if you turned 60 in June, you'd have to earn less than $986.67 in May and June or leave your job. Not an ideal scenario for most. In addition, these work cessation rules were confusing and difficult to enforce, namely because you could then return to work and earn as much as possible without any clawback. Also once you started collecting CPP, you no longer paid into it.

Now anyone can start collecting CPP at 60 and continue working; the catch is you have to continue paying into CPP until you retire. Plus, you're hit with a larger reduction, 0.6 per cent for every month prior to your 65th birthday, as compared to the previous 0.5 per cent. (Note the new reduction is being introduced gradually until 2016, starting at .52 per cent this year.)

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Essentially, if you turn 60 this year and start collecting CPP, your pension would be 31 per cent (60 months x 0.52) less than if you wait until age 65; assuming you qualified for the maximum amount, monthly benefits would be $680.80 instead of $986.67.

Conversely, the government also rewards for delaying benefits. For every month you hold off beyond your 65th birthday, your CPP will rise by 0.7 per cent per month; delay CCP benefits until age 70 and you pension amount will be 42 per cent (60 months x .07) more than if you had taken it at age 65, or $1,401.07.

So yes, you have options, but which is right for you?

Jim Yih, best-selling author and founder of Think box, a fee-only financial advice and education company in Edmonton
"I definitely see more pros than cons," says Yih. "You get less income early but you also get money you never would have hadů. Even if you don't need the money, you can take it early and invest it for the future or use it to pay down your debts to be debt free when fully retired."

The decision boils down to two key factors -- emotion and logic.

On the one hand, people can collect the money at a younger age, when they're more likely to enjoy it. Some believe the best years of their retirement are early on; others prefer the safety of having the larger income to cover higher healthcare costs in the later retirement years.

While another group, including those with physically taxing jobs, such as nurses, like the idea of cutting back hours as they approach retirement, and collecting CPP helps ease the transition.

(continued on next page)
-- Posted May 2, 2012
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