If you are a freelancer your financial decisions may be a little different from those of people who cash a weekly paycheque. It shouldn’t be a surprise that your pension situation is also unique, and you have a lot of choices to make about when to start collecting your Canada Pension Plan benefits. Should you defer benefits as long as possible? Should you take advantage of your benefits as soon as they become available? As a freelancer, consider the pros and cons of each of these options.
First, Take a Moment to Understand Your CPP Benefits
The usual age for taking CPP is 65. If you start taking your CPP benefits the month after you turn 65, you get full benefits. That’s not your only option, though. You can also take benefits earlier with a penalty or later with an incentive. In fact, you can claim your benefits at any time after your 60th birthday. If you choose that option, your payment is reduced by 0.6 percent per month or 7.2 percent per year. That means that if you take benefits 5 years early, your payments are 36 percent lower than they would be if you wait till 65. Alternatively, if you delay your payments, they increase by 0.7 percent for every month or 8.4 percent for every year. If you wait until age 70, your benefits are 42 percent higher than they would be at age 65.
Why Should You Delay Your CPP Payments?
The basic math shows clear benefits for delaying your CPP payments. As of 2018, if you take your payments at 65, you can receive a maximum of $13,610.04 per year, but if you delay your payments until age 70, they increase to $19,326.26 per year, without taking the effects of inflation into consideration. In contrast, if you take those benefits at 60, they work out to just under $9,000 per year.
The actual amount of CPP benefits you receive varies based on your work history and other factors. While these examples use the maximum payment as of 2018, the average annual CPP payment for someone age 65 is only $7,699.56.
Why Should You Take Your CPP Payments Early?
Although the math clearly shows the advantages of delaying your CPP benefits, there are also compelling reasons to take early payments. As a freelancer, you have to continue contributing to your CPP until you are 65, but even if you are still working, you can start to take benefits when you are only 60. If you want to cut back on your hours and need some income, consider this option. Some people opt to take early benefits because they prefer to have the funds in their hands rather than having them held by the government.
Others think they can make up the difference by investing the funds now. If you’re thinking about taking early CPP payments and investing them, ensure that the return on the investment exceeds the incentives offered by the government for delaying your payments. For instance, if you are trying to decide between taking benefits at age 65 versus age 70, you need an investment that reaps at least 8.4 percent annual growth plus inflation. Still other freelancers take early benefits because they don’t want to take the risk of dying before they get to take advantage of their benefits.
You can see clear advantages on both sides of this debate. To decide which option is right for your situation, talk with a financial adviser or an accountant. They can help you crunch the numbers on various retirement options so you can make the right decision for your needs.