CPP Deferral debate - Fred Vettese article discussion

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by gaspr »

I can think of three cases where it would not make sense to delay CPP. Poor health, not enough money to fund the bridge to age 70, or so much money that it just doesn't matter.

But overall, I agree that one should delay if none of the above applies.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by longinvest »

gaspr wrote: 20 May 2017 21:12 I can think of three cases where it would not make sense to delay CPP. Poor health, not enough money to fund the bridge to age 70, or so much money that it just doesn't matter.

But overall, I agree that one should delay if none of the above applies.
I don't fully I agree with the third case. Let's divide this third case into two subcases:
  1. Lots of more money than necessary along with huge bequest motives, part of wealth in bonds or cash.
  2. Lots of more money than necessary along with huge bequest motives, all wealth in stocks.
In case i, I would argue that replacing some bonds or cash (e.g. the amount necessary to bridge payments until 70) with CPP seems like the right choice, given the guaranteed real returns of delaying CPP. (I'm referring to my previous post).

In case ii, where the investor has a net preference for stock returns and volatility over bonds, one could maybe justify passing on a cheap guaranteed annuity.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park »

gaspr wrote: 20 May 2017 21:12 I can think of three cases where it would not make sense to delay CPP. Poor health, not enough money to fund the bridge to age 70, or so much money that it just doesn't matter.

But overall, I agree that one should delay if none of the above applies.
I agree with poor health. About so much money that it doesn't matter, there will be few this applies to. Even if you have so much money that it doesn't matter at age 60, can you be confident that the same statement will apply in thirty years at age 90? And if you have enough money, the downside of deferral to age 70 is minimal. Why not buy some insurance against financial catastrophe late in life, especially when the cost of that insurance is minor to you at present. About not having enough money to fund the bridge to age 70, that could be relevant to some. One counter to that is that there are few people who can't work full time until their 65th birthday. So even though one might be unable to fund the bridge until age 70, there will be few who would need to take CPP early out of financial necessity. And if one's financial circumstances are such that a deferral until age 70 is not feasible, then I think there should be serious consideration of working past 65, if possible.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by SQRT »

gaspr wrote: 20 May 2017 21:12 I can think of three cases where it would not make sense to delay. so much money that it just doesn't matter.

But overall, I agree that one should delay if none of the above applies.
My CPP entitlement is not material to my current income and spending in retirement. It really doesn't matter. But I am deferring till 70. It'll be a little more material at that point but still not significant. Don't see this as a reason to take earlier than 70?
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by gaspr »

And even if one's health is considered below average, it likely still makes sense to delay benefits. This is from Wade Pfau...

"A retirement income plan should be based on planning to live, rather than planning to die. A long life will be expensive to support, and it should be the focus."

We just don't know what future medical advances and treatments will be available to us...

BTW the above quote comes from this article https://www.advisorperspectives.com/art ... e-planning
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Re: CPP Deferral debate - Fred Vettese article discussion

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https://www.ncbi.nlm.nih.gov/pmc/articl ... figure/F1/

Look at the top of Figure 1 in the link above. The solid line is a distribution of life expectancy in the US in 2000, with the other line being for 1900. It's not a normal distribution, as there's a marked negative skew, but there are tails to the distribution. Decisions made regarding CPP are between the ages of 60-70. At those ages, the left tail is much reduced; however, the right tail is still there. CPP deferral helps you deal with that right tail, which is a graphic form of longevity risk. The decrease in the size of the left tail, at ages 60-70, means that you even if you end up having a shorter than average life, you won't lose that much with CPP deferral.

Also notice the difference between the right tails for 1900 and 2000. With time, longevity risk has increased. Obviously, 100 years is not relevant to anyone contributing to CPP. But for an 18 year old, 72 years may be relevant. And for a 60 year old, 30 years may be relevant. One can't just consider present longevity risk, but what it will be in the future.

http://micawberprinciple.com/the-10-sma ... tion-1716/

"All investors share one formidable and all too easily underestimated adversary: Inflation. This adversary is particularly dangerous for individual investors – and most particularly dangerous for retired people. Over the long run, inflation is the major problem for investors, not the attention-getting daily cyclical changes in securities prices that most people fret about.” – Charles D. Ellis

"...consider that at only 3 percent inflation (which our government considers “normal”) the purchasing power of your money will be cut in half in 24 years"

Longevity risk and inflation risk are correlated: the greater the longevity risk, the greater the inflation risk. If you retire at 60 and live to 90, inflation is very relevant. CPP is indexed to inflation. The only other financial asset, with comparable inflation insurance, are real return bonds.
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Re: CPP Deferral debate - Fred Vettese article discussion

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Just bear in mind that inflation protected assets such as CPP and real return bonds are indexed to previous years inflation rate rather than current inflation,usually not a major difference in the short term when inflation is low but can be quite significant over the long term or with increasing rates as at present!
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Re: CPP Deferral debate - Fred Vettese article discussion

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izzy wrote: 22 May 2017 10:14 real return bonds are indexed to previous years inflation rate rather than current inflation
Real-return bonds (RRBs) are indexed to inflation daily (see finiki: Real Return Bonds - The reference CPI and index ratio), with a 2 to 3 months lag. But, unless the timing of coupons and maturities was perfectly planned, they carry interest-rate risk; the total RRB market is way more volatile than the total nominal bond market, even in inflation-adjusted terms, due to a significantly higher average duration.
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Re: CPP Deferral debate - Fred Vettese article discussion

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Park wrote: 22 May 2017 09:41 "...consider that at only 3 percent inflation (which our government considers “normal”) the purchasing power of your money will be cut in half in 24 years"
From the horse's mouth:
The Bank of Canada aims to keep inflation at the 2 per cent midpoint of an inflation-control target range of 1 to 3 per cent. The inflation target is expressed as the year-over-year increase in the total consumer price index (CPI). The CPI is the most relevant measure of the cost of living for most Canadians because it is made up of goods and services that Canadians typically buy, such as food, housing, transportation, furniture, clothing, recreation, and other items.
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Re: CPP Deferral debate - Fred Vettese article discussion

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izzy wrote: 22 May 2017 10:14 Just bear in mind that inflation protected assets such as CPP and real return bonds are indexed to previous years inflation rate rather than current inflation,usually not a major difference in the short term when inflation is low but can be quite significant over the long term or with increasing rates as at present!
Over the long run that would have almost no effect. It's a single-year lag, not a cumulative lag. And any individual lag would only be the difference between the between the rates of the two previous years (which would be negative across years where inflation dropped ...).
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park »

There is a downside to CPP pension benefits: it's a form of forced income. Any form of forced decision in investing can possibly hurt you: forced buying (stock enters an index, internet stock fund having to buy stocks in 1999), forced selling (stock leaving an index, margin call) or forced income (mandatory RRIF withdrawals).

It's an advantage of cap gains over dividends or interest. With cap gains, you tend to have more flexibility, as to whether you take it as income or not.

CPP income helps to manage risk (market risk, inflation risk, longevity risk and dementia risk). Exposure to those risks tend to increase as one ages from 60 to 70. By deferring CPP to age 70, you are maximizing the risk management benefits of CPP, while decreasing your exposure to the forced income downside of CPP from ages 60 to 70.

For a Canadian, it wouldn't be easy to find a pension or annuity better than CPP.
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CPP Rules - Fred Vettese article

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An interesting article by Frederick Vettese of Morneau Shepell about the CPP.
Learn how the federal civil servants who designed the government pension plan made sure they feathered their own nests. Politicians have a well deserved reputation of looking after themselves. It seems their servants are not far behind - maybe they learned from their masters.

Planning to retire? These CPP rules could be harmful to your financial security

Hint: If you are behind the G&M paywall, you can read this article in a private browsing window.
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Re: CPP Rules - Fred Vettese article

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CROCKD wrote: 21 Jun 2017 07:27 An interesting article by Frederick Vettese of Morneau Shepell about the CPP.
Learn how the federal civil servants who designed the government pension plan made sure they feathered their own nests. Politicians have a well deserved reputation of looking after themselves. It seems their servants are not far behind - maybe they learned from their masters.

Planning to retire? These CPP rules could be harmful to your financial security

Hint: If you are behind the G&M paywall, you can read this article in a private browsing window.
Here are the two harmful rules discussed in the article:
  1. While one could maximally contribute to CPP for 47 years, between the ages of 18 and 65, one would not accumulate more benefits than maximally contributing for 39 years. For such a maximal contributor, this represents 8 years of lost contributions.
  2. The CPP survivor benefit is capped so that the sum of the survivor benefit and the survivor’s own CPP pension cannot exceed the maximum CPP pension. In other words, if the survivor has maximally contributed to CPP for 39 years or more, he will get no survivor benefit at all.
The first harmful rule is just another way to look at the 17% drop out provision.

The second harmful rule seems to be based on the old model of the one spouse working and the other staying at home. Stray from that model and you'll be penalized.

I'll let others discuss whether these rules are fair or not. I don't have any control to change them, and it's not like politicians and the general population are likely to get sensitive to these issues any time soon.

I'm interested in the planning perspective. The fact that CPP has a capped survivor benefit and that OAS has no survivor benefit at all is challenging. While one could naively think that expenses for one surviving spouse should be less than for two, it's not that simple. After the death of one spouse, all income gets taxed in the hands of the survivor which can significantly increase the total tax load. Also, most of the survivor's fixed expenses don't change relative to the couple (such as house taxes and utilities). Some expenses might be cut (food), but others might increase (such as hired help for house repairs or cooking that the deceased used to take care of).

I've decided to plan as if my wife and I will only get one CPP and one OAS pension (while alive). This will minimize the impact of the partial loss of these pensions when one spouse dies. The additional CPP and OAS pensions we'll get, while alive, will simply reduce our portfolio withdrawals. It's not perfect, because it has the adverse consequence of partly delaying spending; but it will significantly lessen the impact of the death of one spouse. Anyway, it seems like a more efficient approach, financially, than buying life insurance which becomes overly expensive as one ages, exactly when it would be most needed to offset lost pensions.

Another strategy would be to ignore this and assume that the survivor will find a new spouse to share expenses with. Or that the survivor will downsize (sell the house and rent something cheap).

I'm curious to learn about how other FWF members, retired members living in a couple in particular, tackle this problem.
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Re: CPP Deferral debate - Fred Vettese article discussion

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The problem is the perception that social security pensions are funded by taxes rather than contributions.This leads to rules which are supposedly designed to prevent recipients from receiving an advantage ("double dipping")which MIGHT be perceived as unfair-the fact that the opposite may occur as a result seems to be of lesser concern.Thus the UK pension is "frozen" when paid to residents of Canada on the assumption that they may qualify for similar benefits here as well and US social security is subject to a "windfall"provision for much the same reason etc.Inevitably such rules result in an over reaction. I believe there is a saying that "hard cases make bad law"and something similar is happening here !
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Re: CPP Rules - Fred Vettese article

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longinvest wrote: 21 Jun 2017 08:35 I'm curious to learn about how other FWF members, retired members living in a couple in particular, tackle this problem.
Firstly, I agree with the harmful effects with respect to CPP. CPP is an individual contributory program and there should be no interference with the benefits one gets. CPP should work somewhat like a RPP such as a DB pension whereby the annuitant gets years of service times X%/yr times some formula on annual contributions (e.g. last 5 years or 20 years or similar) OR excess contributions be returned to the annuitant when the fomula tops out. Survivor's benefit is already factored into the program so a surviving spouse should not be capped IF that survivor has already earned his/her own pension. That said, Bruce may rightfully argue that the survivor benefit on CPP was meant more to be social welfare than true contributory pension and thus can rightfully be capped. Have to wait for his response.

On OAS, readers will know I am on a totally different page. IMNSHO, OAS is not a pension. It is non-contributory social welfare that while it comes out of general revenues and thus the national tax base, it is not contributory. It rightfully goes away upon death. If you really want a social welfare program, then structure it to be strictly iincome support, i.e. overhaul GIS and OAS and make it for what it really is. I won't repeat what I've argued about multiple times other than to say OAS should have never been characterized and set up the way it is.

Added: Our case is a bit muddled because my CPP was equalized and split with my former spouse upon divorce. In my current relationship, we keep our finances separate and share house expenses. My CPP is thus much less and won't have 'another' survivor benefit available to my current spouse (similarly in her case). On OAS, her OAS is hers, while I essentially get clawed back. If we part ways, or one dies, our financial plans are based on being responsible for ourselves. Overall, I have no sympathy for society/government/taxpayers having a responsibility to padding the accounts of a surviving spouse. Single folk should revolt on this matter.
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Re: CPP Rules - Fred Vettese article

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AltaRed wrote: 21 Jun 2017 10:18
longinvest wrote: 21 Jun 2017 08:35 I'm curious to learn about how other FWF members, retired members living in a couple in particular, tackle this problem.
In our case, we relied on term life insurance until we had built up sufficient assets, mainly in RRSPs, to feel we could reduce the term insurance and eventually discontinue it. Our retirements are built around our RRSPs (now RRIFs). Everything else is gravy. In particular, I decided around 1995 not to rely on either CPP or OAS to any great extent. At that time, there was significant doubt in my mind as to their long term viability.

That means that, on the death of one of use, the other will have no significant reduction in pre-tax income. Taxes will indeed increase, but living expenses will decrease, so we should not have a problem.

Currently my OAS is completely clawed back, so that's not an issue. My wife's OAS goes to help out her sisters, who need the money. After death, our estate has a small provision for them.

Our CPPs are rather small. My wife stayed home for fifteen years with the kids, and had other zero years. I only joined the labour force at age 26, and stopped paying CPP at age 54, when I incorporated. Plus I started my CPP at age 60. What I do have is split with my wife.

So I'm not personally affected -- that's the way I planned it.
Bruce may rightfully argue that the survivor benefit on CPP was meant more to be social welfare than true contributory pension and thus can rightfully be capped.
I can't speak for Bruce, but that was certainly my impression, and the impression of the people I was working with at the time (I was at Sun Life). The plan was deliberately designed to alleviate poverty among seniors, and so was front-end-loaded. That means that early beneficiaries, i.e. those reaching 65 in the late 1960s, got way more than what they put in. This advantage has been declining over time, and may yet reverse itself, so that future generations will likely get less than they put in -- all while the plan over all is fair.

Survivor benefits are a standard option on many private sector annuities and pension plans. Whether or not they are a tool of social p9olicy depends, in my view, whether there is a price for them and, if so, whether the price is fair. Many private plans give you the option of survivor benefits; the CPP makes them mandatory. That indicates social engineering to me (one of the reasons I decided not to rely on CPP back in 1965).
If you really want a social welfare program, then structure it to be strictly income support, i.e. overhaul GIS and OAS and make it for what it really is.
As you know, I agree with you on this.

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Re: CPP Rules - Fred Vettese article

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longinvest wrote: 21 Jun 2017 08:35I'm interested in the planning perspective. The fact that CPP has a capped survivor benefit and that OAS has no survivor benefit at all is challenging. While one could naively think that expenses for one surviving spouse should be less than for two, it's not that simple. After the death of one spouse, all income gets taxed in the hands of the survivor which can significantly increase the total tax load...
DW and I both worked. We took CPP at 62 and 60. Hopefully the CPP "clawback" will not happen until after 20 years or longer. We both took OAS ASAP. She still gets hers, and I get some of it (varies with capital gains). I am always in clawback territory but some years much more than others. Moving to a blue chip dividend portfolio is making this more predictable.

But this inequity in taxation is just one of many. The best we can do is try to minimize the adverse effects. Maybe we should have a topic in finiki about all the unfair aspects of the taxation system?
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Re: CPP Rules - Fred Vettese article

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While one could maximally contribute to CPP for 47 years, between the ages of 18 and 65, one would not accumulate more benefits than maximally contributing for 39 years. For such a maximal contributor, this represents 8 years of lost contributions.
In addition, if you work past age 65 and do not start taking your CPP, you continue making contributions which are also lost.
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Re: CPP Rules - Fred Vettese article

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ghariton wrote: 21 Jun 2017 13:26 I can't speak for Bruce, but that was certainly my impression, and the impression of the people I was working with at the time (I was at Sun Life). The plan was deliberately designed to alleviate poverty among seniors, and so was front-end-loaded. That means that early beneficiaries, i.e. those reaching 65 in the late 1960s, got way more than what they put in.
Yes
Survivor benefits are a standard option on many private sector annuities and pension plans. Whether or not they are a tool of social p9olicy depends, in my view, whether there is a price for them and, if so, whether the price is fair. Many private plans give you the option of survivor benefits; the CPP makes them mandatory.
The 2017 Manulife summary of pension legislation says all jurisdictions require DB RPPs to provide a minimum survivor benefit of 60% but give the spouse the option to waive that before the pension begins. Curiously, the Ontario Teachers Pension Plan provides a minimum 50% survivor benefit that cannot be waived. I assume that was grandfathered.

Here is a 1997 consultants report on CPP survivor benefits. I currently lack the time and energy to read it.
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Re: CPP Rules - Fred Vettese article

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ghariton wrote: 21 Jun 2017 13:26 I can't speak for Bruce, but that was certainly my impression, and the impression of the people I was working with at the time (I was at Sun Life). The plan was deliberately designed to alleviate poverty among seniors, and so was front-end-loaded. That means that early beneficiaries, i.e. those reaching 65 in the late 1960s, got way more than what they put in.
Yes
Survivor benefits are a standard option on many private sector annuities and pension plans. Whether or not they are a tool of social p9olicy depends, in my view, whether there is a price for them and, if so, whether the price is fair. Many private plans give you the option of survivor benefits; the CPP makes them mandatory.
The 2017 Manulife summary of pension legislation says all jurisdictions require DB RPPs to provide a minimum survivor benefit of 60% but give the spouse the option to waive that before the pension begins. Curiously, the Ontario Teachers Pension Plan provides a minimum 50% survivor benefit that cannot be waived. I assume that was grandfathered.[/quote]

Here is a 1997 consultants report on CPP survivor benefits. I currently lack the time and energy to read it.


FWIW, CPP is jointly sponsored by Ottawa and the provinces except Quebec. So any major change in benefit design is difficult. The 1997 reform -- required to put the plan on a sound footing -- was extremely challenging and even heroic as the politicians of the day agreed to bear the political cost of sharply increasing premiums even though the benefits of doing that would not become apparent until long after they were out of office. I doubt we'll see another reform effort of that magnitude as long as the Chief Actuary keeps declaring the plan sustainable.
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Re: CPP Rules - Fred Vettese article

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kcowan wrote: 21 Jun 2017 14:50
longinvest wrote: 21 Jun 2017 08:35I'm interested in the planning perspective. The fact that CPP has a capped survivor benefit and that OAS has no survivor benefit at all is challenging. While one could naively think that expenses for one surviving spouse should be less than for two, it's not that simple. After the death of one spouse, all income gets taxed in the hands of the survivor which can significantly increase the total tax load...
DW and I both worked. We took CPP at 62 and 60. Hopefully the CPP "clawback" will not happen until after 20 years or longer. We both took OAS ASAP. She still gets hers, and I get some of it (varies with capital gains). I am always in clawback territory but some years much more than others. Moving to a blue chip dividend portfolio is making this more predictable.

But this inequity in taxation is just one of many. The best we can do is try to minimize the adverse effects. Maybe we should have a topic in finiki about all the unfair aspects of the taxation system?
Hi kcowan. I'm thinking of taking mine at 60 just because the bit of extra cash will help with travel - something I may not be able to do at 70+. A bird in the hand kind of thing. What was your rationale?

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Re: CPP Rules - Fred Vettese article

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2 yen wrote: 22 Jun 2017 07:48...But this inequity in taxation is just one of many. The best we can do is try to minimize the adverse effects. Maybe we should have a topic in finiki about all the unfair aspects of the taxation system?
Hi kcowan. I'm thinking of taking mine at 60 just because the bit of extra cash will help with travel - something I may not be able to do at 70+. A bird in the hand kind of thing. What was your rationale?
2 yen[/quote]At the time it was driven by dropout years. Since taking my big company pension at age 49, I had managed my earnings to have many dropout years. DW also had been in NYC and Mexico so also had dropout years. And each year of deferral would replace an earlier dropout year.

But the whole notion that she would be limited in her survivor benefits was unknown to us at the time. It would have just increased the motivation to take it early. There was also the notion of enjoying the money while we were young enough to capitalize on it. This year we enter RRIF withdrawal territory and so are resigned to pay back our OAS welfare payments. It is only $10k each but all clawback. Meltdown might have worked for us but CPP deferral was never a wise financial decision.
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Re: CPP Deferral debate - Fred Vettese article discussion

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BTW a friend retired at 55 and he planned to delay CPP until 65 until I told him that the reports from the government were pure BS. So he did the work himself and has decided on 60 for both him and his wife. I have not told him about the survivor aspect yet.
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Re: CPP Deferral debate - Fred Vettese article discussion

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When I took early retirement, dropout rules made it necessary to take CPP as early as possible, so I took it at 60.
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Re: CPP Deferral debate - Fred Vettese article discussion

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Shakespeare wrote: 22 Jun 2017 09:58 When I took early retirement, dropout rules made it necessary to take CPP as early as possible, so I took it at 60.
I took CPP at 62.5 for similar reasons. Think I could have gone another year but errored on the side of caution.
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