The Canadian Money Roadmap

How much will you get from the Canada Pension Plan?

October 20, 2021 Evan Neufeld, CFP® Episode 30
The Canadian Money Roadmap
How much will you get from the Canada Pension Plan?
Show Notes Transcript

EPISODE SUMMARY

Today’s episode focuses on the Canada Pension Plan.  As CPP will be a component of your retirement paycheque, Evan walks you through CPP specifics and how much you might receive.

DOWNLOAD FREE RETIREMENT READINESS CHECKLIST


TOPICS IN THIS EPISODE

  1. How CPP works and what it is 
  2. CPP funding and contributions
  3. How you can find out how much you might receive 
  4. Impacts to your payment based on early or late receipt of the benefit


RESOURCES MENTIONED

CPP Investments 

My Service Canada Account Log-In Page


OTHER EPISODES

27. Will you Have any Guaranteed Sources of Income in Retirement 

31. That Other Government Pension Plan…OAS (Old Age Security)


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Hello, and welcome back to the Canadian Money Roadmap podcast. I'm your host, Evan Neufeld.  Today, we're continuing with our series on my retirement readiness checklist, which you can find on my website and today's topic is going to be about the Canada Pension Plan.

If you're joining us for the first time here in this series, head over to the link in the show notes below, and you can download my retirement readiness checklist and follow along with each of these episodes. But today we're going through the first section of the checklist titled your retirement paycheck and part of your paycheck is going to be comprised of the Canada Pension Plan or CPP. Today we're going to talk about a few things. The question that I have on the checklist is specifically about reviewing your CPP estimate, but I'm going to go into a little bit more detailed about what CPP is so we have a better handle on that.  First things first though, if you have not reviewed your estimates, the place to find that is through your My service Canada account. And I will have a link to that in the show notes below, and you can log in there and you can see what you would qualify for when it comes to CPP. But that's a bit of a loaded question now, if you're not understanding what CPP is in the first place, so let's back up the bus a little bit.

So the Canada pension plan is a government pension that provides retirement income to people who have contributed to the plan. And the way that you contribute to the plan is through employment.

For most employed people, the contributions come 50/50 between yourself and your employer. So something comes off your paycheck every month. But before you receive money from your employer, they're also making a contribution on your behalf. It's changed over the years a little bit, but it's in the ballpark of about 5% each way for your income and then it tops out at a certain maximum, it's called the yearly maximum pensionable earnings. You don't need to worry about that too much, but you won't just pay into it indefinitely. There's a maximum per year that you can actually contribute. So to start receiving the CPP benefit, typically most people take it around 65, but you can take it as early as age 60 or as late as age 70 and anywhere in between.

So receiving CPP is an opt-in program. You don't receive it automatically, but you have to apply to receive it. If you apply online, it usually takes about a week or two, to receive it. So you obviously have to apply in advance before wanting to receive the payments. But why would anybody take it early versus late?

Well, let's explain a little bit more about how much you could qualify for. So to qualify for the CPP. As I mentioned, you have to have contributed to it in the first place and those who have contributed more money over a longer period of time will have a greater chance of qualifying for the maximum amount. Currently in 2021, the maximum that you can get at age 65 is just over $1,200 per month. However, the average person is getting just over half of that.

So the data that I have in front of me here, it says that as of June 2021, the average monthly person is receiving $619. So if you look at the maximum and you start doing your own financial planning and things like that, and you say, well, I'm going to get the maximum, I've made good money and I'm going to work for a typical career.

I can plan on getting about $1,200. Well, that's not typically the case, you might, but it's not typically the case. The average person is getting about half that.  The things that will really determine how much you will receive is typically how long you're working. I believe it's around 38 years of a working career and constant contributions during that time to be able to qualify for the maximum and of course your income has to be above that maximum threshold where you're making the maximum contributions and working for the maximum amount of time. As you can see, because the average is so much lower than the maximum. Most people don't actually get there. But the amount that you receive is a taxable benefit to you.  So it is treated just like regular employment income, by the time you actually start receiving it.

So I said that the maximum starting at age 65 right now is about $1,200. But I also said at the beginning that you can take it as early as 60 or as late as 70. So another factor in determining how much you're going to qualify for is when you take it. So think of the baseline number or age that you're going to take CPP at is age 65.  So if you take it early, you will get a reduction, a permanent reduction in the amount that you'll get. And that reduction is 0.6% per month that you take it early. Okay. So 0.6% per month if you take it early.

So if you take it at 60. Again, that's five years early. That means you'll get a permanent reduction in your CPP of 36%. Okay. Point six per month, times, 12 months, times five years, 36%. Okay. You can take it anywhere in between. You don't have to do just at 60, just at 65. That's why they do the reduction based on months.

However, if you were to delay CPP and take it a bit later, you would qualify for an increased amount of 0.7% per month for every month that you defer it past age 65. So if you defer it all the way up to the month that you turn 70, you would get a 42% increase in your payment and now the nice thing about that, obviously, getting more money forever is great, but that helps raise your income floor in retirement. And your income floor is just the baseline amount of money that you're always going to have. So Canada Pension Plan is one of those things. If you have annuities or other guaranteed sources of income, if you go back to my first episode in this series, I talk about guaranteed income.

But increasing your CPP is a really nice way to increase your income floor, especially for people that haven't had the opportunity to save much of their own money throughout their career. Deferring CPP can be a nice way to ensure a higher level of lifestyle throughout retirement because of that extra guaranteed income.

One other factor that you want to be aware of when it comes to the Canada pension plan, is that the payments aren't fixed? So, like I said, the maximum right now is about 1200 a month. But that amount changes every year based on inflation. And right now, inflation is a bit of a buzzword and it's very prevalent,

I'm looking at outside and gas prices here in Saskatoon, jumped up about 12 cents overnight. And so inflation is kind of right in our face right now. So the nice thing about CPP is that the payment will increase with inflation. So even if there's deflation in a given year, which very, very rarely happens, your payment won't be affected, but based on the consumer price index, this pretty standard government baseline for measuring inflation, whatever that is at the end of the year, your payment for CPP will increase accordingly.

One final thing that I want to mention here about CPP is that because it's a government benefit, some people get up in arms and there's a bit of hand wringing about whether the CPP benefit will actually be there for them when it comes to their retirement and they actually need to rely on that. Most people that think this way are people that are generally have a distrust of government in the first place.  But the nice thing about the CPP is that it's actually managed by a completely independent board of investors. It's called the CPP investment board and it is managed outside of the hands of the government. So the government, right now during COVID, they're spending more money on emergency support systems and things like that. They cannot dip into the CPP to withdraw money for spending in other places. It's not funded by tax revenue, it's funded by people contributing to it and employers contributing to it, so it is kept separate from governments.

The CPP is actually one of the 10 largest pensions on earth. It is a huge, and historically it has been managed really well. The investment returns have been really strong. Not sure if that will continue just like any other investment, but CPP is very transparent about their investment process, their returns and their risks and if anybody has the stomach to read through their entire annual report, there's some interesting things in there. I'll have a link to the CPP investment board in the show notes. But they invest in very unique things. I think I saw last year or a few years ago, maybe that CPP purchased Lego land or they're one of the owners of Lego land.  They own office towers in Europe, shopping malls in Asia, and also owns stocks in things that you know, like MasterCard and Google. It is a huge, huge pool of money that has been managed really well historically and so in my mind, there shouldn't be any significant fears of the CPP running out. Things could always change, especially due to demographics and things like that, where more people are drawing on it than contributing. But based on the statistics that the CPP shows, they are anticipating this being a solvent pension plan for many generations to come.

So just a little recap here. What is the CPP? Well, it is a government pension that is provided to people who have contributed to it throughout their working years. It is a taxable benefit that you can take anytime between age 60 and 75.  How does it work? You have to apply for it and you can receive up to currently a maximum of about $1,200, but your situation, the number of years you worked and your average salary during those periods of time will determine how much you'll receive.  But also when you take it along the way you get a reduction if you take it before 65, or you get a permanent increase if you take it after 65. But to be able to maximize the value, you've either have had to contribute to it for the maximum amount of time, I believe that's 38 years or so at an average salary above the yearly maximum pensionable earnings, and then deferred it all the way to age 70. There's a number of factors in everyone's own personal circumstance that will determine whether they should take it early or defer it later. But I would recommend that you speak with your financial planner to come up with a plan that works best for you.

Thanks for listening to this episode of the Canadian Money Roadmap podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a Certified Financial planner and Registered Investment Fund advisor. Mutual funds and ETFs are provided by Sterling Mutuals Inc.

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