Understanding our Canada Pension Plan for Retirement Income Planning

Understanding our Canada Pension Plan for Retirement Income Planning

At Cashflows & Portfolios, we spend a lot of time with many DIY investors as clients striving to understand and optimize the timing of their Canada Pension Plan (CPP) benefits.

Rightly so. 

Taking CPP too early might have retirement income and tax consequences.

Deferring CPP benefits might not be possible nor as relevant.

Discussions about retirement income planning often bring up questions here like:

• When can I retire?
• Will I run out of money in retirement?
• Should I take CPP at age 65 or 70?
• How do I minimize OAS clawback?
• And many, many more!

In today’s post, we’re here to provide an overview and further understanding about the Canada Pension Plan and maybe just as importantly for you, we created a FREE CPP calculator you can use anytime on your own or as part of your retirement income projections work with us.

Read on!

What is the Canada Pension Plan/Quebec Pension Plan?

Note: Today’s post will focus on CPP vs. the Quebec Pension Plan (QPP) but some references to that plan will be provided below for context.

The Canada Pension Plan/Quebec Pension Plan is one of the major pillars of retirement income for Canadians. The plan provides contributors and their families with partial replacement of earnings in the case of retirement, disability or death.

This of course is a very good thing. 

Each Canadian worker (outside Québec, which has its own pension system – see note above) who earns more than the basic exemption amount must contribute to CPP, which is managed by the CPP Investment Board (CPPIB).

CPP contributions are mandatory if you work up until age 65, then voluntary until age 70 if you continue to work. (Contributions for QPP are collected by Revenu Québec and managed by the Caisse de dépôt et placement du Québec.)

So, if you’re employed and over the age of 18 well – you’ve started to contribute to your retirement income plan whether you realize it or not. :)

We wrote a very comprehensive post about what is the Canada Pension Plan (CPP) unto itself so we won’t repeat all the details here to today.

We’ll focus on understanding CPP income as part of your retirement income planning including sharing how we intend to use it too!

What is Canada Pension Plan (CPP) and How Does it Work?

CPP/QPP Eligibility as part of Retirement Income Planning

As referenced above, because CPP / QPP are contributory programs, it’s important to know what you’ve contributed to CPP to maximize benefits, or not.

In most cases, you will not have full CPP benefits.

Let’s start with eligibility and general contributions.

With very few exceptions, every person over the age of 18 who works in Canada outside of Quebec and earns more than $3,500 per year must contribute to the CPP. If you earn less than $3,500, you do not pay CPP contributions.

Canadian workers who earn more than $3,500 annually are required to contribute 5.25% of their earned income up to the designated maximum annual pensionable earnings to the Canada Pension Plan. Their employer must also contribute a matching amount each year. (Quebec employees and employers might contribute differently.)

While the minimum income threshold for contributing to CPP hasn’t changed in quite some time (it’s been the same since 1996!!! – sigh), the maximum annual pensionable earnings increases each year to account for the cost of living and inflation.

(In fact, back in 2019, CPP contributions gradually increased due to the CPP enhancement. The enhancement was put in place to start working as a top-up the existing CPP. The result of that change will mean higher benefits in retirement income in exchange for making higher CPP contributions by Canadian workers on the whole.)

This year, we already know the YMPE. We’ll keep this link updated for you.

Therefore, there is a maximum contribution amount to CPP in any given year.

The more money you make in any given year does not mean the more you pay into CPP necessarily.

This is one reason we mentioned that most Canadians won’t get full, maximum CPP benefits.

• Full CPP income benefits are a function of full YMPE contributions over multiple decades, which is hard to do. So, there are under-contribution years per se. To get the full CPP amount, your salary must meet or exceed the Government of Canada’s YMPE for nearly 40 years.

There are other, more subtle reasons to consider too:

• Many Canadians spend years working part-time, taking entry-level salaries, or in some cases experiencing long periods of unemployment or not working at all – that play into lower, overall contribution averages. Consider any of the following since full CPP benefits consider your “best” 39 working years:
  • What if you stayed home to raise children, went to university for an extended time, or took career breaks?
  • What about new/newer Canadians who didn’t work here and therefore didn’t contribute to CPP whatsoever?
  • What about your corporation and any dividends you paid yourself? Some small business owners and contractors choose to pay themselves through corporate dividends rather than a traditional salary. Dividends are not considered pensionable earnings under federal rules so because no CPP contributions are deducted from dividends (vs. a corporation salary), these years count as zero toward the CPP calculation.
  • And other reasons…

One is: you may continue to work while receiving your CPP retirement pension.

If you are between ages 60-70, you can continue to contribute to the CPP. Your CPP contributions will go toward post-retirement benefits, which will increase your CPP retirement income.

But at age 70, your contributions to CPP cease, even if you’re still working (regardless of whether you’re employed by a company or self-employed).

So, like most government programs: it’s complicated!

We Built a CPP Calculator!

How much you can expect to receive through CPP/QPP payments depends on multiple factors we’ve highlighted above.

Historically speaking, we’ve learned and estimated that because of these strict and complex contribution rules, less than 1% of all Canadian retirees will qualify for full CPP at age 65.

So, getting full CPP benefits on this Government of Canada page here will hardly be for most.

This is why we’ve built a FREE CPP calculator you can use anytime on your own or as part of your retirement income projections work with us.  Note that the calculator is still a beta release, so please let us know if you encounter any errors/bugs.

> Give our CPP Calculator a try! <

While CPP/QPP benefits normally begin at age 65, specifically the month after your 65th birthday, you already know you can take CPP as early as age 60 (with less benefits) or as late as age 70 (for higher income benefits).

While CPP retirement income benefits are indexed every year in January, they are also fully taxable.

If you begin your CPP/QPP payments prior to age 65, you’ll incur a 0.6% reduction for each month you collect before your 65th birthday. This reduction works out to be 7.2% per year.

If you begin collecting your pension at age 60, your reduction will be 36%.

However, if you delay your CPP/QPP payments, you’ll receive an increase of 0.7% for each month you wait after your 65th birthday.

This amounts to an increase of 8.4% per year and can be up to 42% if delayed until age 70.

We’ve read things like this over the years:

• Because there are so many factors involved, it’s difficult to estimate what your exact CPP/QPP payment may be. It’s difficult because:
  • The Government of Canada – Service Canada CPP calculator/statement of CPP income includes too many hidden assumptions.
  • You want to include some working income while receiving your pension.
  • You have personal savings, investments or a company pension plan that need to be factored into your CPP income plans. 

Well, we’ve tried to solve for that with this FREE CPP Calculator tool.

While Services Canada/ Retraite Quebec can supply you with your personal payment amounts, there are assumptions included in any government forecast calculations – if you have not yet taken CPP/QPP that must be considered. While all contributions should be accurate to a point in time, CPP/QPP forecast calculations have some big assumptions that we know of. Those forecast assumptions include:

1. you will keep working at your exact current salary until you officially start taking your CPP. e.g., the estimate for CPP at age 60 assumes you continue working until the day you turn age 60 and then begin CPP immediately, and
2. because you continue to work at your current wage you have the same Years Maximum Pensionable Earnings (YMPE) until CPP begins – which may or may not be true.

CPP income estimates need to account for annual YMPE, drop-out years and more.

Our simple tool accounts for that.

CPP Statement of Contributions

While tools including our own are fun and good, they are just tools.

We believe it’s always important to go to the source – so it’s a good idea to periodically review your Canada Pension Plan Statement of Contributions to check for accuracy of all past contributions. The most important information is your name, address, date of birth, contributions you’ve made and qualifying pensionable earnings. You should use your T4 tax slip to compare your pensionable earnings.

You can log into your My Service Canada Account at any time to review your Statement of Contributions. If you notice any errors, or believe any information to be incorrect, contact CPP immediately.

Remember that if you’ve ever worked in Québec, these earnings will not be included in your CPP account. You’ll need to contact Retraite Québec for more information regarding any income earned in Québec.

When are we going to take CPP/QPP Income as part of Retirement Income Planning???

At Cashflows & Portfolios, we are literally years if not decades, away from making this decision as early retirees but this doesn’t mean we don’t think about it. :)

As mentioned earlier, we spend a lot of time with many DIY investors as clients striving to understand and optimize the timing of their Canada Pension Plan (CPP) benefits – given the timing can be great for income needs, smoothing out taxation and reducing a big portfolio estate but getting this decision wrong can do the opposite!

Our intention, respectively, is to start our own CPP benefits when either of us turn age 65 but we are striving for defer CPP until age 70 for 42% income boost we highlighted.

This might be a strong consideration for you too, as part of your overall retirement income projections work which is something we love helping Canadian DIY investors with.

Cashflows and Portfolios remains a free online resource providing beginning-to-end content for all Do-It-Yourself (DIY) investors. We offer a free newsletter to your inbox offering wealth-building tips; retirement case studies; and more to help you manage your retirement nest egg over time – including our personal experiences with early retirement.

We also offer personalized low-cost financial projections services beyond all the free content to support all DIY investors by DIY investors!

What we want you to take away from this post is, CPP remains a very important pillar of our Canadian retirement system planning toolbox. It’s an important element as part of our government-administered plans, to go along with any employment-based pension plans, and finally those personal retirement savings plans such as TFSAs, RRSPs, and other investment accounts.

While government-administered plans like the Canada Pension Plan (CPP) are not designed to be your sole source of income during your retirement, it can be a very important one. It’s also an income stream that should be carefully analyzed as part of any retirement income projections to deliver a secure financial future, including long-term tax efficiency.

Need any support or help with deciding on when to take CPP?

Knowing the best age to start taking CPP in the context of your entire financial picture can be tricky.  If you need some help in solving your retirement decumulation puzzle (i.e., how to efficiently withdraw from your retirement accounts), we’re here to help.

If you are interested in obtaining private projections for your financial scenario, please contact us here to get started.

Thanks for your readership and engagement. Let us know what you think of the CPP Estimator Tool.

Mark and Joe.

Disclaimer: Any information shared on our site (“Cashflows & Portfolios” https://cashflowsandportfolios.com/) or related to our site, is for awareness and illustrative purposes only.