# CPP question



## Steve19

If I've been a Canadian resident all my life, but decided to take an early retirement at age 55, how is my CPP effected? If I hold off until age 65, do I still receive maximum payments (even though I haven't been working for the last 10 years (55 to 65)? What about if I decide to receive my CPP at age 60?

All the documents I've read always discuss taking CPP at age 60 and take a penalty (0.5%/month before age 65), however, how does it work if you retire at age 55 and then wait to collect your payments?

Thanks!


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## FrugalTrader

I believe the CPP calculation allows you to omit 15% of your lowest income years. You can run a calculation here: http://www.servicecanada.gc.ca/eng/isp/common/cricinfo.shtml

It would probably be in your best interests to take CPP early.


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## Larry6417

*Early retirement may not be beneficial*

New changes have been made to reduce the benefit of early retirement. Now max. pension is reduced 0.6% per month if retiring before 65 (but after age 60). Conversely, pension amounts are raised 0.6% per month if retirement delayed past 65 (up to age 70). 

See www.fin.gc.ca/n08/data/09-051_1-eng.asp

My understanding is that you have to be 60 to receive CPP i.e. live on other savings between 55-60.


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## cardhu

The short answer is no, you won’t get your maximum CPP benefit if you get out of the workforce at age 55 and wait until age 65 to collect... The formula for calculating CPP benefits allows for the exclusion of certain low-income periods within the overall measurement period, but the 10 years that you’re talking about is more than the basic exclusion. It’s a relatively simple formula and you can set up a spreadsheet to model various “what-if?” scenarios.

The rules have changed recently ... it used to be a 0.5% reduction factor if you elect to begin CPP before age 65, but for anyone whose CPP starts on or after 2011, the reduction factor is 0.6%, and if you delay past age 65, then your benefit increases by 0.7%. The 15% exclusion factor referred to above will also be bumped up to 17%.

Under the old rules, if you retired at 55 and took CPP at 60, you’d suffer about a 22% reduction in CPP benefits as compared to starting CPP at 65. 
Under the new rules, it’d be more like a 28% reduction, compared to starting at 65.


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## OhGreatGuru

Not quite sure how you calculated that. Assuming you retired at 55 in both cases, the penalty for taking CPP at age 60 was 30% (0.5%/mo. x12 mos/yr. x 5 years). In 2011 it will be 36%.


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## Steve19

Thanks for advice.

The calculator provided by FT worked well.


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## cardhu

toolbox said:


> Assuming you retired at 55 in both cases, the penalty for taking CPP at age 60 was 30% (0.5%/mo. x12 mos/yr. x 5 years). In 2011 it will be 36%.


Yeah, that's a very common mistake. I was referring to the difference between the actual dollar amounts you'd receive at age 60 vs age 65. The reduction factor remains 0.5% (or 0.6%) per month, but the dollar amount that that factor is applied to is different in each case ... the result is that the two amounts are not as far apart as most people think they are.


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## Doug Out West

I've done the CPP calc and at 50 even if I don't put another $ into CPP it doesn't effect my payout. Which seems strange but if you pay in the max for 25 years then there is no payback for working more.

There should be more reward for people working longer but it works for me.


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## sprocket1200

better try that calculation again...


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## Doug Out West

Well put in $0 earnings from 49 to 65 and got the same $934 per month. Now that assumes that I was making full $47K form 18 on which is not true but for me its ~ 22 so if I make full CPP to 52 should be same~.


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## sprocket1200

read the cpp website. there is a percentage the the cpp tries to replace for your income. then you take your actual incomes up to the max, and subtract out the others year. you will be close.

or go the the service canada area and get into your account. it will be accurate and NOT $934...


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## Doug Out West

Its funny that the calculation on the service Canada site is so off. I ran the calc many times and always got the result that I was not expecting. Though I have not been able to find the actual calculation formula on a gov't website. I'm assuming its in a crude form number of years worked /40 is the fraction of a max benifit pension. 


Have asked for a password into account so when I'll get it I'll go from there.


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## cardhu

Doug said:


> Its funny that the calculation on the service Canada site is so off.


Something must be wrong with your inputs ... the results you were getting are clearly not possible ... unless you will still have kids under age 7 during retirement, or will be collecting a CPP disability benefit during retirement ... I assume neither of those exceptions applies to you? 

The Average Joe would have to work at least to age 57, in order to maintain full benefits starting at age 65 ... if A.J. chose to start CPP at age 60, he’d have to work at least to age 53, to maintain the maximum reduced benefit.


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## MoneyGal

The average Joe would have to work until age 57 or 53 *_making full contributions for each year_* in order to receive the maximum benefit at 65 / the maximum reduced benefit. (Not disagreeing with you at all Carhu; just amplifying...)


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## the-royal-mail

MoneyGal said:


> The average Joe would have to work until age 57 or 53 *_making full contributions for each year_* in order to receive the maximum benefit at 65 / the maximum reduced benefit. (Not disagreeing with you at all Carhu; just amplifying...)



Based on what beginning age (for full contributions)?


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## MoneyGal

18. That's the "contributory period" for CPP contributions: ages 18-70 (and you can opt to take CPP earlier than 70 and receive CPP payments). 

Also: you can drop out up to 15% of the lowest-earning years, and if you were the primary parent taking care of a child and you received CCTB, you can drop out an additional (I think) 7 years for child-rearing. There's also the capacity to drop out years if you were/are disabled. 

But generally speaking if you want full CPP you need to contribute the maximum from ages 18 to at least 65.


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## the-royal-mail

Yikes. I don't know many 18 year olds who are putting in full CPP contributions every year. I think my first year of _full _contributions was at around age 23 or 24.

So for most people, we need to work until we are 65 to receive the maximum benefit at 65/maximum reduced benefit.


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## MoneyGal

The vast majority of people do not receive the full CPP. Average CPP earnings are about half the maximum.


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## the-royal-mail

$500 a month...sheesh. A pittance. Mind you, OAS and one other (?) thing kicks in at some point too...still won't make you rich. Need to save as much as possible during your working life.


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## MoneyGal

You are thinking of GIS. 

You can only get GIS if you have little or no other income other than OAS. 

GIS is clawed back if you receive CPP income or ANY other income. 

You only get GIS if your total income from all other sources (not gifts, ha) is less than about $15K for an individual.

Don't plan on more than $14K from government sources (taxable, in today's dollars) as a *maximum.*


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## Doug Out West

cardhu said:


> Something must be wrong with your inputs ... the results you were getting are clearly not possible ... .


yes I see your point but here is what I entered and the results:

Input birth 1964 ( actually 1960 but to account for university time)

Put in “ *On average, from the age of 18 to the present, your annual income from earnings (in today's dollars) was approximately $47,200*- I was earning a pretty good salary right out of school so was contributing max from 22 on fudged to be 18 by lowering age.

Result
*Based on this amount, your estimate at 65 is $934 per month (or $11,208 per year), expressed in today's dollars. …We also assume that your future average earnings to the age of 65 will be the same as the amount you entered above*
So on to “*Do you want to know what happens if your future earnings change?”* yes


*On average, I expect my future yearly earnings will change to 

$47,200 from 45 to 48 and 
$0 from the age I selected above to 65.* 

So will work for 3 more years at max then nothing after that, total years worked 18 to 48 = 30 years ( really 22 to 52)

*Result Based on your revised future earnings, your recalculated CPP retirement pension estimate at 65 is $934 per month ($11,208 per year), expressed in today's dollars.*


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## Doug Out West

I used the bank of Canada site to take my salary in 1983 to covert to todays $ and its above the $47K. So I'm pretty sure made full payments into CPP from 1983 till today.


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## MoneyGal

DOW: I went to the calculator and did the same thing. Something is buggy with that calculator. There's no way I can have zero employment income from age 48 - 65 and get the maximum CPP.


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## Doug Out West

MoneyGal said:


> DOW: I went to the calculator and did the same thing. Something is buggy with that calculator. There's no way I can have zero employment income from age 48 - 65 and get the maximum CPP.


Didn't anyone tell you that CPP was really really really goood !


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## Four Pillars

I remember going through this exercise a couple of years ago and I had the same problem. The calculator seems to assume you will be working right up to age 65 regardless of your inputs.

Annoying....


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## cardhu

MoneyGal said:


> The average Joe would have to work until age 57 or 53 *making full contributions for each year* in order to receive the maximum benefit at 65 / the maximum reduced benefit.


Yes, good point ... I was actually referring to a person’s individual maximum, as opposed to _“the”_ maximum ... however, I never made that point clear ... thanks for clarifying. 



> _That's the "contributory period" for CPP contributions: ages 18-70_


Not quite ... the contributory period runs from age 18 until (a) you die; (b) you begin receiving CPP payments, or (c) you turn 70 ... whichever occurs first. 

Note that the recent changes to CPP distort that definition a little, in that you MUST in some circumstances, and MAY in other circumstances, continue contributing to CPP even after you’ve begun receiving it ... in such cases, the overall benefit amount will be the result of some blend of varying contributory periods. 



> _you can drop out up to 15% of the lowest-earning years_


For the moment, but its 17% for anyone who initiates CPP in 2014 or later ... I assume that includes most people participating in this forum ... anyone presently aged 56 or less should just assume 17%, and ignore the present rule. 

Also, to clarify, it is not the lowest earning years that are dropped ... it is the lowest earning _months_ ... if you had a well-paid summer job during college, that year might represent 8 months of zero earnings and four months of decent earnings, so that can alter the landscape a bit ... likewise for years in which you were employed for only part of the year. 



> _you can drop out an additional (I think) 7 years for child-rearing_


I am not certain, but I thought it was ANY low income periods during which you were raising a child under 7 years of age ... that could stretch to more than 7 years when there is more than one child ... I wasn’t aware of a particular cap on that, although I confess it’s a purely academic point in my case ... I also wasn’t aware of the requirement to have collected CCTB. 



> _There's also the capacity to drop out years if you were/are disabled. _


Provided you were receiving a CPP disability benefit. 



> _generally speaking if you want full CPP you need to contribute the maximum from ages 18 to at least 65. _


NO ... absolutely not ... the basic 17% exclusion covers 8 years if you elect to begin taking CPP at age 65 ... you therefore only need 39 years (468 months, actually) of earnings at or above the YMPE, to get the max ... it makes no difference whatsoever what you did in the other 8 years (96 months). 

PS ... contrary to popular belief, the amount you contribute to CPP has no direct bearing on the calculation of your CPP benefit ... the relevant metric is your pensionable earnings. 



> _You can only get GIS if you have little or no other income other than OAS. _


YES ... a little off-topic in this thread, but this is why it is so laughably absurd that the GIS is constantly tossed up in discussions of RRSP ... I read somewhere (can’t find a cite) that the majority of GIS recipients are elderly widows who spent most if not all of their lives out of the workforce, and whose deceased husband’s pension (if there was one) had poor, if any, survivor benefits ... that is a declining demographic, and one would have to be off their rocker to actively plan to be in that situation in retirement ... therefore, anyone who plans ahead, and especially anyone who plans decades ahead, for retirement, should simply ignore the GIS ... it will be a non-issue.


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## cardhu

Doug said:


> I used the bank of Canada site to take my salary in 1983 to covert to todays $ and its above the $47K. So I'm pretty sure made full payments into CPP from 1983 till today.


YMPE isn’t adjusted to broad-based inflation, which is what I assume you took from the BoC site ... it is adjusted based on wage-inflation only ... its still pretty close, but not exactly the same as CPI. 

With only 4 years knocked out to attend university (you really had ZERO income in those years? No summer jobs? No part-time employment? No taxable grants/scholarships?) and retiring at 52, and with all other years earning above the YMPE, the MAXIMUM you could expect to draw at age 65 is about ... $718/mo.

If you chose to take CPP at age 60, you’d draw about ... $514 ... a 28% reduction (approx) from the benefit at age 65.


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## Doug Out West

cardhu said:


> With only 4 years knocked out to attend university (you really had ZERO income in those years? No summer jobs? No part-time employment? No taxable grants/scholarships?)....


MAde very good money while going to school but in order to use calculator simplified earning. Not that really worked anyway.


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## MoneyGal

Cardu, thanks for your patient reworking of what I said. I appreciate your depth of knowledge on this topic. 

FWIW, I've been working on estimates of the (actuarial) present value of CPP, if anyone is interested in those calculations. That is, the amount you would need to spend to purchase a SPIA (single premium life annuity) to replace CPP income.


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## sags

MoneyGal said:


> Cardu, thanks for your patient reworking of what I said. I appreciate your depth of knowledge on this topic.
> 
> FWIW, I've been working on estimates of the (actuarial) present value of CPP, if anyone is interested in those calculations. That is, the amount you would need to spend to purchase a SPIA (single premium life annuity) to replace CPP income.


Maybe not relevant, but the CPP has a spousal benefit, and is also indexed to the cost of living, so would a SPIA be accurate?


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## Dogger1953

cardhu said:


> Yes, good point ... I was actually referring to a person’s individual maximum, as opposed to _“the”_ maximum ... however, I never made that point clear ... thanks for clarifying.
> 
> 
> Also, to clarify, it is not the lowest earning years that are dropped ... it is the lowest earning _months_ ... if you had a well-paid summer job during college, that year might represent 8 months of zero earnings and four months of decent earnings, so that can alter the landscape a bit ... likewise for years in which you were employed for only part of the year.
> 
> I am not certain, but I thought it was ANY low income periods during which you were raising a child under 7 years of age ... that could stretch to more than 7 years when there is more than one child ... I wasn’t aware of a particular cap on that, although I confess it’s a purely academic point in my case ... I also wasn’t aware of the requirement to have collected CCTB.


Just to clarify, you're right that it can be months that are dropped, but Revenue Canada doesn't record your earnings by month, so CPP doesn't know what months you earned the income. The CPP legislation therefore deems the earnings to have been received evenly throughout the year, so in effect, you drop out the months in which you had the lowest annual income.

You are right that you can drop out more than 7 years under the CRDO if you had more than one child. The only limit is that any periods of CRDO cannot reduce you to less than the "basic number of contributory months", which is normally 120 months or 10 years.


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## Daryl-Manitoba

The calculator screws up when you change future salary to $0. If you want a better look at your future CPP you can change your salary to $5,000. This should reduce your CPP then. It isn't perfect but gets you a better result.


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## Dogger1953

Daryl-Manitoba said:


> The calculator screws up when you change future salary to $0. If you want a better look at your future CPP you can change your salary to $5,000. This should reduce your CPP then. It isn't perfect but gets you a better result.


Or if you want something more accurate, you can email me at [email protected] and I can do exact calculations for you. All I would need is your latest CPP statement of contributions and any future earnings projections that you want to make. I currently charge $25 for each such calculation, but I guarantee the accuracy of my calculations.


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## MoneyGal

Dogger1953 said:


> Or if you want something more accurate, you can email me at [email protected] and I can do exact calculations for you. All I would need is your latest CPP statement of contributions and any future earnings projections that you want to make. I currently charge $25 for each such calculation, but I guarantee the accuracy of my calculations.


I totally see the value proposition in this service. I am sure there are many here who might benefit from these personalized calculations. HOWEVER, might I suggest you make a footer to promote your services, instead of promoting them in-thread? Thanks!


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## Dogger1953

MoneyGal said:


> I totally see the value proposition in this service. I am sure there are many here who might benefit from these personalized calculations. HOWEVER, might I suggest you make a footer to promote your services, instead of promoting them in-thread? Thanks!


MoneyGal - Sounds like a good plan. Thanks for the suggestion!


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## andrewf

Might I suggest some kind of referral scheme for our gracious hosts here? You're getting free advertising, after all.


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## Dogger1953

andrewf said:


> Might I suggest some kind of referral scheme for our gracious hosts here? You're getting free advertising, after all.


Andrew - I'm giving away lots of free advice too, but when it comes to detailed calculations, each one takes about an hour to program So I see it as a win/win for me and for the Money Forum.


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## GoldStone

andrewf said:


> Might I suggest some kind of referral scheme for our gracious hosts here?


I disagree.

Look at the bottom of this page. It links to MDJ and CC blogs. Every single page on this forum includes those links. Every time a member writes a new post, those links push MDJ & CC higher in the google ranks. That's gotta be worth something.

This forum is a two-way street. The hosts provide a platform. We (members) provide the content. Both parties benefit.


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## andrewf

Hey that's up to our hosts. They have paid advertising for a reason.


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## My Own Advisor

Everybody wins here.


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