# CPP - Should 55 year old Business Owner start to Contribute?



## Yasehtor (Oct 12, 2018)

I was recently asked by a friend if I knew offhand whether it made sense for her to start contributing to CPP. She owns a small incorporated business, is 55 years old and plans on working for another 5 years. To this point she has always taken a dividend from the company to pay herself. She has very little in the way of CPP contributions, only a couple of years when she worked part time when she was young. She realizes that if she takes wages she has to pay the employee CPP and employer CPP. She wants to know if it makes sense to do this now that she is closer to retirement. She did some basic calculations and says that if she paid herself a salary of $60,000 a year she would end up paying about $3,000 in CPP herself and the business would have to pay about $3,000, so a total of $6,000 a year. Over 5 years that would be $30,000. In return she has estimated she would get a pension at age 65 of about $160 a month or $1,920 a year, which might be as high as $200 a month or $2,400 a year with child rearing adjustments. If she opted to take the pension at 60 the amounts would be reduced by 36% and her pension (with child rearing adjusted) would be $1,536 a year. Ignoring the time value of money and based on my simple calculation of payback it would take her 12.5 years ($30,000 / $2,400) to get a payback if she takes it at age 65 and 19.5 years ($30,000/$1,536) if she takes it at age 60. I would appreciate any comments from forum members on this situation and what you might recommend. She is not a saver so an alternative of contributing the $6,000 a year to a RRSP or TFSA account is not likely to be something she would end up actually doing.


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## Retiredguy (Jul 24, 2013)

Yasehtor said:


> I was recently asked by a friend if I knew offhand whether it made sense for her to start contributing to CPP. She owns a small incorporated business, is 55 years old and plans on working for another 5 years. To this point she has always taken a dividend from the company to pay herself. She has very little in the way of CPP contributions, only a couple of years when she worked part time when she was young. She realizes that if she takes wages she has to pay the employee CPP and employer CPP. She wants to know if it makes sense to do this now that she is closer to retirement. She did some basic calculations and says that if she paid herself a salary of $60,000 a year she would end up paying about $3,000 in CPP herself and the business would have to pay about $3,000, so a total of $6,000 a year. Over 5 years that would be $30,000. In return she has estimated she would get a pension at age 65 of about $160 a month or $1,920 a year, which might be as high as $200 a month or $2,400 a year with child rearing adjustments. If she opted to take the pension at 60 the amounts would be reduced by 36% and her pension (with child rearing adjusted) would be $1,536 a year. Ignoring the time value of money and based on my simple calculation of payback it would take her 12.5 years ($30,000 / $2,400) to get a payback if she takes it at age 65 and 19.5 years ($30,000/$1,536) if she takes it at age 60. I would appreciate any comments from forum members on this situation and what you might recommend. She is not a saver so an alternative of contributing the $6,000 a year to a RRSP or TFSA account is not likely to be something she would end up actually doing.


Some thoughts

What will her financial retirement at 60 look like? If she has not saved, invested to this point are we to assume she has little? IF she is going to be at the low end of income in retirement, and receive OAS plus GIS I say don't bother with the CPP because if you receive CPP your GIS is reduced by approx .50 for every dollar of CPP income. You say she won't save but if she did save and have 30000 at 65 she could just self annuitize that amount and give herself 100 mth for 25 years on top of OAS/GIS. ( Saved/invested into a TFSA would not effect her GIS amount)

On the other hand, the 3000/3000 will be tax deductible for both her and the company so the net amount will be less. Ok, you've excluded time value of money, so lets say 30000 at age 65 gives her 1920 plus ( potentially up to 2400) yr. That's 6.4% to 8% and it's *INDEXED. *If I could buy an annuity with an initial 6.4% or higher payout, _indexed_ annuity I would certainly do so. Also if she doesn't contribute to CPP I don't think she's making the most of the child rearing dropout years available to her.

People often look at CPP and calculate years of payback but given your comment that if she doesn't contribute to CPP she's unlikely save the money anyway I really don't think years of payback matter in the least, she either contributes to CPP and gets a indexed pension or doesn't contribute has no money saved and no pension.


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## ian (Jun 18, 2016)

My spouse took her CPP 60. She worked full time for 14 years, then mostly part time. All of her CPP deductions were at the very low rate, just over 2 percent as I recall. After 9 years of child rearing it was all part time. 

We were surprised at her CPP pension amount. I think the payback for her, ignoring time value of money, was something like 2 years when she took it at age 60. Only $270. but indexed all the same and an incredible return on investment.


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## Retiredguy (Jul 24, 2013)

ian said:


> My spouse took her CPP 60. She worked full time for 14 years, then mostly part time. All of her CPP deductions were at the very low rate, just over 2 percent as I recall. After 9 years of child rearing it was all part time.
> 
> We were surprised at her CPP pension amount. I think the payback for her, ignoring time value of money, was something like 2 years when she took it at age 60. Only $270. but indexed all the same and an incredible return on investment.


The op's friend will be paying both employee/employer contributions which equal about 10%. Difficult to compare to what transpired years ago because for example those retiring in 1978 who made 10 yrs of full contributions got a maximim cpp whereas today you have to have made 39 yrs of max contributions to get max cpp and contribution rates were very artificially low for many years, years ago . Now they are actuarially sound.


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## james4beach (Nov 15, 2012)

I'm reading these replies with interest, because I'm also "behind" on my CPP



Yasehtor said:


> She is not a saver so an alternative of contributing the $6,000 a year to a RRSP or TFSA account is not likely to be something she would end up actually doing.


My sense is that contributing to the CPP is a very good idea. I don't see how it is not. Even your simple calculation shows only 12 years of payback which is quite reasonable. And the CPP payments will adjust with inflation, which is beautiful.

But the real kicker is what you wrote here, that she is not a saver and *would not* be able to save this money and self annuitize. So in this scenario the CPP becomes a forced savings program, which is very good. And by all accounts it's a fair forced savings program, so she will get out of it what she puts in.

I would do it, yes.

I'm self employed and when I pay my CPP, I think of it as a payment into another kind of investment account (a pension), which will pay me back fairly.


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## OptsyEagle (Nov 29, 2009)

I figure if you have an employer paying the other half it will almost always make sense. If you pay it all, as the OP does, then it is unlikely to work out beneficially. If you have lots of children, the numbers may work out better. At the end of the day, the plan pays out what gets paid in MINUS CPP disability benefits. So in other words retirees can expect something less back then what gets paid in, due to these other costs.

Just my opinion of course. I have not run any numbers to confirm my theories. For most of us, it is not really a decision but more an obligation.


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## afulldeck (Mar 28, 2012)

OptsyEagle said:


> If you pay it all, as the OP does, then it is unlikely to work out beneficially.


And this is why the OP not saving is a double-whammy. She is hurting her self by not stepping up to the plate and saving for herself, and if she decides to go for CPP she is paying twice the cost. Bad combination.


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## Beaver101 (Nov 14, 2011)

^ Not really and looking it from a glass half-full's POV, she can say "hey, I enjoyed all of it" since she can't take it with her. 

As for the kids (if she has any), don't financially learn from/follow mom.


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## afulldeck (Mar 28, 2012)

Beaver101 said:


> ^ Not really and looking it from a glass half-full's POV, she can say "hey, I enjoyed all of it" since she can't take it with her.


Sure--so long as she isn't expecting the rest of us to look after her.....



Beaver101 said:


> As for the kids (if she has any), don't financially learn from/follow mom.


*hallelujah*


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## Beaver101 (Nov 14, 2011)

afulldeck said:


> Sure--so long as she isn't expecting the rest of us to look after her.....


 ... hate to disappoint you but she'll be collecting GIS as with the rest of us (rich & poor).


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## afulldeck (Mar 28, 2012)

Beaver101 said:


> ... hate to disappoint you but she'll be collecting GIS as with the rest of us (rich & poor).


Perhaps there is just no hope in self-sufficiency for all. I hate being a libertarian in a big gov world....


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## ian (Jun 18, 2016)

If you are not employed you pay the ee's share and the er's share. 5 percent each. 

That may change the numbers completely.


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## indexxx (Oct 31, 2011)

Timely thread for me also. I worked for many years in a low-income service industry occupation, then had a few years out of the country so no contributions, and several years of minimal employment due to life circumstances. I am now self-employed in a health practice and will earn 80-100K/year. I'm 56 and plan to work until 67. I have a small amount of RRSPs and own a condo in the Lower Mainland of BC- my only assets. I'm planning to pump up my RRSPs and do full CPP contributions- does that make sense?


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## Yasehtor (Oct 12, 2018)

afulldeck said:


> Sure--so long as she isn't expecting the rest of us to look after her.....


She is not expecting anyone to look after her when she retires. Her business is successful and has built up her business which and she should be able to sell it for a substantial amount when the time comes. I tend to favour the CPP contributions myself because she really will not put the $6,000 a year aside and invest it. She does have other investments though a life insurance policy on her and her husband with substantial cash surrender values according to her, but I don't know any of the details.


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