Stop guessing - it's time to make a plan.
When should I start my Canada Pension Plan retirement benefit?
This is the most frequently asked question we hear from our nearly retired clients.
The answer may seem simple, but the more factor in the complexities of retirement income planning, tax planning and investment planning the murkier this decision becomes.
In its simplest form, the earlier to take CPP (age 60 being the earliest) the more your benefit will be reduced. Conversely, the more you delay taking CPP, the more your benefit will be permanently increased.
For some this may be their start and endpoint for choosing a start date. But I would argue that most Canadians have unique circumstances a more in-depth approach is needed to help create a sustainable retirement income from all sources of income.
How important is this decision?
A couple collecting the maximum CPP benefit for only 20 years could receive nearly $1,460,000!!!*
Did that get your attention?
To help you get started, here are 4 vital considerations to maximize your CPP benefit.
1) Pinpoint the optimal age at which to claim benefits
Your first step is to request your CPP estimate request from the Canada Revenue Agency using your My Service Canada Account.
On this site you will be able to estimate benefits based on your retirement date, determine any post retirement benefit you could receive if you continue to work while taking CPP (Double Dip!!) and factor in years where your income was reduced to raise children.
The last one is a big one.
It is called the Child Rearing Drop Out provision and it could have a profound impact on the amount you receive. The only catch?
YOU must apply for it, if you don't, you could be leaving big bucks on the table.
2) Consider the impact of working during retirement
Many retirees plan to continue working, most often part-time. While this is a great way to stay active and maintain a steady income, working in retirement can impact your benefits and taxes
Important rules to know are:
BEFORE AGE 65 – If you choose to continue working, you will be required to pay into CPP regardless of whether you have started taking CPP.
AFTER AGE 65 – If you choose to continue working, you can elect to stop CPP contributions. (However, if you are NOT collecting CPP and still working, you must continue to make contributions)
Old Age Security CLAWBACK – If you continue to work during retirement and your combined income is over a certain limit, you may be subject to a clawback of your benefit. This is an effective 15% increase in your marginal tax rate.
Working part-time during retirement is a great way to keep active and maintain relationships with colleagues.
Outside of the social benefits, it will also reduce the stress on your investments as the need for early withdrawals to supplement income will be reduced.
The key takeaway here is to fully understand how having multiple sources of income could increase your marginal tax rates and negatively impact your OAS with an effective 15% increase in taxation.
3) Employ efficient tax planning
This is really an extension of my second point.
However, I would argue the minimization of taxation is one of the most important financial planning areas retirees should master.
So where do you start?
You will need to factor in all sources of income when constructing a retirement income plan. This is an integral part of choosing your CPP start date while minimizing taxes.
Sources may include:
Another important tax consideration that's often overlooked...
How are your non-registered investment accounts structured?
Do your investments in these accounts generate interest income, return of capital, dividends, or capital gains?
Be sure to get these accounts in good order sooner than later to minimize your ongoing tax liability. For more information on tax savings, check out the blog post I wrote about year-end tax planning for retirees.
4) Factor in options based on marital status
Your marital status has an enormous impact on your claiming options. Depending on your status, it can be an extremely complex decision—and choosing the “easy” way is why some people lose out on the opportunity to maximize their benefits.
Single - You may want to consider starting your benefit sooner than later. Why? Well once you die, the benefit ends and your beneficiaries get a cheque for $2,500.
Married - This one gets complicated. Will one spouse continue to work? Is there a significant difference in marginal tax rates? Does one spouse have more of the investment assets? Time to sit down with a professional to get things dialed in.
Widowed - When calculating whether or not to start your CPP retirement pension in addition to your survivor benefit, you will want to fully understand the impact of your timing decision.
The CPP combined benefit rules are complex and may need professional guidance to calculate properly.
In short, the most that can be paid to a person who is eligible for the retirement pension and the survivor's pension is the maximum retirement pension (which is more than the maximum survivor's pension).
As you have probably gathered, this decision is anything but simple. If you are interested in learning more about pinpointing a start date here are some resources for you.
1) 4 Vital strategies guidebook - this goes a bit more in-depth than this blog post
2) Maximizing Government Pension Plans and Create a Sustainable Retirement Income - Book available on Amazon.
If you are looking for expert advice to help guide you through this permanent decision, sign up for a complimentary 15-minute discover call to chat about your options.
To a happy, successful retirement.
Written and published by Michael Isbister, IG Private Wealth Management as a general source of information only, believed to be accurate as of the date of publishing. Michael Isbister is a CERTIFIED FINANICAL PLANNER professional in Saskatchewan. Not intended as a solicitation to buy or sell specific investments, or to provide tax, legal or investment advice. Seek advice on up to date withholding rules and rates and on your specific circumstances. Trademarks, including IG Wealth Management and IG Private Wealth Management are owned by IGM Financial Inc. and licensed to its subsidiary corporations.
*Hypothetical estimate of a lifetime benefit assuming a couple – both contributing the maximum YMPE and would qualify for maximum CPP. Both have lived in Canada for 40 years and will collect maximum OAS. Benefits starting at 70, life expectancy to age 90. A 2% Consumer Price Index (CPI) included in the calculation. Estimate created using CRA calculator November 2020: https://www.canada.ca/en/services/benefits/publicpensions/cpp/retirement- income-calculator.html