Planning your retirement plans, especially when it involves the Canada Pension Plan (CPP) and working simultaneously, is a primary concern for many Canadians. The CPP is a significant part of Canada’s retirement income system.
It is a programme that helps people financially when they retire, if they become disabled, or to support their family if they pass away. It involves contributions from earnings during a person’s working life. It involves contributions from earnings during a person’s working life.
As Canadians get closer to retirement, one of the most frequent questions is what happens if they continue working while still getting CPP payments. This question is essential for people trying to balance growing in their profession and using retirement savings.
Starting CPP at 60 vs 70
Starting CPP at age 60 offers the advantage of receiving pension payments five years earlier than the standard age of 65. This can benefit individuals who need income support immediately upon early retirement.
The disadvantage is that the monthly CPP payment is reduced each month you take it before age 65. If you start receiving CPP at age 60, your pension amount is reduced by 0.6% each month you take it before age 65.
Since there are 60 months between age 60 and 65, the total reduction for starting CPP at age 60 is 0.6% multiplied by 60 months, which equals a 36% reduction in your pension amount. If your calculated CPP payment at age 65 would be $1,000 per month, starting the pension at age 60 would reduce this amount by 36%, resulting in a monthly payment of approximately $640.
Deferring Till 70
Delaying CPP until age 70 significantly increases the monthly payout. The CPP amount increases every month you delay it past age 65 up to age 70. The increase is 0.7% each month you delay, or 8.4% per year. If you postpone from 65 to 70 over 5 years (or 60 months), your pension increases by 42% (0.7% x 60 months).
Working While Receiving CPP
If you are under 70 and still working while receiving CPP, you must make CPP contributions. These contributions are mandatory until you reach the age of 65 and optional between 65 and 70. This means part of your income will go towards CPP, even as you receive benefits.
Your continued contributions to CPP while working can increase your future CPP payments. This is due to the Post-Retirement Benefit (PRB), which adjusts your pension amount upwards to consider these additional contributions.
CPP benefits are taxable income. If you are working, combining your employment income and CPP benefits could put you in a higher tax bracket, potentially increasing your overall tax payments.
Continuing to work while receiving CPP can allow you to save more for retirement, mainly if your CPP benefits and salary cover your current expenses.
Importance of Considering Various Factors in CPP Decision
Life Expectancy Considerations: One common concern is the fear of not living long enough to benefit from a delayed CPP. However, deferring CPP can result in higher lifetime benefits if you live beyond the average life expectancy.
Flexibility and Adaptability: Circumstances can change, and the chosen strategy might need to be revisited. For instance, health or financial situation changes could warrant re-evaluating the decision.
Personalized Advice: Each individual’s situation is unique, and a financial planner can offer advice that fits personal circumstances. Factors such as health, retirement lifestyle expectations, and other income sources are considered.
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