Looking to retire early? CPP changes may make you think twice
This is a guest post from Cleo Hamel, Senior Tax Analyst for H&R Block Canada
According to recent Statistics Canada numbers, a 50-year-old worker in 2008 expected to stay in the labour force about 3.5 years longer than the same worker in the mid-1990s. But this does not mean we will enjoy fewer retirement years. In 2008, a 50-year-old man could expect to spend 48 per cent of his remaining years in retirement, compared to 45 per cent in 1977 because life expectancy has increased.
Many Canadians think that the Canada Pension Plan (CPP) benefits will replace any missing savings in their retirement years. It is not the case. The CPP is designed to replace about 25 per cent of your average pre-retirement employment earnings, up to a maximum amount. It will not keep you entirely comfortable in your golden years. But recent changes mean more flexibility for Canadians choosing to work a little longer.
Previously, CPP increased retirement pension by 0.5 per cent for each month you delayed the benefit after age 65. So, if you decided to take CPP at 70, your pension was 30 per cent more than it would have been if you took it at age 65. Under the new rules, that same delay will give you a 42 per cent increase. If you are between 65 and 70, still working and receiving CPP retirement pension, you will have the option of not contributing to CPP any longer. But any additional contributions would work to increase your monthly benefit.
Under the old rules, people between 60 and 65 who wanted to start receiving retirement pension early had to stop working for at least two months. It didn’t mean they couldn’t go back to work later but if they did, they didn’t have to resume contributing to CPP. This has changed as well. Now people no longer need to stop working in order to start receiving their retirement pension from CPP. However, if they do continue to work while receiving pension, they will have to continue making contributions. There is no option any longer. The good news is there is a benefit to paying more money into CPP. The additional contributions will increase CPP benefits as part of the new Post-Retirement Benefit (PRB).
But if you want to retire early, benefits are reduced. Under the old system, if you retired at age 60, your pension amount was 30 per cent less than if you had waited five years. Since January 1, 2012, the system will gradually change and the reduction will move from 0.5 to 0.6 per cent per month. It doesn’t sound like much but it means your pension would be reduced by 36 per cent, rather than the previous 30. The implication to your retirement plans depends on how much you plan to rely on your CPP benefit.
People out of the workforce for a number of years will also benefit under the new system. Now you can drop up to 7.5 years of zero or low income earning years from your benefit calculation. So, if you were a stay-at-home mom, family caregiver or you travelled for a period of time, those years can be ignored, resulting in a few extra dollars of CPP.
For more information about CPP, please see http://www.servicecanada.gc.ca/eng/sc/cpp/retirement/canadapension.shtml.