I’m turning 65 and trying to get my paperwork in order. I had planned to postpone my Canada Pension Plan benefit until I turn 70 as I don’t have a lot of “forever” income and wanted to squeeze the most out of it. I’ve been researching and wonder if I’d be losing out, since I stopped working last year and don’t intend to work again. From what I’m reading, these years will be counted as my lowest five years for income. Will this hurt how much I receive, based on how CPP is calculated?
After the age of 65, the years you do not contribute to CPP are not counted toward years that could be “dropped out” of the calculation for what you could receive. Sixty-five is the magic age where the calculation can only be improved if you work (and make more than your lowest-earning years). Of course, your specific circumstances may be affected by the amount of time you have worked in Canada and contributed to your CPP, but that is a separate topic that we address for clients with cross-border planning needs. Another important consideration is your tax situation. CPP can help you with maintaining “tax control” by taking it earlier or later in life. Tax control is the ability to plan and co-ordinate taxable income in the hopes of minimizing the tax you pay.
Two important factors that I encourage you to consider when looking at CPP maximization:
- Remember to consider “child-rearing provisions” if you were the primary caregiver for children during your life. This is commonly missed and can be applied retroactively even if you are already receiving CPP benefits. This can help drop out low-income years over and above the 17-per-cent drop-out calculation the government provides.
- “Life maximization” is a concept often lost when looking at these decisions from a purely mathematical approach. Life maximization is the concept that you should use your wealth to improve your life when you can most enjoy it. I have found that the early years of retirement are the most active. Typically, clients have slowed their travel by the age of 75, and large expenses are less common. To maximize the enjoyment of your wealth, it may make more sense for you to take your CPP earlier to better align with cash flow requirements and to enhance your lifestyle. The biggest variable in any pension calculation, including CPP, is always life expectancy. Given that it is a variable that is not easily quantified, I always encouraged clients to view their wealth as a tool to achieve life maximization.
Devan Legare is a portfolio manager at Cardinal Point Capital Management and a member of the Financial Planning Association of Canada.
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