Updated: Oct 28, 2020
I'm sure you have been thinking, and hopefully planning, for retirement for several years now. Yet, when the time comes, there are still a lot of uncertainties. I have chatted with so many fellow baby boomers, and when it comes to our Canadian Pension Plan (CPP), there's a lot of confusion and unanswered questions.
I get it, I've been there! I am not a financial advisor, and this is not meant to be read as financial advice, but I want to give you an overview of what CPP is and how it affects you. Here are my answers to the top 3 questions I hear.
What is CPP?
If you lived and worked in Canada, you are entitled to receive CPP. This is money you will receive each month to replace part of your income when you retire. You can start collecting CPP at a reduced rate at age 60. When you opt to start collecting CPP early, the monthly amount will be smaller by up to 36% less. The standard age to start receiving CPP is 65, although you can wait up to 70 years. The amount you receive at 65 years vs. 70 years is the same, so there is no benefit to waiting the extra 5 years. If you do work past 65, you can cancel your CPP premiums.
How do I apply?
There are 2 separate plans, CPP and the Quebec Pension Plan. If you worked in both provinces, you are entitled to receive both but must apply separately. This is where people often become a bit confused, but it's easier than it can appear. You must apply for CPP in order to receive it; it's not automatic. If you want to start collecting at 60, you can apply when you are one month past your 59th birthday. You can apply online or in-person at a Service Canada location.
How much will I receive?
Your pension will depend on how long you have worked, how much you have contributed over the years, and the age you start collecting. As the old saying goes, the more you put in, the more you get back. In 2019, the maximum monthly amount you could receive if you started collecting CPP at 65 was $1,154.58. This is the highest possible amount you could collect. The average amount Canadians receive a month is $679.16.
During the course of one's working life, you might have had low periods where you weren't earning an income. When calculating your CPP amount, they can automatically drop several months (up to 8 years) of your lower earnings. Disability exclusion is when a person has been disabled for a long period of time and is not included in their contributory period. In 2019 an individual who became disabled will have a credit drop for the months they were disabled. The value of the credit is based on the 6 years before becoming disabled. If you were to die before applying for CPP, the pension would not be paid out unless you were over 70, and your estate applied no later than 1 year after your death. There is also a disability payment that can be issued if you are under age 65, and unable to work. Lastly, there is a lump sum death benefit of $2500.00, which will be paid to your estate if you apply within 60 days of your death.
This is a very complex program that suits many different needs. I recommend speaking with a financial advisor to know more about your specific situation. You have worked hard and deserve the money you have paid out over the course of your career!
Did you receive professional advice before collecting CPP? I'd love to hear your story in the comments below.
Have a great day!
P.S If you are considering a job to top up your pension after retirement. Check out my blog post Jobs After Retirement: It's More Common Than You Think.