Looking to retire early? CPP changes may make you think twice

It looks like many of us are planning to work a little longer before retiring. 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.

I have spoken with many clients who think that the Canada Pension Plan (CPP) benefits will make up for a lack of retirement savings. Unfortunately, this 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. So if you are planning on CPP to keep you entirely comfortable during your retirement years, you may want to re-think your financial plan.

Recent changes mean more flexibility for Canadians choosing to work a little longer, as working past 65 will now bring greater benefits. Before, CPP increased your retirement pension by 0.5 per cent for each month you delayed taking the payments 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. Also, 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.

The previous rules required people between 60 and 65 who wanted to start receiving retirement pension early 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. You do not need to stop working to start receiving retirement pension from CPP but you have to continue to make contributions even if you are working. This is no longer optional. The good news is there is a benefit to paying more money into CPP: additional contributions increase CPP benefits as part of the new Post-Retirement Benefit (PRB).

But if you want to retire early, benefits are reduced. Under the previous 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. This may or may not change your retirement plans, depending on how much you rely on CPP for income.

People who are out of the workforce for a number of years will be helped by 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 and how benefits are calculated, please see http://www.servicecanada.gc.ca/eng/sc/cpp/retirement/canadapension.shtml.

Brenda Bryant
Senior tax pro and community supporter