Canada has one of the world’s most reliable pension plan systems. In a 2020 study, Canada ranked 9th out of 39 countries for sustainable and adequate pension programs. Overall, the Canada Pension Plan (CPP) is well run and managed to ensure that the benefit will be sustainable for many generations to come while providing a dignified minimum standard of living.
Despite this ranking and knowledge, many Canadians face the common fear of not reaping the maximum benefit of their contributions. Consequently, far too many Canadians begin withdrawing from the CPP as early as possible for fear they may pass away without benefiting from the fund. While this attitude is understandable, it’s often more harmful than helpful, and in this article, we’ll look at why.
How the CPP Works
The idea of CPP is for all employed Canadians to contribute a monthly fee that will fund a modest but liveable retirement income later in life. Your employment situation will affect how much you pay into the CPP. While the government pension does offer a stable source of income, it is always better to have additional sources of revenue in conjunction with the CPP. This can come in the form of RRSP accounts, TFSA funds, or corporate pension plans. The more money you can set aside for a comfortable retirement, the easier it will be to resist drawing upon your CPP at the minimum age.
Why Waiting to Claim CPP Is Better
A significant portion of Canadians chooses to start claiming their CPP benefit at the minimum age of 60. Why? Often it’s because they fear the unknown. The idea of passing away early before enjoying the benefits of the fund can be worrying for some. For others, the temptation of seemingly “free money” is too great to ignore. In both these scenarios, many Canadians begin claiming CPP before they really need to. Consequently, their monthly payment is far lower than it would have been if they had waited until they were 70.
How much you earn from CPP will depend on various factors, including your contribution history, the age you begin withdrawals, and specific life circumstances. In 2022, the maximum monthly amount an individual can earn at age 65 is $1,253.59, but the average amount Canadians were receiving in 2019 was only $702.77. The dramatically lower amount is mainly due to individuals starting their withdrawals early, before 65. If Canadians waited until age 65 or later, their monthly payment would be even higher.
The Canadian Government does make some additional considerations regarding your pension amount. For example, individuals who were single parents for a significant amount of time or outside the regular workforce to raise children will have their CPP payments adjusted rather than as a pure reflection of their contributions.
What Happens to Your CPP When You Pass Away?
When you pass away and are single, your CPP benefits remain in the pool of capital. Unlike a personal investment or savings account, your CPP earnings cannot be inherited by your children or grandchildren. However, if you are survived by a spouse, they are entitled to earn a portion of your CPP income after you’re gone. For spouses that are over the age of 65, they are entitled to receive 60% of your entitled monthly payment. If your spouse is under the age of 65 and is not receiving other CPP benefits, then they will receive a flat rate portion plus an additional 37.5% of your pension income.
Planning for the Unpredictable
Retirement planning can feel like trying to stare into a crystal ball. We cannot know how much time we have to live, but the statistics show that many Canadians who are concerned about premature death more often live longer than they thought they would. When we underestimate our own longevity risk (live longer than we expect to), we run the risk of outliving our savings far more frequently than we miss out on taking advantage of our savings.
Every person has their own experience to account for, which is why discussing your hopes, fears, and financial needs are essential to creating a retirement strategy. The wealth advisors at Regan Schiller & Associates can help make the process easier by asking important questions and creating retirement plans to suit your lifestyle.
This is a general source of information only. It is not intended to provide personalized tax, legal or investment advice, and is not intended as a solicitation to purchase securities. Regan Schiller & Associates is solely responsible for its content. For more information on this topic or any other financial matter, please contact an IG Wealth Management Consultant.