Please note that I am not a trained accountant or tax professional, just a regular gal trying to navigate the world of personal finance, like yourself. Below is my understanding of the amendments to the Canadian Pension Plan (CPP), and should be taken with grain of salt. Please consult a third party professional and complete your own research before you make any financial decisions.
Early retirement has been something my dad and I have openly discussed for the past few years. Both my parents work in the automotive industry. It’s a very labour intensive work, being on your feet all day and operating (often times) heavy machinery. It’s a job that is more and more difficult to do as one ages.
My dad and I have been crunching the numbers, and figuring out when he could retire, and of course, how much CPP “income” he would get.
For those who don’t know, a portion of one’s paycheque goes towards “CPP” and that amount is not taxable, and cannot be withdrawn until retirement. This amount was capped at $2,217.60 in 2011. After retirement, one’s CPP monthly payments are based on what one contributed during their working years.
Amendments to the CPP
This is all information available on the internet at the Service Canada website. Here is the link I found helpful for changes to the CPP.
In a nutshell:
The CPP retirement pension amount will increase by a larger percentage if retirement is taken after age 65, but it will also decrease by a larger percentage if retirement is taken before age 65.
Since my dad is not planning on working after age 65, we only focused on how much of a decrease in his CPP amount he will have to take.
From 2012 to 2016, the Government will gradually change this early pension reduction from 0.5% to 0.6% per month. This means that, by 2016, if you start receiving your CPP pension at the age of 60, your pension amount will be 36% less than it would have been if you had taken it at 65.
What this means:
The earlier you retire, the more you are “dinged”. So, someone who retires at age 60 will be “dinged” 36% (0.60% per month x 12 months x 5 years), whereas if you retire a year later at age 61, you will be “dinged” 27% (0.58% per month x 12 months x 4 years), and so on.
Present Value Analysis
I love seeing charts, so I decided to plot a chart of how much money in total my dad would get at age 70, 75 and 80, if he were to retire at 62, 63, 64 or 65.
This is my first run at it, assuming his maximum CPP monthly payment was $700 or $8,400 a year.
Since the $700 a month is “future” payment, I brought all future value payments back to present value, and assumed an interest rate of 3%.
According to this chart, at age 70, even though his annual payments are lower, because my dad would have been collecting payments for longer, he comes out ahead (total payment) from taking early retirement at age 62 than waiting until age 65.
Even at age 75, he would still come out ahead if he had taken early retirement at age 62 than waiting until age 65.
And at age 80, he still almost breaks even if he were to take early retirement!
One of the biggest reasons I hear from relatives and co-workers who don’t want to take early retirement is that they don’t want to be penalized with lower CPP payments.
Of course, this is true, but as the above analysis shows, one may not be penalized as much as one would think. Don’t get me wrong, a 36% reduction in your monthly payments is a big deal, but one must also factor in that the total amount can be comparable, since the payout period is longer.
There are many factors to consider for early retirement and CPP payments is only one of many. So, always consult with your financial planning professional before making any decision.
Have you thought of early retirement, or early retirement for your family members? What are your thoughts on the amended CPP?