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The Canadian Money Roadmap
Maximizing Your Canada Pension Plan (CPP) Benefits with Jason Yee
In this week's conversation with Jason Yee, we discuss all things related to the Canada Pension Plan (CPP). Jason helps unravel the diverse types of CPP benefits, eligibility rules, and how to leverage CPP's unique features optimally. To make the concepts easier to understand, Jason created an animated video that explains the process of obtaining the maximum retirement pension from CPP.
You can watch Jason's CPP Explainer Video Here
Later in our discussion we talk about your decision on when to take CPP being a strategic choice. We take you through this crucial choice and the trade-off it brings between receiving it earlier for a smaller amount or waiting for a larger payout. Delving into CPP's two types of inflation adjustments, we explore how the pension maintains its purchasing power. We also briefly talk about recent changes with the Additional CPP and their potential benefits.
Planning for retirement can often seem like venturing into the unknown. With Jason, we address this uncertainty by highlighting the importance of accurate CPP benefit estimation for effective retirement planning. Together, we navigate the four essential questions to ponder when considering your future spending. Additionally, we shine the spotlight on CPP sharing, post-retirement benefits, and death benefits. Join us in this insightful journey as we demystify CPP and equip you with the knowledge to make the best decisions for your retirement future.
Contact Jason at Finepoint Solutions
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Build your Retirement Plan With Evan
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Hello and welcome back to the Canadian Money Roadmap podcast. I'm your host, evan Neufeld. On today's episode, I'm joined by fellow CFP professional, jason Yee. Jason is an expert in all things related to the Canada Pension Plan, so I wanted to bring him on to discuss how to maximize your benefits and a few things to consider when you are planning to receive your CPP. Alright, jason, when I wanted to do an episode about CPP, I realized I didn't have all the answers, and I know that there are people like yourself that actually focus their entire practice or the majority of the practice anyways, being an expert in the Canada Pension Plan and the rules around it and what not. So I thought who better to bring on the podcast than yourself? But coming into recording today, you had a little surprise for me here.
Speaker 2:Yeah, after we met in September, I wanted to have a few visuals to make it easier for your listeners to see what we're talking about. I have an analogy that I used to illustrate how CPP works, but I didn't think that simply having an analogy would be good enough. Cpp rules and calculations can be quite complex. I didn't think that just having me talk through an analogy would work by itself, so I played around with a few ideas about how to do some visuals, and the conclusion that I came to was I really felt that an animated video was the right way to do that. An animation would bring my CPP analogy to life, and so, as soon as I decided that an animation was the right way to go, I challenged myself to pull that off in time for the podcast. So the animation is meant to compliment what I'll be talking about with you, but the topic of the animation is a little bit different. In the animation, I show how to get the maximum amount of a retirement pension from CPP, but I do that with all the math and equations. What I want to focus on during our conversation is more how to think about the Canada Pension Plan and a broader financial planning context how to use CPP's unique features in the best way for your spending later in life. So the two are related and they fit nicely together, but I'm going to focus on different things later on. It was quite a challenge. The animation only covers about half the concepts that I really wanted to get into, but I'm really happy with the results so far. I hope your listeners enjoy getting information about the Canada Pension Plan this way and, if they do, I want to know that the CPP animation is on the Fine Point Solutions YouTube channel and particularly interested to know if you like this format for getting information about CPP and what else about CPP you want to know more about. If there's interest, I want to do more of these animations and I'll work to make that happen.
Speaker 1:Awesome. That sounds like a nice way to make some of these complex topics a little bit more approachable. But beyond that, we can kind of get into the podcast episode here. But yeah, like Jason said before, you, listen to the episode today might be good to get started over there and watch the video and then hop back in and listen to the rest of our discussion here today. I've seen a lot of questions and people commenting on things online, always regarding CPP, and there's a ton of misinformation about it, and people either have either overly rosy opinions of what they're going to get from CPP or overly negative things about CPP, or it's never going to be there, all these things and so I thought, well, we got to do an episode about CPP. Jason, you're the CPP guy that I know from right here in Saskatoon, no less, and so I thought this would be a great topic for you to come on and share your expertise in the area of CPP specifically. We've got a lot to cover today, and I'm really excited to hear what you have to share with us.
Speaker 2:I'm glad to do it because I've been living in the CPP world for quite a while and put a lot of horsepower into it. So no kidding, I can share.
Speaker 1:So let's get started. Jason, right off the top, high level. What is the Canada pension plan? How does it work? Let's start there.
Speaker 2:Sure, if you're like me, your first introduction to CPP was a deduction on your paycheck. Money from CPP was subtracted from your pay, along with other things like income tax, employment insurance premiums, and what's left after these deductions is referred to as your net pay, your after tax pay. Take home something like that. The CPP deduction is your contributions into the CPP program. In the animated video, these are the portions of your earnings that get poured from your jug into your personal ice cube tray. For this part, the contributions part, you don't get a choice. If you earn employment income, you're required to contribute into the CPP program. The way that works is you pay one half of the required contribution and your employer pays the other half of the required contribution, and self-employed individuals have to pay both those parts. Self-employed pay twice the amount that an employed individual has to pay. An employed has to pay is 5.95% of the earnings, but only they only have to pay this amount up to an earnings maximum threshold in 2023, that earnings threshold, which is called the year's maximum pensionable earnings. That threshold is $66,600. The animated video brings these numbers to life with pictures, so if you already watched the video, that part might make more sense.
Speaker 1:So what are those contributions actually go towards?
Speaker 2:So the purpose of the Canada pension plan is to make reasonable minimum levels of income available, under three conditions, at normal retirement ages, to people who become disabled and to the dependents of people who die. And in doing so, there are seven distinct benefits that the Canada pension plan provides. There's a disability pension, a disabled contributor's child benefit, a retirement pension, a post retirement pension, a survivor's pension, an orphan's benefit and a death benefit. Now, each of these benefits has their own set of rules for determining if an individual is eligible to receive the benefit and how much they're eligible to receive. What's important to know is that the contributions you make are for you and you alone. Now, what I mean by this is that the dollar amount of your contributions and the earnings associated with those contributions they go into your own personal CPP record. And this record, your own personal CPP record this is what's used to calculate what you can get out of CPP.
Speaker 1:Do you have to keep track of that CPP record yourself.
Speaker 2:No, you don't. You can get a copy of it from Service Canada. You can do that a couple different ways. If you have a MyService account, you can log in yourself and it's made available to you, or you can phone Service Canada and they will physically mail one to you. For the financial planners out there, an individual can authorize someone else to request that. It's called statement of contributions. They can request the statement of contributions on your behalf. In that case it will be mailed to the individual's physical address, so the person you designate won't receive it themselves. It has to go through you, gotcha.
Speaker 1:So if I'm doing that on behalf of a client, perhaps, and I'm requesting it it'll be mailed to the client specifically and then they come share it with me. Exactly.
Speaker 2:So when the time comes for you, or your dependence, to access money from the Canada Pension Plan, the amount of money that can come out is calculated based on what you put in. So, for the most part, the more you put in, the more you get out. That's what I'm going to talk about most. We're going to focus more on what your contributions will turn into, and for now, I'm going to specifically talk about the retirement pension. When you think about your retirement pension, your CPP contributions turn into money later in life. Let's start by talking about later in life, how you should think about getting money later in life and the role CPP can play for your money later in life. Just like early in life, later in life you're going to need money to spend in order to live. The difference between early in life and later in life is that early in life, you can work to get the money you need to live. Later in life, it gets harder to earn money by working. This means that later in life, you need to have other sources of money besides working. One such source is old age security, which is another form of pension that is similar to CPP. Another source is whatever money you can get out of your personal savings. This is usually some kind of investment portfolio, and that portfolio is usually held in an RRSP or a RIF or a TIFASA or maybe some kind of company plan like a defined contribution pension or a lira. Later in life, in order to keep living, you have to spend money. Making equals spending For that spending. You mostly know the amount you'll need or you can set a target, so that part is known. What you don't know is how many of those spends are needed. Fast forward to your death. This will be your last spend. You don't know when it will be, but we know it will be your last spend. So when you think about later in life, the spending you have to do as you live and the sources of money you have available to do that spending, I want you to think about these four questions what do you know, what's unknown, what can you control, and how safe do you want to feel? It's important to think about those questions because CPP has three features that make it particularly valuable as a source of money for later in life. Your money from CPP is guaranteed, it lasts until you die and CPP provides inflation protection. Now, when you think about the role CPP can play for your money. Later in life you will notice that CPP is more than just a dollar amount. Cpp is a dollar amount plus the peace of mind that those dollars will be there next month. Cpp is a dollar amount plus the peace of mind that those dollars will be there until you die. Cpp is a dollar amount that keeps its purchasing power because CPP grows with inflation. Now I believe that your pension from the Canada Pension Plan is so valuable that you should put effort into getting the most out of CPP.
Speaker 1:I really like how you framed that there. But how can you actually do that? So when we're planning for one's retirement or doing a little bit of estate planning or things like that, even life insurance and whatnot it's like okay, well, you tell me exactly the day you die and then I'll tell you exactly how much you need. We'd file that under one of your unknowns here, but maybe let's talk about some of those more knowns, if you can.
Speaker 2:Sure, what specifically can you control? Cpp is also valuable because you get a choice. You have control over a very important CPP decision. That decision is the age you start receiving your CPP retirement benefit. This decision is so important that I refer to it as your strategic CPP decision. There is a strategic CPP decision and there are tactical CPP decisions. Now, right now, I'm going to focus on the strategic decision. The age you start CPP is strategic because your start date can really move the needle about how much money you get from CPP. You get to being in control over how much your CPP retirement pension will shrink or grow, depending on how soon or late you want to start. There's a lot of power in this choice. Going in, you didn't get a choice and coming out, you get this important choice. The age you start determines how much growth and how much of the safety adding features you'll get from CPP. Don't forget that part. You get a dollar amount plus. You get a whole bunch of peace of mind for your spending later in life.
Speaker 1:Maybe let's talk about these numbers a little bit, because you can take it as early as 60. You can take it as late as 70, anywhere in between, literally any month in between from there. Maybe should we talk about some standard procedures or what are some of the factors that will affect that, just maybe based on your age even.
Speaker 2:Sure, the basic starting age for the Canada Pension Plan is 65. Now, basic means the amount CPP is designed to provide you, based on the amount and how often you contribute into the program. The more you put in, the more you get out. And we showed how this works is tilting your personal ice cube tray back and forth in the animated video. Tilting the ice cube tray until all the water is at the same level represents calculating the average amount over your lifetime. Cpp is designed to provide you with 25% of your personal lifetime average earnings. So that's what you should expect to get back out of CPP as a basic starting point. There's another important point that I have to make here. Nothing is lost to inflation with CPP. All the money you put into CPP, your contributions and your earnings that are associated with those contributions, all that money is adjusted by wage inflation to bring it up to a current value in the year you start. And then, once you start, the money you get from CPP maintains its purchasing power by adjusting for price inflation each year in January. So there's actually two inflations that CPP adjusts for wage inflation and price inflation. Now, this is a technical detail that I left out in the animation in order to keep it simple. Now, there's another minor complication here, because currently extra rules are being phased in as part of what's called the additional CPP. For the additional CPP, the numbers change and do different things, but the general idea is the same.
Speaker 1:I've heard it called the enhanced CPP. Is that just different language meaning the same thing? It's the same thing yes, exactly. Gotcha.
Speaker 2:So the CPP will increase the percentage of your personal lifetime average earnings that CPP is designed to provide you from 25% to 33%. But it's going to take about 40 years to complete for that complete transition to take effect. So people who contribute into the additional CPP and you start the retirement pension before the end of that 40 year transition period, they will still benefit from the additional CPP. It's just that the income replacement for those people will be somewhere between 25% and 33%. Coming back to your strategic decision, the age you start CPP moves the needle because there are adjustments that will either shrink or grow your basic amount depending on whether you start earlier than age 65 or later than age 65. You can start as early as age 60, or as late as age 70. Your basic amount will shrink more the earlier you start CPP compared to age 65. For the basic amount will grow more the later you start CPP compared to age 65. So the age you start moves the needle because these adjustments can be huge. Your basic amount is reduced by 0.6% for each month earlier than age 65 that you decide to start taking CPP. This is a reduction of 7.2% per year for each year that you start earlier than age 65. The earliest you can start CPP is age 60, and if you start at age 60, your basic retirement amount will shrink by 36%. On the other hand, your basic amount grows by 0.7% for each month later than age 65 that you decide to start taking CPP. This is growth of 8.4% per year for each year that you start later than age 65. The latest you can start CPP is age 70, and if you start at age 70, your basic retirement amount will grow by 42%. So the trade-off is you can get money earlier, but if you do that you'll get less money, or you can get more money if you start later. Earlier might sound better, but so does more.
Speaker 1:That's a good point. A lot of people say I've contributed to this pension my whole life and I want to get as soon as I can. They might still be working even at 60. We call it a retirement pension, but it's nothing to do with retirement. It's just perhaps notionally related to retirement.
Speaker 2:That's why I've been referring it to spending later in life and not retirement.
Speaker 1:There's a little bit of nuance here that Jason is looping in here. How do we actually make that decision between money earlier or more money later? How do you decide that?
Speaker 2:Sure you can decide by coming back to the four questions that I want you to think about as you consider the spending that you have to do later in life as you live. Those questions are what do you know, what's unknown, what can you control and how safe do you want to feel? So ask yourself how much of your expected spending can CPP cover? How much more of your expected spending can CPP cover if you start a little bit later? Would you rather feel safe with all your living spends or for your last spend, even if you don't know how many of those living spends there might be? There's a couple ways to put some numbers to those questions. Get an estimate of your lifetime amount of CPP that you can expect to receive. To do this, the most objective starting point is the life expectancy for your age from appropriately calculated tables. This helps to get the emotional influence out of getting a good number. To start with and this is what I think you should do Get a good number based on the middle part of how long people of your age are expected to live. Then compare how much you expect to get from CPP over your lifetime when you start receiving CPP at age 70 and when you start receiving CPP at age 60. This is called the lifetime loss method. The lifetime loss method was introduced by Bonnie Jean MacDonald in a paper she wrote in 2020. It's called the lifetime loss method because it shows the lifetime amount you give up by starting CPP earlier compared to starting CPP later, and the amount of lifetime loss can be huge. Bonnie Jean reported that lifetime loss can be around $100,000 for an individual who will get the middle of the road amount of a retirement pension from CPP, and my own experience with clients is very similar. I've calculated lifetime losses that are typically many tens of thousands of dollars and very often the estimated losses have exceeded six figures and lifetime loss will generally be larger for younger people because of the additional CPP. Cpp is going to replace a higher proportion of an individual's lifetime earnings, going forward from 25% to 33%. If your CPP retirement pension is larger, your lifetime loss will also be larger. All things equal, you can also do a lifetime loss analysis to compare any two ages you want, not just age 60 compared to age 70. And if you want to compare other life expectancies, you can do that too. For example, you may have personal reasons to expect a lower life expectancy. I always provide numbers for a die early scenario as part of the standard CPP analysis that I offer, so I look at that too when I work with clients. Now, another way to put numbers to those questions is your CPP coverage ratio. How much of your expected spending later in life can CPP cover? Your CPP coverage ratio is simply the percentage amount of your spending that CPP can cover alone. These ratios work well with other sources of guaranteed money, such as old age security and defined benefit pensions, if you're lucky enough to have one of those. I break up spending into two parts needs and wants, so perhaps CPP covering only a small portion of your needs is enough for you to feel safe. For others, the percent covered will need to be even more to feel safe, if that's possible and that's a broader financial planning question rather than a CPP analysis question. What a good CPP analysis does is it gives you accurate information to use in your financial planning. What is the percentage in garbage out thing? I believe CPP is so valuable that you should have the most accurate estimate possible of what your retirement pension will be before you start thinking about broader financial questions. You need accurate information to put into a plan or the planning won't be accurate either.
Speaker 1:Would you believe that an accurate CPP analysis is more valuable based on the percentage of income that it would typically represent? So if, say, your later in life income I'm careful not to use retirement there your later in life income perhaps is represented by, say, 50% CPP based on all your other sources, versus, say, 10% CPP because you have so much savings and whatever For people that are needing CPP as a larger part of their income, would it be fair to say that a good estimate earlier would be more prudent for that person to have?
Speaker 2:Yeah, I used to think that getting a really accurate estimate was necessary. About 10 years out from retirement and since working with younger clients, I started sort of just that thinking, and anyone that's serious about their financial planning and doing projections, I think should get a really accurate estimate because, like I said, garbage in, garbage out. The more accurate number you put in, the better those projections are going to be. The other thing that I find is, especially when you're combining your sources of income and you're thinking about a portfolio and other sources like CPP, nothing adds survivability to a portfolio than guaranteed sources. So when you do things like Monte Carlo analysis and stress tests, nothing improves those numbers like having a guaranteed source and not needing to draw from the portfolio. Right, yeah, these numbers inaccurate CPP estimate, lifetime loss calculations and your CPP coverage ratio. These numbers provide a good starting point to have a conversation about your spending later in life and the four questions that I think are important for you to consider what do you know, what's unknown, what can you control and how safe do you want to feel? I believe you have a better chance of getting the most out of CPP when you have accurate numbers and when you think about your spending later in life.
Speaker 1:Together with answering those four questions, Okay, so you mentioned CPP has a strategic decision and but also tactical decisions. What do you mean by both of those, strategic and tactical?
Speaker 2:Sure. There are three reasons why I think choosing your CPP start date is a strategic decision. Cpp is already paid for when you make the start date decision. That part's done. Now it's time to think about how you can design your money from CPP to be the most useful for your needs. Your needs later in life are related to how you're going to get the money for all your spending later in life. That brings us to the second reason why I think choosing your CPP start date is a strategic decision. Cpp specifically addresses the risks you'll be facing for your spending later in life. Cpp is guaranteed, so there's no market risk. It lasts until you die, so there's no risk of outliving money from CPP. And CPP provides inflation protection, so you maintain your purchasing power. And the third reason is you're in control over how much your money from CPP will shrink or grow. It will shrink by 36% if you start CPP at the earliest possible age, at age 60. But you can also grow your retirement pension by 42% if you're able to start CPP at age 70. And we already discussed number two and number three quite a bit. I'd like to take a moment to address number one. Cpp is already paid for. I think a lot of CPP thinking is backwards I mean literally backwards is and too much emphasis is put on the past rather than your future. There's a lot of CPP thinking that demands an answer to the question where did the money go? For example, some individuals want to get a rate of return from the contributions they put into CPP. Those individuals advocate for getting money out of CPP as quickly as possible, and this is often expressed as a preference to start taking CPP as early as possible at age 60. Those individuals feel like CPP is a bad deal if they don't get a certain rate of return.
Speaker 1:Do you feel like that's perpetuated by like the news articles that report on the returns of the CPP investment board every year? I think that can, which have been pretty good, actually, I think that confuses people.
Speaker 2:But those are two separate, absolutely completely different things. Now remember you didn't get a choice about having to make those contributions in the first place. So I don't know why anyone would want to compare and compete with the actions of their past self, especially when your past self didn't have a choice. This kind of thinking ignores your future needs. It ignores the value of CPP's special features. Cpp is guaranteed, it lasts until you die and CPP provides inflation protection. Don't forget with money from CPP you not only get a dollar amount, you also get a whole bunch of peace of mind about your spending later in life. The break-even age is another example. The break-even age sort of compares the money you get if you start CPP at, say, age 60 with what you'll get if you start at age 70. Now remember the trade-off you can get money earlier, but if you do that you'll get less money, or you get more money if you start later. The break-even age is the point in time where those two cumulative amounts of money are equal. So break-even age thinking says you're only better off by delaying your CPP start date, if you live longer than the break-even age. This kind of thinking is also demanding an answer to the question where did the money go? It's a race to get to that age. So you can say I got it without thinking about what your needs later in life might be after that point in the race. On the other hand, lifetime loss answers how much you expect to lose by winning that race. Now I want you to think about a different question. I want you to think about answering where will the money come from? Where will the money come from later in life as you need to spend? Where will the money come from? Takes us back to for your spending later in life. You mostly know the amount you'll need. What you don't know is how many of those spends are needed. Where will the money come from? Also takes us back to the four critical questions to ask what do you know? What's unknown, what can you control and how safe do you want to feel? Now, in my opinion, lifetime loss and your CPP coverage ratio are better numbers to look at when answering where will the money come from? And with making your strategic CPP decision, the start date decision.
Speaker 1:OK, we've talked about CPP, but other sources of income are typically derived from your own savings or investments that you might have, which is another place where some of that money can come from.
Speaker 2:Yeah, now we know the special features of CPP. It's guaranteed, it lasts until you die and CPP provides inflation protection Sort of the features of an investment portfolio. An investment portfolio is not guaranteed. An investment portfolio has market risk. There's baggage the market risk but there's also opportunity. An investment portfolio has potential for growth. In the case of stocks and equities, that growth can be pretty exciting. A conventional wisdom about investment portfolios for individuals thinking about later in life is that they should reduce the amount of market risk in their portfolios. In doing this, you transform your portfolio from one that has more growth potential to one that's supposed to provide regular, safer money for later in life. Now the conventional wisdom can be said another way. That means the same thing when thinking about where the money will come from for your spending later in life, you should rely less on sources with more market risk and you should prioritize having more sources that are safe. A way to achieve this rebalancing is by using your investment portfolio to pay for spending while you grow CPP, instead by starting CPP later. Now let's look at what's accomplished. When things are done this way, you reduce market risk at the point in time when the conventional wisdom says you should, when you do ultimately start receiving CPP, you can cover more of your spending because your CPP amount will grow. Your CPP amount will grow by 42% if you were to delay from age 65 to age 70. And you get more of the safety-adding features. You get a larger redial amount. Plus, you get a whole bunch of peace of mind for your spending later in life. What do you know? What's unknown? What can you control and how safe do you want to feel? Now, I know some listeners don't like the idea of using their investment portfolio in this way, for a couple of reasons. Number one what if you die while you're delaying? In that case, you didn't get anything out of CPP. And number two spending more from your investment portfolio might mean less of an inheritance for your survivors. So let's start with number one you might die while you're delaying your CPP start date. Yeah, you might. In general, you can't control that. You also can't control that you had to contribute into CPP in the first place. Cpp is already paid for. What you can control is how much safety is in the sources of money that you'll need for your spending later in life if you do happen to live. Yes, absolutely. This is a very personal decision. I simply want everyone to understand what CPP can do for them, and then it's everyone's own individual decision. Now let's talk about number two the potential size of an inheritance, your last spend. Remember what I said at the very beginning this will be your last spend. You don't know when it will be, but you know it will be your last spend. So, yes, using more from your portfolio in order to be able to delay starting CPP does prioritize having more safety for the unknown number of spends you might have to make later in life, or having more money for your last spend. Again, how you want to prioritize these two things is a personal decision, but I would suggest that you consider a couple of things. Evan, let me ask you can you think of an asset that lots of people have that doesn't do a very good job, providing money for all your lifetime spends, but can provide a bunch of money for your last spend?
Speaker 1:Well, the one that comes to mind for me. I was just working with a client on this. We're kind of hashing out the details of the lifetime, spends a little bit, and one of their goals we went through kind of a comprehensive goal assessment and one of them was to leave money to their kids and, as I'm looking at their projection, they live in a part of the world or part of the country anyways that has very high housing costs and like well, even if you're spending all of your RSP and RIF assets and things like that, you're forgetting about your house. That's worth well over a million dollars and I kind of on track with what you're thinking here.
Speaker 2:Exactly, a house comes to mind. So when you start thinking about all your spending later in life, including your last spend, maybe there's a better match among your different sources of money to pay for that last spend. Again, what do you know? What's unknown, what can you control and how safe do you want to feel? I think it's important that your listeners know that I don't always recommend that a client should start CPP later. I understand that an individual's own CPP start date decision is very personal and that many considerations often need to be thought out. Thinking out these considerations and learning the numbers behind your options is exactly what financial planning is. I think the decision is very important. That's why I call it a strategic decision. I simply want everyone to understand what CPP can do for them, and then it's everyone's own personal decision. Tactical decisions I haven't talked about tactical decisions yet. Tactical decisions have two features. Tactical decisions have a smaller impact on how much money you'll get from CPP compared to the start date decision, and tactical decisions may or may not be available for your personal situation. Tactical decisions are important because they potentially let you squeeze out a little bit more by using CPP rules to your advantage, permitted you meet any qualification requirements, for example. Sometimes there are opportunities around the transition between the end of one calendar year to a new calendar year. There was an article that Fred Vatisse wrote last year. There was a really good opportunity last year because of how much price inflation was going to adjust in January the case that he cited in his article. It turned out to be actually more beneficial for the individual to take CPP in December and capture the price inflation increase that was going to happen in January, rather than to defer it and get the wage inflation increase.
Speaker 1:This doesn't happen very often.
Speaker 2:Historically, the wage inflation is a little bit higher historically. For the price inflation to be that much higher or higher absolutely, it's a little more rare.
Speaker 1:A bit more of a recent phenomenon here.
Speaker 2:Another example is CPP sharing. Cpp sharing is how you might be able to do income splitting between spouses. Income splitting means paying less tax. This is a good CPP rule to use, if you can, for your personal situation. There's another one related to the child raising dropout. In CPP, the child raising dropout is available to the parent who received the Canada child benefit. It's called a female presumption. I hate saying that. I'm going to just simplify things and go mom, dad. Basically, there's an assumption that mom was the primary caregiver. If it turns out that dad is, there's a procedure for mom to waive her right to the child raising dropout and then dad can use the child raising dropout in the calculation for their CPP. This potentially could be quite beneficial. I've seen this a number of times. It can be quite beneficial for that waiver to happen and for the child raising dropout to be used by dad rather than mom.
Speaker 1:To claim these dropouts, and you talked about it in the animated video as well. How do you actually do that? Can you just do that on your initial CPP application?
Speaker 2:You can do it on your application. The main application has most of the stuff, or all of the stuff that can take effect. I believe there is also standalone individual forms for a lot of the different options as well.
Speaker 1:Gotcha Okay.
Speaker 2:Another tactical decision that can be made is around post-retirement benefits. What post-retirement benefits are is if you are already receiving your retirement pension and continue to work, you're either required or can choose to continue contributing to CPP and earn what's called a post-retirement benefit. There's possibly a tactical decision there, because after you turn age 65, you have the option of continuing to contribute and receive post-retirement benefits. There's a bit of a cost-benefit trade-off analysis there that you can make and, incorporating that into someone's financial planning, decide whether or not that's something that they want to do for their personal situation. What's critical is that you give the most priority to the strategic decision. Don't make a poor strategic decision just because there's a CPP rule that will get you a little bit more. The CPP start date decision has the potential to get you a lot more. You don't want to win the battle if it means you're going to lose the war.
Speaker 1:Right, Making sure that you're making a good call on when you're actually starting it. Based on all these factors that we've talked about here, that's going to move the needle a whole lot more than little bits here and there.
Speaker 2:There is, and there's one thing that I forgot to mention that's a one-time decision. Once you make it, it's over.
Speaker 1:Right, you can't go back.
Speaker 2:You can go back within a certain period of time. I believe it's either three months or six months, but any time you've got about a three-month or a six-month window to cancel any benefit that you've started, that you've applied for.
Speaker 1:I think you get to repay it too, don't you?
Speaker 2:You would have to pay back anything you received. Absolutely Nothing comes for free.
Speaker 1:That's right. There's no oopsie-daisy bonus here.
Speaker 2:There's no freebies with anything.
Speaker 1:Got you. We've talked about the CPP being there during your lifetime. It pays until you die. What happens if you die? If I have a pension say I'm a teacher, maybe here in Saskatchewan if I die, a certain portion of my pension then goes to my spouse, and that happens all the time. Does that happen with CPP too?
Speaker 2:Yes, it does. Earlier in the podcast I mentioned that CPP has seven distinct benefits. Three out of those seven provide money to the dependents of a contributor, the survivors of a contributor. Those three are the death benefit, the orphan's benefit and the survivor's pension. The death benefit provides assistance to contributors as state with things like funeral expenses or really anything. It's money that's going to go to the state by providing a one-time lump sum payment. The one-time payment is fixed at $2,500. That one's easy. That one's simple. It's just flat them out. The estate applies and there you go.
Speaker 1:That one has not been adjusted for inflation. That's correct Just a flat $2,500. If you listened to this podcast, if we were to have recorded this five years ago, that number still would have been the same Five years ago, maybe not. Maybe. I'm setting you up for.
Speaker 2:In the past. There has been a change recently. I can't remember when that transition took place, but in the past it was a calculated amount, again based on your contributions, and the maximum was $2,500. A few years ago they just fixed it at $2,500.
Speaker 1:Gotcha. Okay, I didn't even know I was setting you up for another little technical blip there. This is fantastic.
Speaker 2:The orphan's benefit provides assistance to the children of a deceased contributor while they are dependent children. Children of a contributor are considered dependent if they are under the age of 18 or between 18 and 25, if the child is attending school or university. The orphan's benefit is a monthly amount, but that one is in lex to inflation. So in 2023, the monthly amount for the orphan's benefit was $281.72. The survivor's pension provides assistance to a deceased contributor's spouse or common law partner by providing a lifetime pension. Now, the calculation for the survivor's pension is different depending on whether the survivor is aged less than 65 or 65 and higher. In both cases, the calculation for the survivor's pension starts by calculating the contributor's retirement pension. Now, this is a constant feature throughout CPP Most things start by calculating a retirement pension and then any number of adjustments or extra calculations or special rules. Then all that stuff applies.
Speaker 1:Okay, so if I pass away, I'm not collecting the CPP right now. If I pass away first, what they would do is calculate my pension before they figure out how much anything goes to my wife, correct?
Speaker 2:Okay. Another important thing to know about all three of these benefits is that there's a minimum qualifying period. This means that the deceased contributor needed to make the minimum number of annual contributions in order for their dependents to be eligible to receive either one of those three benefits. The minimum number of contributions is contributions for at least one third of their contributory period at the time of death, but no less than three years. Contributory period is called your CPP, working life in the animation Four contributions for at least 10 years. Now, that's a pretty big difference compared to the retirement pension. For the retirement pension, you only needed to make one qualifying contribution to get the pension. Now, if you only made one contribution, your retirement pension will be small. Now remember, the more you put in, the more you get out, but you only need to make one for the retirement pension. Please see the complete list of Beatrix papers on the right For your survivors to get the death benefit, the orphan's benefit or the survivor's pension. You do need to have made the minimum number of contributions.
Speaker 1:Okay. So if I were to pass away now we've kind of figured out when someone would qualify for it how much would my spouse theoretically get? We can do some heavy assuming here.
Speaker 2:So, like I said, the survivor's pension is calculated differently depending on whether the survivor is age 65 or less. If the survivor is less than age 65, you're going to start with the contributor's retirement pension. Multiply that by 0.375 and add a flat rate. I don't remember what the flat rate happens to be for this year, but so it's 0.375 of the contributor's retirement pension plus a flat rate. If the survivor is age 65 or older, it's 0.6% of the contributor's retirement pension. Now things get a little bit more complicated once the survivor takes their own pension. That's what's called combined benefits, combined retirement plus survivors. I don't want to go into that. That gets really funky and really technical. Those are the kind of calculations that when I need to do those, I actually break out pencil and paper, I put the spreadsheets aside. I don't want to get cute. I want to be thoughtful, methodical, because there's any number of little special quirks that might apply in those situations.
Speaker 1:At a high level, though, if I were to pass away. I'm over 65, we're well into typical CPP collection years. If I die, my wife is not getting all of my CPP.
Speaker 2:Absolutely not. That's one of the other things. There is a maximum to the combined benefit.
Speaker 1:You usually between a spouse. If one of them passes away, there will be a reduction in household income from CPP.
Speaker 2:Usually yes, absolutely.
Speaker 1:Yeah, okay, so we didn't really talk about specific amounts here, but just for someone that is curious or hasn't even considered looking up their estimate or anything like that Right now say someone is 65 and they qualify for the absolute maximum, how much would that person actually receive an income?
Speaker 2:It's just over $1,300 a month.
Speaker 1:So yeah, about $15,000 a year. Now that is before tax. Cpp is taxable right.
Speaker 2:Yes, it's taxable's regular income.
Speaker 1:Which is kind of a bit of mental gymnastics for someone, because if it shows up on your pay stub as a deduction, it's like, well, this feels like a tax, and then they take tax again.
Speaker 2:Well, it's not quite that way. Not quite that way.
Speaker 1:When someone takes it, can they elect to have taxes withheld at the source or do they have to pay taxes come tax time?
Speaker 2:Yes, they can elect to have taxes taken off at source.
Speaker 1:And so that way someone can kind of finagle how much they're receiving, because, as goofy as it is, some people really hate having to pay tax at the end of the year, even though they're not paying any extra tax.
Speaker 2:And if they want to have more taken off than the statutory withholding amount, they can contact Service Canada and specify the amount that they take off from CPP. Yes, yeah awesome.
Speaker 1:You covered a lot of ground on CPP here. Maybe could you maybe summarize some of the main thoughts and points around how you feel about CPP, or how listeners should be thinking about CPP when it comes time to make those decisions.
Speaker 2:Yeah, I really want to emphasize that your start date decision is a strategic decision. There's three reasons why I think it's a strategic decision. Cpp's already paid for. It specifically addresses the risks you'll be facing later in life. Cpp is guaranteed last until you die and CPP provides inflation protection. And the third reason is your control of how much your CPP will shrink or grow. When you pick your start date decision, and I think it's really important that you think about all the spending that you're going to do later in life and answer where will the money come from? And the four critical questions what do you know, what's unknown, what can you control and how safe do you want to feel?
Speaker 1:Jason, this was awesome. Thanks so much for joining me and sharing your insights on CPP today.
Speaker 2:Oh, my pleasure. This is a lot of fun.
Speaker 1:Thanks for listening to this episode of the Canadian Money Roadmap Podcast. Any rates of return or investments discussed are historical or hypothetical and are intended to be used for educational purposes only. You should always consult with your financial, legal and tax advisors before making changes to your financial plan. Evan Neufeld is a certified financial planner and registered investment fund advisor. Financial funds and ETFs are provided by Sterling Mutuals Inc.
