Episode #6: CPP and Your Retirement Income Strategy

In this episode of the Retirement IQ Podcast, retirement wealth coach John Stregger tackles some of the most common misconceptions about the Canada Pension Plan (CPP). Many Canadians wonder if the CPP will still exist when they retire or how much income they can really expect. John breaks down the facts to help you plan with confidence.

Learn how CPP benefits are calculated, when it might make sense to start or defer payments, and why the plan remains financially stable for decades to come. John also explores how CPP fits into the bigger retirement picture, alongside strategies to reduce taxes, optimize investment portfolios, and secure reliable income.

Whether you’re approaching retirement or just starting to plan, this episode will help you understand how to make CPP work for you.

Chapters

• 0:09 Introduction to Retirement IQ
• 0:19 Misconceptions About Canada Pension Plan (CPP)
• 0:51 Role of a Retirement Planner
• 1:23 Importance of Understanding CPP
• 1:55 Basics of Canada Pension Plan
• 2:28 CPP Income Example
• 3:10 CPP Retirement Benefits
• 4:02 Myth 1: CPP Stability
• 5:05 Myth 2: Significance of CPP Income
• 5:25 Calculating CPP Income
• 6:41 Checking Your CPP Projections
• 7:05 Planning Your CPP Benefits
• 7:25 Early and Late CPP Income Start
• 8:07 Deferring CPP Income
• 9:11 Inflation Adjustment and Long-term Benefits
• 9:55 Tax Benefits of Deferring CPP
• 10:16 Free Retirement Report
• 10:41 Free Retirement Report
• 11:04 Disclaimer and Professional Advice

Transcript

CPP and Your Retirement Income Strategy

John Stregger: 00:09 - 10:51

Hey everyone, welcome to Retirement IQ, where I help you, our listener, better understand all things retirement, so you can build the kind of retirement you want to have. I'm your host, John Stricker, and today I want to share with you something that I've been noticing over the past couple of months in my client meetings.

There seems to be a lot of misconceptions around the Canada Pension Plan in terms of how it works, what you can expect as an income, and how secure the plan is in terms of will it be around for the long haul. So today, I'm gonna give you the Kohl's notes on how it works and how you can maximize the value to you.

But before we jump into CPP and why I think it's such an important topic to understand, I wanna pull the curtain back a little bit and let you in on what it is that I do in my day-to-day job as a retirement planner. Everything I do day-to-day is to help people answer three big questions, which are, can I afford to retire? How can I reduce my taxes in retirement? And three, can my investment portfolio be improved?

Ultimately, every question I get every day falls under those three categories. The way I see it, people just wanna know that they aren't missing out on anything and that they're gonna be okay financially.

Now, when it comes to the Canada Pension Plan, I find that there are a lot of misnomers out there about its stability and how much you're gonna get. By the way, understanding CPP falls under that category of, can I afford to retire? Because depending on your situation, it can be a really significant part of your lifetime retirement income.

As an example, and to give you context to that, a married couple age 70 starting CPP income today could potentially be drawing over $48,000 per year. To me, that's a significant number, which can go toward answering that question of, can I afford to retire?

Even if you aren't asking questions about CPP, I believe it is incumbent upon me as an advisor to make sure you are aware of the various options around CPP and help you navigate those options.

So let's start at the basics. What is the Canada Pension Plan?

When you go to retire, there are three sources of income that are gonna be available to you. One is social security, two, employer pension plans, and three, your personal savings. It's kind of like a three-legged stool where you wanna try and maximize the income benefits from each leg of that stool to provide you with the most secure and stable income possible.

Canada Pension Plan falls under the first category of Social Security. The CPP is a government-run pension plan which provides income to contributors and their families for retirement income but also disability and death. For this particular podcast we're going to focus on the retirement benefits which the CPP offers. CPP is funded by employees, employers, as well as self-employed individuals.

The Canada Pension Plan is a key part of most Canadians' retirement income plan. Now most people think that the CPP is actually funded by the federal government. While the government administers the payments, the CPP is actually managed by a crown corporation called CPP Investments, and their mandate is to invest the contributions of the plan and ensure its long-term stability.

While the payments retirees receive are paid and administered by the federal government, the actual money for those payments are drawn from the CPP. And that's important because it's the financial health of that plan, which dictates the reliability of your income in retirement.

I mentioned that as important because I wanted to dispel a couple of major myths around the CPP.

Myth number one, the CPP won't be around when you go to retire. Now, surprisingly, over 60% of Canadians believe that the plan won't be around when they retire. Nothing could be further from the truth. The CPP is strictly regulated by Canada's Chief Actuary and monitored on a very regular basis.

In fact, the most recent report from the chief factory confirmed that the CPP is in excellent financial health and is positioned to be able to make income payments for at least the next 75 years. So if you're over the age of 25, you shouldn't need to worry about any of your future income from CPP not being there.

Not only is the plan stable, the plan is also recognized internationally as one of the top performing pension funds in the world. You can definitely count on it being around when you retire. And for that reason, you should definitely integrate it into your retirement income planning.

Now, myth number two is that the income won't be significant. Now, I guess it really does depend on your financial circumstance, but for the majority of people that I work with, CPP is a core piece of their income.

So what kind of an income can you expect from CPP? Your CPP income is calculated based on what's referred to as your pensionable earnings throughout your working life.

Now, based on your salary or self-employed income, you contribute to CPP up to a limit each year. The income calculation also considers the number of years in which you contributed to CPP and also the age at which you start receiving the pension, which by the way, can be anywhere between age 60 and 70.

For a 65-year-old retiring today, the average CPP payment in Canada is about $844 per month, which is also indexed to inflation every year. Again, that's the average CPP income for all recipients across the entire country. Now the maximum benefit that you could actually receive is $1,433 per month.

So there's a pretty wide difference between the average and the maximum. And most of the people that we work with tend to fall on the higher side of the average.

If you wanna find out what you're on track for, the best way to get that information is to go online to Service Canada, where you can get a summary of your lifetime contributions, and more importantly, what your estimated income benefit will be at your age 60, 65, and 70.

It's a super simple process to find that information, and we'll link that website in our show notes so that you can go on and get your CPP projections.

How can you best plan your CPP benefits? This is where I kind of nerd out on the planning side with clients. Now, depending on your situation, there's great opportunity to not only maximize your retirement income, but also save some tax dollars along the way. But you do need to understand some of the nuances of the opportunities available.

The standard date to start your CPP income is age 65, but you do have the option to start income as early as age 60, or even as late as age 70. If you do wanna start your income early, CPP will pay you a reduced amount from what your expected age 65 benefit is gonna be.

Now for every year that you wanna start your income before age 65, CPP will reduce your income benefit by 7.2% per year. So if you wanna start CPP at age 60, your pension is gonna be reduced by 36%.

Now the flip side is, if you wanna start income past 65, they're gonna bonus you by 8.4% per year. So if you wait all the way to age 70 to start, you'll get a 42% raise on your CPP benefit.

Now let's put that in perspective. Let's say you're 65, married, both you and your spouse had good careers, you maxed out your CPP for the most part, you go online to Service Canada, you get your CPP projected income at age 65, and between the two of you, your combined total CPP income is $2,500 a month, or $30,000 per year, all guaranteed for the rest of your life and indexed to inflation.

Now for a couple like this, one option that we find works well is to take advantage of the CPP raises and defer your income to age 70. In this case, that couple who's on track for $30,000, they'd get $42,600 by waiting to age 70.

Now you would need some income to bridge from age 65 to 70, but the benefit to you is your $30,000 CPP income now is over $42,000.

But remember, CPP income is also adjusted for inflation. So if you take $30,000 at age 65, that's gonna grow to over $43,000 by the time you're age 80, assuming 2.5% inflation. But if you wait to take your CPP age 70, your income would grow to $61,000 at age 80.

The income gap grows significantly over time, which means that if you live long enough under these assumptions, you'll pull in a lot more CPP money over your lifetime just by deferring your start date to age 70.

Deferring your CPP income to age 70 also gives you the opportunity to withdraw RSPs at a potentially lower tax rate than if you were to wait till after you turn 70.

Often, when we do projections for our clients, we find this strategy not only increases their lifetime income, but it also reduces their lifetime tax bill.

Now, I do want to be clear on something. Deferring your CPP, it's not always the right choice. There are many other variables which will impact your decision on when to start taking CPP. The choice of whether to defer or not can be one of the most impactful to your lifetime income, but modeling your specific situation will help you make the right choice.

If you would like to see how to integrate your CPP into your retirement planning, I encourage you to visit us at freeretirementreport.ca. That's where we would be happy to help you model your retirement plan.

Until we meet again on our next episode, I'm John Strager, and thank you for listening to Retirement IQ.

Narrator 11:03 - 11:20

The information provided in this podcast is general in nature and should not be relied upon as a substitute for advice in any specific situation. For specific situations, advice should be obtained from the appropriate legal, accounting, tax, or other professional advisors.