Canada Pension Plan
First, what is the Canadian Pension Plan (CPP)?
It is a fund that exists and is managed by the Canadian government. Canadians contribute money to the fund with every single paycheck, which shows up as “CPP Contribution”. It’s roughly 5% of your salary, up to a maximum (YMPE – Yearly Maximum Pensionable Earnings) of roughly 57-58 grand – however, these numbers may change annually.
There’s a lot of myths out there. People think that it’s severely underfunded, while that is not actually the case. The most recent actuarial valuation put the dollars at about $400 billion, and the actuarial valuation said that it is good for at least 75 years. It’s averaged about 11% return in the last while or so.
The asset allocation has also dramatically changed. It used to be nothing but bonds back in the 70s and 80s. Over the past while there’s been a dramatic shift, first to equities and stocks, and then the last 5 or 10 years there’s been a dramatic shift to alternatives.
Real estate infrastructure, private equity, and even private debt exist now. Stocks are about a third of the CPP, with traditional bonds accounting for around 10%. The rest is all that other fun stuff that is usually uncorrelated to the stock market.
Old age security (OAS) is a dollar figure that you get when you hit 65. It’s based on how many years you’ve been a resident of Canada regardless of whether you paid into it or not, unless you made too much money in which case the OAS will be clawed back.
The claw back starts at around 80k, give or take, and goes up to about 120k. It works in a linear fashion, all the way to the point where you get $0 if you make about 120k. In other words, the more money you make, the more the OAS cheque will be clawed back. See the chart for an example of how your OAS would be clawed back as you earn more income.
If you are deferring your CPP, you are choosing to let it go for a further period of time. You can start taking your CPP as early as age 60 and you can take it as late as age 70. Every month that you take it prior, and every month that you defer is effectively 0.6% more assets that you are getting for the rest of your life. From 60 to 65 that number is 0.6% and from 65 to 70 that number is 0.7%.
Think of it this way – if you defer it five years, you know you’re adding about 6% or 7% per year. You are adding about 30% to 35% to the amount that you will be collecting for the rest of your life.
You can do the same with the OAS. You can defer the OAS up to age 70 – the key with the OAS is you want to make sure that if you reach the age of 65 and are in a situation of getting the OAS clawed back, you should unequivocally defer it because you’re not getting it anyways. If you’re deferring it, things might change in your life, to the point where you’re making less money and are able to collect on that OAS.
In the case of OAS, defer it if you are making 120k or more. However, when should you be deferring on the CPP?
There are a couple of situations that can impact whether you should take it early or not. First, the most obvious one is if you are still working and you do not need the capital, you should absolutely not take the CPP because you will pay tax on that.
You’re likely in a relatively high tax bracket, so you don’t get the full value of the CPP. Plus, you’re not deferring it, so you will not get that 30% to 40% bonus that you get by deferring it. If you don’t need the cash and are still working, do not take the CPP.
There are a couple of considerations to be accounted for when deciding to take the CPP earlier. If there’s any issue with your health that is impacting how long you think you might live, you should consider taking it early. If you’re short on cash, and you cannot meet your cashflow on a month to month basis, you should consider taking the CPP.
These situations are all very dependent on a good sound financial plan. Without having a strong financial plan, you have no clue whether you should take it or not. A financial plan looks at cashflow, tax situations, and the value of your estate.
It looks at all your different taxable needs, a cashflow needs on a year to year basis and spits out a solution for you so that you know where you’re taking your money. To make the proper CPP decision and OAS decision, you absolutely need to have a sound financial plan. At the Tetrault Wealth Advisory Group, we work with you to create a sound financial plan, which can help provide you the answers as to when might be the best time to draw your OAS and CPP benefits.
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