One of the biggest fears that many Canadians have has to do with retirement. Will you be able to retire when you want to? Will you be able to do so comfortably? It’s important for you to do what you can to boost your retirement savings, and it’s important to use all the tools at your disposal.
As a result, don’t forget that Canadians have access to the CPP. In fact, contributions to the CPP are required. As you plan for your retirement, you should certainly shore up your finances with the help of your RRSP, TFSA, and taxable investment accounts. But don’t forget to factor the CPP into your plans.
The Canadian Pension Plan and Your Retirement
The CPP is part of Canada’s retirement income system. Anyone that is is 18 or older and employed must contribute to the CPP. The contribution calculation is based on the employee’s income. This plan applies to all provinces and territories except Quebec, which operates its own similar plan, the Quebec Pension Plan (QPP).
While it seems a little hard that the contribution to the CPP is mandatory, the reality is that too many of us don’t save what we should. The CPP enforces a certain amount of saving so that you at least have something to fall back on during retirement. Chances are that the CPP won’t guarantee a comfortable retirement on its own so you will need to use other tools to build wealth. But it can help you provide the base for your retirement income.
The Canada Pension Plan is a monthly benefit designed to replace 25% of your earnings during retirement. To begin collecting under the CPP you must be 65 to receive your full benefit. It is possible to begin receiving your CPP benefits as early as age 60 if you either stop working in the month before your CPP begins. or make less than the monthly maximum Canada Pension Plan retirement pension payment in both the month before and the month of your first CPP payment.
This isn’t always the best option, however, because by starting to receive your payment at 60, your CPP payment will be 30% lower than if you wait until 65. If you decide that you want to retire early, it usually makes more sense to draw from other income and investment sources and hold off on your CPP if you want full benefits.
On the other hand, you can delay your payment under the Canada Pension Plan until 70 and your payment would be 30% more than what you would have received at 65. Deciding when to begin claiming your CPP benefits is a big deal and depends on your individual situation. Before you make a decision, it’s a good idea to consult with a knowledgeable financial advisor who can help you see how your entire retirement income picture will look — including the tax implications of your decisions.
Your CPP and Non-Retirement Income
The CPP isn’t just for retirement, though. There are two other forms of CPP payment: disability payment and survivor payment. Both of these types of payment recognize that there are situations in which you can’t wait until you are older to begin receiving benefits.
The disability payment can come into effect if a disability leaves you unable to work at any job regularly. It’s designed to help you supplement your monthly income when you can no longer work at the same level as in the past. Disability can be financially devastating, and the CPP can help offset that.
The survivor payments include a one-time payment to the estate of the contributor, as well as monthly payments to the spouse, or common-law partner, and to dependent children. This benefit is designed to help take care of your family in the event of your untimely death.
Realize, though, that CPP disability and survivor payments, like retirement benefits, aren’t designed for total income replacement. Proper insurance is a good idea in order to ensure that your family’s finances aren’t destroyed by unexpected setbacks.
You can apply for the Canada Pension Plan either online or by mail. Make sure you have all the proper documentation when you apply. You can contact the CPP for information about what is needed ahead of time so that your application isn’t slowed down by missing documentation.