Applying for the Canada Pension Plan (CPP) is a significant milestone in your retirement journey. This government pension provides a foundation for your retirement income, but the amount you receive depends on various factors throughout your working life.
In this blog post, I’ll share 18 important financial moves to consider before applying for CPP. These steps can help you optimize your benefits, reduce taxes, and ensure a smoother transition into retirement.
Review Your CPP Contribution History
Request a copy of your CPP Statement of Contributions from Service Canada. This document shows your entire contribution history. Check for any missing years or errors in your record. If you find any discrepancies, contact Service Canada to have them corrected. Ensuring your contribution record is accurate can significantly impact your CPP benefit amount.
Consider Delaying Your CPP Application
You can start receiving CPP as early as age 60 or delay it until age 70. For each month you delay after age 65, your benefit increases by 0.7%. This means if you wait until 70, your benefit could be 42% higher than at 65. Consider your health, financial situation, and life expectancy when deciding when to start CPP.
Maximize Your Contributions in Your Final Working Years
If possible, aim to have high earnings in the years leading up to your CPP application. CPP benefits are calculated based on your average earnings throughout your career. Strong earnings in your later working years can boost your overall benefit. Consider working extra hours or taking on additional responsibilities to increase your income.
Make Use of the Child-Rearing Provision
If you took time off work to raise children under the age of seven, you can use the child-rearing provision to increase your CPP benefit. This provision excludes periods of low or zero earnings while raising children from the benefit calculation. Apply for this provision when you apply for CPP to potentially increase your benefit amount.
Evaluate the Impact of Early Retirement on CPP
If you’re considering early retirement, understand how it will affect your CPP benefits. Retiring early means fewer years of contributions and potentially lower benefits. Calculate the long-term impact of early retirement on your CPP payments. Consider working part-time or consulting to continue making CPP contributions if you retire before applying for benefits.
Understand the Post-Retirement Benefit
If you continue working while receiving CPP, you can increase your future benefits through the Post-Retirement Benefit (PRB). This allows you to continue contributing to CPP even after you start receiving benefits. Each year of additional contributions results in a PRB that is added to your monthly CPP payment the following year.
Coordinate CPP with Your Spouse
If you’re married or in a common-law relationship, coordinate your CPP strategy with your spouse. Consider factors like age difference and individual contribution histories. In some cases, pension sharing can be beneficial for tax purposes. Discuss with a financial advisor to determine the best CPP timing strategy for your household.
Assess Your Other Retirement Income Sources
Before applying for CPP, review all your other sources of retirement income. This includes RRSPs, TFSAs, company pensions, and other investments. Understanding your overall retirement income picture can help you decide when to start CPP. It may be beneficial to draw from other sources first and delay CPP to maximize the benefit.
Consider the Old Age Security Clawback
Be aware of how your CPP benefits might interact with Old Age Security. If your total income exceeds a certain threshold, your OAS benefits may be clawed back. Plan your retirement income strategy to minimize the impact of the OAS clawback. This might involve careful timing of CPP, RRSP withdrawals, and other income sources.
Evaluate Your Tax Situation
CPP benefits are taxable income. Consider how CPP payments will affect your overall tax situation in retirement. It may be beneficial to start CPP in a year when your other income is lower. Consult with a tax professional to develop a tax-efficient retirement income strategy that includes your CPP benefits.
Address Any Outstanding Debts
Before applying for CPP, try to pay off any high-interest debts. Entering retirement debt-free can reduce financial stress and allow you to make the most of your CPP benefits. If you have a mortgage, consider whether it’s feasible to pay it off before retirement. Eliminating major debts can give you more flexibility in timing your CPP application.
Create a Detailed Retirement Budget
Develop a comprehensive retirement budget that includes all expected expenses and income sources. Include your estimated CPP benefit in this budget. This will help you determine if you need to supplement your CPP income with other sources. A detailed budget can also help you decide if delaying CPP for a higher benefit is financially feasible.
Consider the Impact on Government Benefits
Some government benefits are income-tested, meaning the amount you receive depends on your income. Understand how CPP benefits might affect your eligibility for other programs like the Guaranteed Income Supplement (GIS). In some cases, delaying CPP might allow you to receive more from these income-tested benefits.
Explore CPP Pension Sharing
If you’re married or in a common-law relationship, look into CPP pension sharing. This allows couples to split their CPP retirement pensions, which can lead to tax savings. Pension sharing can be particularly beneficial if one spouse has a significantly higher CPP benefit than the other. Consult with Service Canada or a financial advisor to see if this option is right for you.
Update Your Beneficiary Designations
Before applying for CPP, ensure your beneficiary designations are up to date. While CPP has specific rules about survivor benefits, it’s essential that all your financial accounts have current beneficiaries. This includes RRSPs, TFSAs, and life insurance policies. Keeping these designations current can help ensure your wishes are carried out and minimize complications for your loved ones.
Consider Your Health and Life Expectancy
Your health and family history of longevity can play a role in deciding when to apply for CPP. Taking CPP earlier might be beneficial if you have health concerns or a family history of shorter lifespans. Conversely, delaying CPP could provide higher lifetime benefits if you’re in good health and expect to live well into your 80s or beyond. Discuss this with your doctor and financial advisor to make an informed decision.
Understand the CPP Survivor’s Pension
If you’re widowed, you may be eligible for the CPP survivor’s pension in addition to your own retirement pension. However, there’s a maximum combined benefit amount. Understand how these benefits interact before applying for your own CPP retirement pension. In some cases, the timing of your CPP application can affect the total amount you receive from both pensions.
Seek Professional Advice
Finally, consider consulting with a financial advisor or retirement specialist before applying for CPP. They can help you navigate the complexities of CPP and develop a comprehensive retirement strategy. A professional can analyze your unique situation and help you make informed decisions about CPP timing, tax implications, and overall retirement planning.
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