Personal Finance

Who can explain this CPP calculation?

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  • Jan 15th, 2021 1:15 pm
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[OP]
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Dec 12, 2012
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Courtenay

Who can explain this CPP calculation?

Following is a question that someone asked on another forum, along with my reply. Is there anybody out there who can explain what situation would make my answer exactly correct and what situation might make it a little wrong. For bonus points and ignoring the enhanced CPP changes, who can tell me how far away from the truth my answer could be. If nobody can provide the correct explanations within 30 days, I'll explain it further then.

Original question:

I've been working on my (early) retirement plans. I refer to it as "stop working" rather than retiring because I might still work here or there, doing something I enjoy. When I go see what sort of CPP I will qualify for, their website shows my work history and contributions. I'm 45, have been contributing since I was 18 with maximum contributions since 2002. For the estimated amounts, does this # assume I continue contributing the maximum amount until I hit the ages shown below? I have to assume so but they don't make it clear in their website. These are the numbers it's giving me:

at 60, you could receive $704.76 per month
at 65, you could receive $1,101.19 per month
at 70, you could receive $1,563.69 per month

How do I figure out what my CPP is worth if I stop working at an age earlier than 60? I realize 60 is the earliest I can collect it, and that delaying collecting it increases how much I will get each month.

I'm working on establishing what sort of income I will have at various ages of retirement so having a formula to calculate different age scenarios would extremely useful.

I found the retirement income calculator on the GOC website but it gives me the same results as the ones I posted above. I hope to stop working by the time I'm 50 but that's flexible. If I did continue to work it would consulting/contract work that likely wouldn't involve CPP contributions or it would be part time at some sort of low wage job so it likely wouldn't impact my CPP that much.

Thanks for any help you can share!

My reply

Ignoring the enhanced CPP changes, the closest thing to the truth is that for your CPP to remain at $1,101.19 (in 2021 dollars) when you turn age 65, you would have to have average earnings at 91.5% of the YMPE for 16.6 years out of the next 20 years. If you can figure out why that is true, you should be able to play with lots of different scenarios.
16 replies
Member
Apr 11, 2011
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Memramcook
Without knowing the birthdate, his non max years are those that are before 2002 and are the drop out periods. So 1101.19 is 91.5 % of the maximum amount. This would mean he needs have 91.5 % of the max amounts YMPE from 2002 to age 65? 2002 to his age 18 = 9 years. His dropout is 8 years.

I will not go into the calculation because you explain it A LOT BETTER than I could at your website.

He needs a total of 35.685 for the sum of his "factor".( 35.685/39 years x 100 = .91.5%) Assumption of 19 years maximum contribution to 2020 = factor of 19. The sum needs to be 35.685 so he needs 83.425 % over the last 20 years (20 x .83435 = 16.685) or 100.5% over 16.6 years to get the same amount. 19 + 16.685 = 35.685. 35.685/39*100 = 91.5%

I am sure I made errors but it was fun trying. Smiling Face With Open Mouth

Robert

ps: it seems like there are "9 years" before 2002 so his closest amount to the YMPE during these years should be known. My calculations are based on 19 years max until age 45 instead of 18
Newbie
Oct 22, 2020
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My Excel sheet says approximately $904 (2021 dollars) per month CPP at age 65, $578 per month at age 60, if the subject stops working at age 50 in 2025. My understanding is to treat the online calculator as if you are already 65 (or your maintain your present ratio until your retirement).
[OP]
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Dec 12, 2012
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Courtenay
bobmacgolf wrote: Without knowing the birthdate, his non max years are those that are before 2002 and are the drop out periods. So 1101.19 is 91.5 % of the maximum amount. This would mean he needs have 91.5 % of the max amounts YMPE from 2002 to age 65? 2002 to his age 18 = 9 years. His dropout is 8 years.

I will not go into the calculation because you explain it A LOT BETTER than I could at your website.

He needs a total of 35.685 for the sum of his "factor".( 35.685/39 years x 100 = .91.5%) Assumption of 19 years maximum contribution to 2020 = factor of 19. The sum needs to be 35.685 so he needs 83.425 % over the last 20 years (20 x .83435 = 16.685) or 100.5% over 16.6 years to get the same amount. 19 + 16.685 = 35.685. 35.685/39*100 = 91.5%

I am sure I made errors but it was fun trying. Smiling Face With Open Mouth

Robert

ps: it seems like there are "9 years" before 2002 so his closest amount to the YMPE during these years should be known. My calculations are based on 19 years max until age 45 instead of 18
Hi Robert - Thanks for the analysis! I'll give it a little longer to see who else might want to give it a shot, and then I'll post my further explanation.
[OP]
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Courtenay
kelaaa wrote: My Excel sheet says approximately $904 (2021 dollars) per month CPP at age 65, $578 per month at age 60, if the subject stops working at age 50 in 2025. My understanding is to treat the online calculator as if you are already 65 (or your maintain your present ratio until your retirement).
I get somewhat less at age 65 if he stops working at age 50, but the age 60 amount should never be 64% of the age 65 amount if there are no earnings after age 50.
Newbie
Oct 22, 2020
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Dogger1953 wrote: I get somewhat less at age 65 if he stops working at age 50, but the age 60 amount should never be 64% of the age 65 amount if there are no earnings after age 50.
Is this because there are 60 less periods of zeros, the so average is higher? So the effective penalty is less than the nominal 36%, more like 27%?
[OP]
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Courtenay
kelaaa wrote: Is this because there are 60 less periods of zeros, the so average is higher? So the effective penalty is less than the nominal 36%, more like 27%?
Yes, that is exactly correct!!
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Apr 11, 2011
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Memramcook
The drop out period will be less if he takes to at age 60 than if he takes it at age 65, 96 months drop out at 65 and 86 months at age 60.

Bob
[OP]
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Courtenay
bobmacgolf wrote: The drop out period will be less if he takes to at age 60 than if he takes it at age 65, 96 months drop out at 65 and 86 months at age 60.

Bob
Hi Bob - Yes, that is also true.
Deal Addict
Jan 21, 2018
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Vancouver
One more thing to note for people thinking about maximizing their return on CPP:

You must go on contributing to CPP if you are still working (and your employer must continue contributing on your behalf as well), until you start receiving CPP, regardless of whether you have already hit the maximum lifetime qualifying contribution.

So if you do not start taking CPP as soon as you hit the maximum qualifying contribution, every dollar you continue to contribute is wasted to you and becomes a bonus to the government. There's nothing you can do about it - it's just a factor to take into account in retirement calculations.
Jr. Member
Dec 5, 2017
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So if I'm ready this correctly, if I plan on retiring when I'm 55, it's best to start collecting CPP when I'm 60 to reduce my 0 income years. Forgive my ignorance, but if I start drawing on my RRSP's at 55 would that not count as income so I wouldn't actually have 0 income years?
Banned
Jul 10, 2020
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Spiritwalker2222 wrote: So if I'm ready this correctly, if I plan on retiring when I'm 55, it's best to start collecting CPP when I'm 60 to reduce my 0 income years. Forgive my ignorance, but if I start drawing on my RRSP's at 55 would that not count as income so I wouldn't actually have 0 income years?
Employment income
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Jul 10, 2020
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Scote64 wrote: One more thing to note for people thinking about maximizing their return on CPP:

You must go on contributing to CPP if you are still working (and your employer must continue contributing on your behalf as well), until you start receiving CPP, regardless of whether you have already hit the maximum lifetime qualifying contribution.

So if you do not start taking CPP as soon as you hit the maximum qualifying contribution, every dollar you continue to contribute is wasted to you and becomes a bonus to the government. There's nothing you can do about it - it's just a factor to take into account in retirement calculations.
Depends.
you get post-retirement benefit.
you also knock off lower income years.
[OP]
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Dec 12, 2012
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Courtenay
Scote64 wrote: One more thing to note for people thinking about maximizing their return on CPP:

You must go on contributing to CPP if you are still working (and your employer must continue contributing on your behalf as well), until you start receiving CPP, regardless of whether you have already hit the maximum lifetime qualifying contribution.

So if you do not start taking CPP as soon as you hit the maximum qualifying contribution, every dollar you continue to contribute is wasted to you and becomes a bonus to the government. There's nothing you can do about it - it's just a factor to take into account in retirement calculations.
This used to be true prior to 2019, but it is no longer 100% true until at least 2063 when we are 40 years into the full implementation of the "enhanced CPP". It is still true that once you have 39 years of maximum earnings/contributions that you have maxed out on the "basic portion" of the CPP retirement pension (ie., the old 25% of average lifetime earnings). The "enhanced CPP portion" though (8.33% of earnings up to the YMPE and 33.33% of earnings between the YMPE and the YAMPE cannot be maxed-out until 2063, when you could have 40 years of max earnings/contributions under the enhanced CPP.

The enhanced portion by itself isn't going to make anybody rich (approx $5.00 more per month at age 65 for max contributions in 2021), but it's not zero. And although any additional contributions beyond 39 years of max don't directly increase the amount of your CPP, it still might be a sound financial decision to defer in order to receive the increase for the age-adjustment factor alone, rather than taking your CPP at a reduced rate when you might be in a higher tax bracket due to your employment earnings.

I agree that you must consider that you're contributions aren't increasing your CPP directly, but I don't think it's a slam-dunk decision to always apply early in this situation.
[OP]
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Courtenay
Spiritwalker2222 wrote: So if I'm ready this correctly, if I plan on retiring when I'm 55, it's best to start collecting CPP when I'm 60 to reduce my 0 income years. Forgive my ignorance, but if I start drawing on my RRSP's at 55 would that not count as income so I wouldn't actually have 0 income years?
As PC said, your RRSP withdrawals won't count as employment earnings, so you will still have zero earnings for CPP purposes. This doesn't necessarily mean that you should take your CPP at age 60 though, but you should know what your real numbers are.
[OP]
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pokemoncollector wrote: Depends.
you get post-retirement benefit.
you also knock off lower income years.
Hi PC - Just to clarify. You will only get a PRB if you contribute after you are already receiving your CPP retirement pension, and if you are already at "the maximum", there are no lower income years to "knock off".
[OP]
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Courtenay
It seems like nobody wants to play anymore, so here is my final answer.

The main point that I was trying to make with this thread is that there are many different possible earnings scenarios that could produce the same Service Canada (SC) estimates at 60, 65 and 70, but they won’t necessarily produce the same actual retirement pension when the time comes.

This specific case had some limits, because the client indicated that he had 18 years of maximum earnings and contributions (E&C). Let’s pretend that he hadn’t said that though, and look at what that does to his actual retirement pension at age 65.

As I said earlier, there are many different earnings scenarios that would result in an age-65 estimate of $1,101.19 for someone that is currently age 45. Because SC has applied the 17% dropout to the 27-year contributory period, that means that the estimate is based on the average earnings for this person’s best 22.4 years (83% of 27 years). Trust me when I say that the two possible extreme scenarios are:
A) 20.5 years of maximum E&C; or
B) 27 years of E&C at 91.5% of the maximum.

These two extremes will both produce the age-65 estimate of $1,101.19 when the client is age 45, but they could produce significantly different results at age 65, as demonstrated by the following examples (ignoring the enhanced CPP for now).

If the client had no further earnings after age 45:
A) Retirement pension of 52.6% max = approx. $632.75, or
B) Retirement pension of 63.3% max = approx. $762.53

If the client had 20 years of maximum earnings after age 45:
A) Retirement pension of 100% max = approx. $1,203.75, or
B) Retirement pension of 95.9% max = approx. $1,154.37

If the client had 20 years of earnings at 91.5% of maximum after age 45:
A) Retirement pension of 95.9% max = approx. $1,154.37, or
B) Retirement pension of 91.5% max = approx. $1,101.19

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