Chapter 1.1: Understanding the Canadian Pension Plan (CPP)

The Canadian Pension Plan (CPP) serves as a government-managed savings plan for most Canadians, funded through paycheck deductions. However, self-employed individuals may opt-out of contributing. It's important to note that not contributing means you'll miss out on CPP benefits in retirement. Some self-employed Canadians choose not to contribute, as they bear the cost of both employee and employer contributions, potentially leading to inadequate savings when they retire.

Consulting an investment advisor can provide critical insights into the best options available for your situation. For those who do contribute to CPP, the amount you pay is significant. You can estimate your potential CPP benefits using the CPP calculator available on my website, joemacek.com.

It's worth noting that if you have received CPP survivor benefits, disability payments, or funds during child-rearing years, this calculator may not provide a precise estimate since it does not account for these situations.

In essence, your CPP payout correlates directly with your contributions and the number of years you contribute at the maximum level. The maximum payment at age 65 is $1,306 in 2023, but most recipients receive between $700 and $1,200, with the average being around $811 due to insufficient maximum contributions.

You can begin receiving CPP benefits anytime between the ages of 60 and 70, but your estimated amount will vary based on your work status. If you plan to continue working until 65, your CPP estimate will be more accurate. Keep in mind that CPP is taxable income, so it's advisable to set aside some funds for taxes by instructing the CRA to withhold an appropriate amount at source.

If you choose to take CPP early, you will face a reduction of 0.6% for each month before age 65. Conversely, postponing your CPP beyond 65 increases your monthly benefits by 0.7% for each month delayed. Delaying benefits can yield an increase of roughly 8.4% annually for the rest of your life, but the years between 65 and 70 are non-contributory for CPP calculations.

If you continue working after 65 and contribute to CPP, there is a post-retirement benefit available, but we will refrain from delving into that in this article.

Chapter 1.2: The Old Age Security Benefit (OAS)

Next, we explore the Old Age Security (OAS) benefit. If your CPP contributions have been minimal, OAS might provide more significant support for your retirement. Unlike CPP, which is based on contributions, OAS is calculated based on the length of your residency in Canada. To receive the maximum OAS benefit, you must have resided in Canada for at least 40 years.

As of 2023, the maximum OAS amount at age 65 is $691, increasing to $760.10 once you turn 75. However, if your income surpasses a set threshold, you may face a clawback on your OAS benefits, commonly known as the pension recovery tax. As of July 2023, this threshold is $81,761 based on your 2022 income, with a clawback rate of 15% for each dollar over this limit.

Once your income reaches $134,626, you will lose your OAS benefits entirely. The threshold is slightly higher for individuals aged 75 and older, reflecting the additional boost in benefits for that age group.