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You’re never too wealthy for CPP

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Individual retirement savings are critical to your future well-being.

But that doesn’t mean you can overlook government pension plans. We all contribute to the Canada Pension Plan (CPP) and expect to receive benefits in return. This can have financial-planning implications, regardless of your individual wealth.

By definition, when you’re a high-net-worth (HNW) individual, you have significant savings and can expect to enjoy a comfortable retirement lifestyle. Yet, there can still be a danger of outliving your retirement savings.

Mitigating that danger means minimizing taxes, developing your retirement plan and asking one key question: When should I apply for CPP?

CPP retirement benefits are based on your average earnings during your working years and the age at which you apply for benefits (anytime between ages 60 and 70).

CPP will provide an estimate of your retirement pension based on benefits at age 65. Under the new rules, after 2016, if you choose to take CPP early, your pension payment will be reduced by 0.6% for each month you’re under age 65. If you wait until after age 65, your monthly pension payment will be increased by 0.7% for each month you’re over age 65.

From a financial standpoint, people who live past age 80 will be better off postponing their CPP application to age 70. But is this really your best choice?

You have options

Low-income retirees will likely apply for CPP when they need the income — when they stop working. However, you may have several sources of retirement funding, and can choose when to apply.

If you’re 65 in 2012, the maximum CPP retirement benefit is $11,840 per year. This may seem like a drop in the bucket, but each drop can make a difference come tax time.

Delaying application for CPP retirement benefits could present an opportunity to reduce your Old Age Security (OAS).

Further, the increased monthly payout as a result of the delayed application could mean an extra 42% CPP benefit. Just don’t wait too long: applications after age 70 provide no additional benefit and CPP will only backdate late applications to a maximum of 12 months.

The reality is you may remain at the highest marginal tax rate throughout retirement. And you may therefore see little benefit in waiting to claim your CPP.

Applying for CPP also removes the risk of future government changes to the CPP program and the potential loss of benefits.

Once the full CPP redesign is in place in 2016, applying for CPP at age 60 will mean a 36% reduction in monthly retirement payments. In today’s dollars, assuming 100% eligibility for benefits, the annual pension payment will fall to $7,578.

Investing your CPP income in this circumstance, with a rate of return of 4% (before tax), would take close to 15 years to break even, compared to waiting and taking CPP at age 65.

The longevity factor

In 2012, the required annual CPP employee contribution limit for high-income earners was $2,306 — double that amount for self-employed individuals. Applying for CPP as early as possible is the only way to guarantee that at least some of those contributions will be returned to you.

Longevity is the biggest unknown. CPP provides a death benefit to a maximum of $2,500 for eligible pensioners — not even three months’ worth of retirement payments.

For most of us, waiting is a gamble. One other caution: CPP also offers disability benefits and eligibility for disability benefits may be impacted by the decision to apply for retirement benefits early.

Non-traditional careers

One good news item if you need to work, you no longer have to provide proof that you have stopped working in order to apply for CPP benefits.

Retiring early and living longer are two of the biggest pressures on your retirement plan. While CPP is only a small piece of the retirement planning puzzle, it shouldn’t be ignored.

CPP annual benefits

Age at application Old CPP Rules (Pre 2011) New CPP Rules (Post 2016)
60 70% 64%
61 76% 71.2%
62 82% 78.4%
63 88% 85.6%
64 94% 92.8%
65 100% 100%
66 106% 108.4%
67 112% 116.8%
68 118% 125.2%
69 124% 133.6%
70 130% 142%

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