How will retiring early and working part time impact my CPP payments

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By Julie Cazzin and Allan Norman

Q: I’m 58 and planning to retire and draw my Canada Pension Plan (CPP) at age 60, and then winter in my townhouse in Panama each year. My wife Emily will be 48 and will retire then as well. She has worked full time for 23 years. We both plan on working on our return to Canada in the summertime for only about four months total each. What will the impact be on drawing my wife’s CPP at age 60 or 65? — Thanks, Mario

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FP Answers: Mario, typical summer employment will add a little to your CPP, but not much. Your bigger question is when to start taking CPP. If you follow the math and assume you are going to live a long and healthy retirement, most people are better off waiting until they are 70 before starting CPP. Of course, there are always exceptions, such as whether a larger CPP impacts your Old Age Security (OAS) or Guaranteed Income Supplement (GIS) benefits.

But deciding when to start CPP is not always about the math. Your decision has to align with how you want to live in your retirement years and your thoughts around CPP. I recently did some work for a couple who might start their CPP at age 60. I’ll walk you through their thought process to give you some ideas on when to start your CPP.

As background, Jill and Bob are 58 and 62, respectively. Bob is collecting his CPP plus a $52,000-per-year indexed pension with a 100 per cent survivor benefit. Their home is worth $850,000 and they owe $150,000 on a line of credit. Jill earns $100,000 per year, has registered retirement savings plans (RRSPs) of $500,000 and plans to retire this summer with a joint after-tax annual income of $100,000 to age 90.

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The couple wants to spend their extra time after Jill retires doing more travel and they think the best thing to do is start her CPP at age 60 to help pay for it. I ran that solution for them with some other comparisons to help them decide.

We used their net worth as the crossover measurement point — that is, if Jill starts her CPP at age 60, at what age would she be better off if she had started her CPP at age 65 instead? We also looked at various real rates of return. For example, a two per cent inflation rate with a five per cent investment return results in a real rate of return of three per cent.

After viewing the results, Jill and Bob questioned why she would wait until she’s 70 to start CPP. If the crossover point is late in life, their lifetime income of CPP, OAS and a 100 per cent survivor pension will be enough at that time. Why not take CPP early and enjoy what the money brings while they are younger and healthier?

I can’t disagree with their thinking. The primary purpose of delaying CPP is to provide a larger, fully indexed, guaranteed income later in life. A secondary reason is that the larger guaranteed income makes it mentally easier for some people to spend money and minimize worries.

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Jill and Bob even thought a crossover point at age 76 was too late in life. Again, their thought was, “Who cares about a higher net worth at age 76? We want the additional funds now.” What I demonstrated next was that they don’t have to wait until they turn 76 to spend their higher net worth — they can spend it today.

For illustration purposes, we looked to see what would happen if they increased their vacation spending by an extra $20,000 per year for eight years starting in 2025 after Jill retires.

We discovered that if Jill started her CPP at age 60, 65 or 70, she would deplete her investments by age 80, 84 and 75, respectively. We then looked at their combined income after age 75. If Jill started her CPP at 70, depleting her investments by age 75, she and Bob still had a guaranteed annual income of $106,000 in today’s dollars, indexed for life until Bob passed, and then Jill’s income dropped to $83,000.

In the case of Jill starting her CPP at age 60, their combined annual income at age 75 was still about $106,000, falling to $94,000 at age 80 and $71,000 when Bob dies. Starting CPP at 65, their combined annual income at 75 is still about $106,000, falling to $103,500 when Jill turns 84 and $76,000 when Bob passes.

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Mario, what are your thoughts after looking at those last examples? In Jill and Bob’s case, it appears that if they want to spend their investments early in retirement and rely on CPP, OAS and a pension later in life, delaying CPP to 65, or possibly 70, may be the better solution.

I don’t know what Jill and Bob will end up doing, but with the safety net of their pension, they will be fine even if Jill starts her CPP at age 60.

Allan Norman provides fee-only certified financial planning services through Atlantis Financial Inc. and provides investment advisory services through Aligned Capital Partners Inc., which is regulated by the Canadian Investment Regulatory Organization. Allan can be reached at alnorman@atlantisfinancial.ca.

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