If you’re like many Canadians, deciding when to begin receiving CPP payments is confusing. In this video, I’ll show you the break-even point for CPP, areas of concern to consider when to taking your CPP benefit, and a live walk-through of the governments’ Retirement Income Planning tool.

The first and most important consideration is; do you need the money? There’s really no point in calculating the break-even on collecting CPP when no matter the result, the issue is you need the income as early as possible.

The next consideration is Longevity. If you have a family history of living to older ages, say well into your 90’s, then delaying your CPP until age 70 is in your favor. However, early family history of deaths suggests taking CPP early to receive at least some benefit. If you choose to take CPP at age 65 vs age 60 it would take 106.7 months to reach break-even.

If you choose to delay until age 65 then by the time you reach age 73.9 you’re now benefiting financially from the increased monthly payments.

Everyone’s situation is different, and having a discussion with your advisor about your income need is the best course of action.

Firstly, this is a biased article for me to write as I am a financial advisor. However, when I talk to teachers at various points in their career about their financial concerns, the one response I seem to hear is “I wish I had one of you earlier”.

Why do teachers need a financial advisor?

1. Mistakes cost money

I recently came across a situation where a teacher needed money for an unexpected expense for her child. She didn’t have anyone to discuss the situation with, so she took money out of her RRSP to pay for the situation. She thought her situation made her eligible for “hardship withdrawal”.

It didn’t.

Not only did this withdrawal incur a penalty but the total amount was added to her annual income and subject to income tax.

If she had someone to discuss the situation with, and lay out all of her options, she would have realized that there were a number of other options available.

2. Uninformed choices cost money

I tell (almost) every new teacher to avoid RRSPs when saving for retirement. As a teacher, you will receive a pension in retirement. Income for your RRSP will increase the amount of money you will pay in taxes to Canada Revenue (CRA).

For most new teachers, RRSPs may appear appropriate because it’s likely what your parents or non-teacher friends are using. As your teachers’ income grows your pension adjustment will also reach its maximum. Your Pension adjustment limits the amount of contribution room available towards your RRSP.

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3. No one wants to look back and think “What If?”

When my wife and I bought our house, we pondered if we should buy a move-in ready townhome and move out when our family grew, or if we should buy a bigger house and do some work. We didn’t really ask people’s opinion who had been there before us and we bought the townhome.

After we bought, the housing market took a downturn and our sizable down payment (now in the form of equity) disappeared, meaning we were stuck for a while. Sometimes we look back and wish we had bought a different house. What if we had spoken to a young family or realtor to get their opinion before buying?

Before you make any initial moves, or changes, to your financial endeavors – have you asked anyone’s opinion? Have you asked a teacher who’s been in your situation recently, or a financial advisor (not sales-person)?

I would suggest you do, so you don’t look back in a couple of years, and think “What if?”

4. I could fix my toilet, but I don’t have a weekend available to do it

Some teachers I come across are knowledgeable about financial topics. They understand pension eligibility and what accounts work well with a pension in retirement. They understand insurance, and the basic estate planning documents they need in place, and the list of other financial things that occur in their lives.

But first and foremost, they’re teachers. They are experts at educating children, providing differentiation of content to various students, and explaining complex situations with ease. While they could manage their financial lives adequately, should they be?

How much time would it take, and how accurate would it be?

I think the same thing when any type of outlet or pipe breaks in my house. I can do some things in the house, but when it comes to anything plumbing or electrical, I know enough to hurt myself and spend hours getting to that point. It makes sense to pay a professional who can do it in 25% of the time, fix the problem completely, and keep me from harm. I’m happy to pay them for their expertise.

That’s what a good financial advisor does.

They know lots of options when it comes to products, approaches to investing, insurance and income tax management; study these topics to remain up-to-date, can design a comprehensive plan that can change your future, and know the danger areas to look out for.

As I said at the start, this is a biased article for me to write as I earn my living as a financial advisor. I work with teachers and help them maximize their lives; make things easy to understand and provide you the flexibility to enjoy your free time as you wish.

When planning retirement income, it’s important to understand the government benefits you might be eligible to receive. These benefits are generally Canada Pension Plan, Old Age Security, and Guaranteed Income Supplement.

Canada Pension Plan is a contributory plan that provides guaranteed indexed income in retirement. It can be started as early as age 60 and deferred until age 70. Currently, the maximum monthly CPP at age 65 is $1,175.83 and the average amount is $672.87. If clients don’t know how much they’ll be receiving, I usually ask how long they will have been contributing to CPP when they reach age 65.

If the answer is 20 years, a good rule of thumb is to divide the 20 years by the maximum required contribution period of 40 years. In this example, it’s 20/40 so the client could expect 50% of the benefit at age 65. This assumes they’ve been making the maximum CPP contribution each year. Remember, this is just an estimate and, if possible, the client can go to Services Canada and get the exact amounts for you.

Old Age Supplement (OAS)

If you’ve been living in Canada for 40 years or more after your 18th birthday, you will qualify for the full OAS. If not, you can use the same logic as we used above to determine your partial payment. For example, if by age 65, you will have lived in Canada for 30 years, you can expect 30/40ths or 75% of the benefit. Right now, the maximum OAS is $613.53, so you could expect approximately $460.

OAS has another feature which results in a reduction in payments when a person’s net income is above $79,054 (for 2020). For every dollar above this amount, 15% of OAS is clawed back. In the extreme case, if some reported net income of $128,136, all of their OAS would be clawed back ($613.53 x 12/15% = $49,082 + $79,054 = $128,136).

Here’s a good table with the OAS and GIS details.

One last number for you, $58,700, this is the 2020 YMPE, or Yearly Maximum Pensionable Earnings. This number is the amount after which, no more CPP premiums are collected.

Business Owner Tip:

Business owners should consider T4 themselves this amount each year to maximize their CPP contributions. If they are only taking dividends, they will not be making CPP contributions. Only paying dividends will disqualify the business owner from using an Individual Pension Plan (IPP) as a retirement vehicle. Your accountants can help you decide which is better.

Let me know your thoughts below.