As a Canadian resident you have access to two supplemental income amounts once you reach retirement age:
- Old Age Security (OAS)
- Canadian Pension Plan (CPP)
You do not have to be retired in order to start taking either of these incomes, but you must start to take them both before 71.
Old Age Security
Old Age Security benefits are payable to Canadian residents who have at least 10 years of residency in Canada or were born in Canada.
OAS benefits are paid by the federal government out of general tax revenues and are not guaranteed forever.
You can start to take OAS once you turn 65. However if you take it late then the amount you get is increased by 7.2% per year after age 65.
Our reports and advice will help you decide if taking OAS after age 65 is in your best interests.
It is also worth noting that with OAS, if your taxable income in a year exceeds a limit set by CRA, then the OAS you would have been paid will be "clawed back" in full or partially. Our reports and advice will help you decide how best to maximize your OAS.
Canada Pension Plan
Most people who earn employment income will pay money into CPP. The money you pay into CPP as well as your employer's money is invested by the government and accessible by you in a number of situations (disability, death or retirement).
Yours and your employer's CPP contributions are invested in a multi-billion dollar fund managed by expert investment managers. The fund is examined by actuaries every 3 years and is expected to provide full benefits for generations to come.
If you take it early (between 60 and 65) then the amount you get is reduced by 7.2% per year before 65. If you take it late (after 65) then the amount you get is increased by 8.4% per year after age 65.
Our reports and advice will help you decide if taking CPP after age 60 is in your best interests.
Year's Maximum Pensionable Earnings (YMPE) & CPP Contributions
YMPE is a concept integral to calculating CPP contributions and retirement benefits. In order to fully understand YMPE and its affect on your retirement, you'll need to understand a few key concepts about CPP.
How do I earn CPP?
CPP is only available to a person who has made at least one contribution to CPP in their career. Typically, a person will consistently contribute to CPP as a part of their payroll deductions throughout their career.
Each year, you will make contributions to CPP based on a percentage of your salary. For 2021, you automatically contribute 5.45% of your employment salary towards CPP (10.9% if you are self-employed).
Am I paying CPP on my entire salary?
No, you are only making CPP contributions up to a maximum amount. This maximum amount is set by limiting the amount of earnings you pay CPP on. In 2021, this limit is $61,600 and is known as YMPE.
So, if you are making more than $61,600 in 2021, you will stop making CPP contributions once you have reached that amount in paid salary. This usually means that you will receive more cash later in the calendar year than you do in the beginning of the year as you have lower payroll deductions.
Do CPP contributions matter?
Yes, CPP contributions are essential to the benefit you will receive. Not only must you contribute to CPP in order to earn any benefit in retirement, the amount you contribute also directly effects the amount you will receive.
Why is YMPE important?
YMPE is the maximum amount that limits how much you are paying in CPP contributions. It is set by the government and changes every year.
YMPE is used to determine if you have contributed enough to CPP to qualify for the maximum CPP benefit in retirement. If you consistently earn less than YMPE and therefore do not make the maximum contribution each year, you will not be entitled to the maximum CPP benefit in retirement.
You don't need to earn more than YMPE every single year of your career, but as long you have maxed out your contributions for at least 40 years, you will most likely be entitled to the maximum CPP benefit in retirement.
How does we use YMPE?
In a few of our reports, we assume that you make the maximum CPP contributions each year. This will then affect your results in two ways:
- The dollar amount of CPP you receive
- The taxes you pay on your CPP income
We automatically assume that you are entitled to the maximum CPP benefit in retirement. Since all our reports calculate after-tax income, even if you are not entitled to the maximum amount, the difference will be nominal. The lower you expect to receive in CPP means a lower tax rate, so the net difference is small.