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Changes to the Canadian Pension Plan

Like it or not, the retirement goal posts are moving. On average people are living longer.

Like it or not, the retirement goal posts are moving.

On average people are living longer. When I started working and saw those television commercials that talked about retiring at age 55, I thought – do people really live that long? As that age creeps closer, it seems implausible that people would retire so young.

There are people who are resisting retirement at any age and others who are forced to keep on working due to financial circumstances. The trend now is towards a more gradual and flexible retirement. There isn’t a hard and fast rule as to when we should retire. But knowing what’s in store can help us be prepared financially, including significant changes to the Canadian Pension Plan, recently unveiled.

What to Expect If You Take CPP at Age 60

While many dream of retiring early, they may not realize the implications if they choose to take their CPP retirement pension before turning 65. Before this year, for every month before age 65, a 0.5 per cent reduction would be taken from your benefit payment if you made this choice. That would be a full 30 per cent less at age 60 than if you had waited to retire until you were 65.

Beginning this year, there will be an even larger reduction of up to 31.2 per cent, or 0.52 per cent per month before age 65, for those who want to retire early. For example, the maximum CPP payment in 2012 is about $987 per month. If you’re 60 this year, eligible for the maximum payment and you choose to start receiving benefits this year, you will get about $678 per month. By 2016 the reduction will climb to 36 per cent or 0.6 per cent per month before age 65.

If You Wait Until Age 70

On the other hand, there are benefits for those of you who want to wait until after the age of 65 to retire. Instead of a 0.5 per cent increase in your CPP pension for each month after 65, the increase will now jump to 0.64 per cent with a maximum of 38.4 per cent for those who decide to retire at age 70.

By 2013, the greatest increase in your regular CPP payment jumps to 42 per cent per year. For example, if you turn 65 in 2013 and you are entitled to the maximum benefit but you decide to wait until you are 70 to receive benefits, you would get about $1,400 per month if today’s CPP pension amount didn’t change. Sorry folks, for those people already receiving CPP benefits, you don’t have this option.

Post-Retirement Benefits

For those of you who started receiving your CPP retirement pension before this year and before the age of 65, you didn’t have to contribute towards CPP if you made the decision to continue working. This requirement was changed so that you and your employer must now make CPP contributions until you turn 65. This cloud has a silver lining — the required contribution will be credited to your new Post-Retirement Benefit. This benefit will provide you with a higher CPP pension starting in the next year.

To be sure your retirement finances are in good health, including your CPP entitlement, consult your financial advisor on what options are best for you.