Over 65, Collecting CPP and Still Working? Why It Makes Sense To Keep Making Contributions

  • Home
  • Blog Articles
  • Over 65, Collecting CPP and Still Working? Why It Makes Sense To Keep Making Contributions
Retirement Income Planning, Calgary

If you are between the age of 65 and 70 and still working you have an opportunity to continue to contribute to CPP and earn as much as 18% returns on those contributions as Post Retirement Benefits - guaranteed and indexed for the rest of your life. 

Let me explain.

Canadians between the age of 65 and 70, who are collecting CPP while employed, have a choice as to whether or not they contribute to CPP on their employment earnings. Far more Canadians are choosing to work into their retirement by choice or out of necessity, so why not maximize your CPP benefit at the same time?

Consider Jane. Age 68 as of December 2016. She has been collecting CPP since age 60 and OAS since age 65. The total value of her investments/retirement savings is $15,000 in an RRSP.

2017 Income: $89,000 ($77,000 employment and $12,000 from gov. pensions)

2017 CPP Contributions Paid Personally through payroll will be: $2564.10 (the max)

2017 “Normal Age 65” maximum CPP amount: $1114.17/mth

Post Retirement Benefits are calculated as 1/40th (that's 2.5%) of the “Normal Age 65 Pension” which is: $334.25/year

Jane’s age-adjusted amount: 36 months since age 65 (0.7% X 36 = 25.2% increase, because she is over 65 ). What we mean by "age adjusted amount" is that once you are past age 65 you earn an additional .7% more in CPP benefits for each month that you delayed starting your CPP pension benefits.

Jane’s Post Retirement Benefit Income starting in January 2018: $334.25 + 25.2% = $418.18/year ($34.87/mth)

Her "Breakeven Point" to recover what she paid in CPP contributions: ($2564.10 divided by $418.18 = is: 6.13 years)

If she executes this strategy for the next 3 years her Rate of Return on CPP Contributions paid will be: 16.3%, 17.1% and 18.2% respectively.

According to mortality charts, she will most likely live to at least 90, but likely longer. When you calculate the additional Post Retirement Benefits, she can potentially make $10,000 or more, over the rest of her life for every year's worth of CPP she (& her employer) contributes. The reason this works the way it does is because she is also benefiting from the matching CPP contributions of her employer. A self-employed person would only see half the benefit and would need twice as long to break-even because they have to pay both employee and employer contribution portions into CPP.

Perhaps you noticed that Jane is a high-income earner. That's great, but it also means that she is getting "Clawed Back" on her OAS pension. (The threshold is $74,789 for 2017.) And, she has been getting clawed back since she was 65. For every dollar that she makes over $74,789,(less in prior years) she will see a reduction in her OAS of 15 cents. In Jane's case, she is being clawed back by about $177.64 each month. So instead of receiving $578.53 each month, she is only getting $400.89. She has actually lost out on over $8000 in OAS pension money since turning 65.

Let's recap Jane's opportunity:

Her window of opportunity only exists for the next 3 years (ages 68, 69 and 70).

Let's assume she works for the next 3 years and earns the same high income.

Her net cost of this strategy will be $7847.16 (CPP contributions of $2564.10 each year for 3 years) (CPP contributions will increase each year by a few dollars)

Her net benefit will be:

  • An extra $384.61 in OAS for the next 3 years: $1177.06 (indexed at 2%)
  • A 2018 Post Retirement Benefit of $418.18 each year for life and indexed at 2% (X's 20 years = $10,362)
  • A 2019 Post Retirement Benefit of $447.56 each year for life and indexed at 2% (X's 19 years = $10,438)
  • A 2020 Post Retirement Benefit of $484.66 each year for life and indexed at 2% (X's 18 years = $10,585)

TOTAL RETURN: $32,538.83 (314% potential return over a 20 year period. Can I get a "WOW!"?)

Let me ask you...Do you have a financial advisor? If you do, is your Advisor helping you save tax and maximize retirement income with strategies like this?

Keep reading...We're not done yet... 

Jane is 68 and still working and earning a high income. She doesn't know how long she will be able to continue working. She intends to work as long as she can and is thankfully very healthy. When we met Jane exactly one year ago she had no other savings and had never had an RRSP (she didn't believe in them). We were also able to help Jane start a monthly contribution to an RRSP. She only has until age 71 to contribute to an RRSP and take advantage of this tax-deferral strategy. 

Because Jane is in a higher tax bracket she will recuperate about $30.50 in tax for every $100 she contributes to her RRSP. The first year she was able to contribute $10,000 which will net her a refund of $3050.00. We suggested she take out an RRSP loan in the amount of $5000 at 3.2% interest and contribute that to her RRSP as well. This will increase her 2016 contribution to $15,000 and will net her an approximate tax refund of $4575. She will use that refund to pay off the loan this spring. The total cost of this strategy will be $45.00 (the cost of interest on the loan for 3 months). We will repeat this strategy for the next 4 years to save her a total of $18,300 in taxes.

It Gets Better!

Because she added an additional cheque of $1500 to her RRSP recently, she is now reducing her taxable income by $16,500. Remember she earned $89,000 in 2016. This was going to cause a clawback on her OAS of $2131.68. Her $16,500 RRSP contribution brings her gross income back to $72,500, which puts her back under the OAS clawback threshold of $73,756 (2016).

This strategy will cost her next to nothing to execute. By the time Jane turns 72, 4 years from now, she will have accumulated $60,000 in her RRSP account, plus any growth (her first year, it grew over 10%, net of fees). She will also earn an extra $8526.72 in OAS pension money. She has a 4-year window of opportunity to take advantage of this strategy before the opportunity is gone forever.

We are the first financial advisors Jane has ever talked with. She was referred to us by another client. Had she sought advice from us before turning 60 we likely would have advised her not to take her CPP early because of the high tax bracket she was in and we definitely would have recommended she delay taking OAS when she turned 65. Simply because she will need increased income when she eventually stops working.

'Cause You Don't Know What You Don't Know...

When it comes to Retirement Income Planning - talk to someone who specializes in Retirement Income Planning. Whatever you do, don't assume anything...or...just assume you don't know everything, and that what you don't know, is going to cost you money. You don't know what you don't know. Consult a trusted advisor. If we were advising Jane when she was 59 years old her situation now, would be much different. She has needlessly paid an insane amount of tax for the past 8 years. We are now reducing that tax burden and taking advantage of the time she has left to save more money and pay less tax so that she will have more income in retirement.

Some of these strategies overlap and any one person may not be able to benefit from all of them simultaneously and there may be other strategies that are more appropriate for you.

You won't know if you don't ask. 

If you would like a review of your current situation and your retirement income plan and how you can structure your income more tax efficiently we would be happy to meet with you. The typical cost is $450 - $600. As you can see from the case study above, you will benefit far more than you pay. Email us at info@langfordfinancial.ca or call 578-755-0159. You will need to bring your Notice of Assessments for the past 2 years along with any investment account statements. We will send you a checklist of other information that will be helpful for us to complete your review. We never make any attempt to sell you anything. Our business is advice, not products!

Want to retire in the next few years? We can help you determine if you're ready.

Click here to Book Your first meeting

Sign up for our next workshop on Everything You Need To Know About CPP & OAS

 

Retirement Income & Investment Planners,

Willis & Nancy Langford

 


Share This Post:

Related Posts

Latest Testimonial

My wife and I realized a long time ago the value of a financial planner over just a bank representative. We just felt like a number to the banks as every year it seemed we saw a different adviser with a different view. But finding a trusted, knowledgeable and personable financial planner took a lot of time and effort. It just seemed, so many large corporate Financial Planners were more concerned about what they could make off of us rather than what they could make for us.
What we wanted, was not just reasonable returns now, but good personal advice in our preparation for retirement and what happens when retirement actually arrives. We wanted someone who would be walking with us, guiding us on our way to retirement.
From the first time, we found the web site for Langford Financial Inc, we could see the knowledge of Willis and Nancy and a real effort to educate and pass on their knowledge through seminars, workshops and their personal service. Once I reached out through their web site for more information, Willis was quick to respond, offering and giving whatever information I was looking for and never was there pressure to commit to anything.
The feeling of comfort and ease when talking with Willis was inviting enough for us to want to meet with Willis and Nancy, just to see firsthand if there was a connection and what working with them would look like.
And when we did meet for the first time, that feeling of comfort and ease was very evident. It was a unique experience for us to be able to sit down and get to know a financial planner (or a team of both Willis and Nancy) and not have any sales pressure on us. Just getting to know Willis and Nancy was important for us. We needed to be comfortable with them and see their competence in the business, and it was obvious that Willis and Nancy wanted to know us better so they could know how best to help us.
Once we decided to move our accounts over to Langford Financial, we found their process was comforting and refreshing as Willis and Nancy first worked at evaluating our complete situation. They dug down to get a complete picture of where we were at, where we wanted to be and how to get there. This took some reflection on our part but once we saw how they put it all together in our “Financial House In Order” binder, we were confident we made the right decision to go with Langford Financial.
Since the time we started working with Willis and Nancy I have attended many of their seminars and can say the information they have been teaching has been amazing. Always relevant, and consistent with their desire to help those coming up to retirement, and covering so many different situations as everyone has a different life situation. I know more than one of the tax-saving strategies they taught at their seminars will work for my wife and I, so we are very happy about that.
We would definitely recommend Langford Financial, not just for all your retirement planning needs, but they have great ideas on savings for your grandchildren too!
Paul and Elaine Radder

Paul & Elaine Radder
Long-term Clients

Contact Us

Questions? Comments? Call us today at 587-755-0159 or fill out the form below:

Have Questions? Call Us Today At

Call Us

Join Our Newsletter



Subscribe