Retiring Early and What to Consider with the CPP

Who doesn’t want to retire early? It’s a chance to take back your life and begin focusing on your passions again. The temptation is understandable, especially if you are a high net worth individual. However, there are some things to consider when planning on retiring early. Today, we are going to focus on how retiring early can impact your Canadian Pension Plan retirement pension.

Every working person in Canada outside of Quebec and above the age of 18 contributes to the CPP throughout his or her working life. You’ll notice it as a tax deduction on your pay stub every month. The idea behind this is as you contribute to the CPP over your lifetime, you are essentially earning pension income set aside for your retirement. The CPP offers their own pension fund calculator here. You can take a look at it to understand what your pension will look like.

Your contribution period begins when you are 18, and ends when you are 70 years old. How much pension you are eligible to collect ultimately comes down to how much you were able to contribute over your earning life.

But what happens when you retire early?

For most people, CPP usually kicks in the month after your 65th birthday. If you happen to retire before that time, you will have contributed less than your peers who are pushing to 65. If that is the case, your eligible pension amount will be lesser as a result.

The CPP calculates this by reducing your pension amount by 0.6% for every month before your 65th birthday that you retire. This means that if you retire at 60 for example, you’ll receive 36% less than if you had waited until you were 65. You don’t need to do the math to understand that a 36% loss year over year can really stack up for you over time in your retirement.

On the flip side, the CPP also rewards those who surpass the average retirement age as well. For every month past 65 that you continue working and contributing to the CPP, you earn 0.7% more pension income. If you work until this bonus ends, at age 70, this equals 42% more than if you retired at 65. Unfortunately, there are no benefits to working past 70 in terms of CPP. has a great example on this:

“Although Amrita enjoys her job as a nurse, she plans to retire when she reaches 65 in 2014. Based on her CPP Statement of Contributions, she expects her CPP retirement pension in 2014 to be $6,220 annually. This amount will then grow with the cost of living, as measured by the Consumer Price Index.

However, if Amrita decides to delay taking her CPP pension until she reaches 66 in 2015, her CPP retirement pension will increase by 8.4% (0.7% x 12 months). Based on this change, the annual amount of her pension will increase by $522, and will then grow with the cost of living, as measured by the Consumer Price Index.”

Retiring early means that you won’t be able to rely so much on CPP to supplement your retirement income

Taking your CPP early has some benefits, but of course they are weighed off with risks.

Wealth Simple does a great job breaking this down, so I’ll paraphrase: If you take the CPP at 60 years old, you will qualify for $676.83 per month. In the time between 60 and 65, you’ll have gained $40,729.42. Consider that the head start “bonus” for retiring early.

If you retire at 65, you’ll collect 986.67. Subtracting the difference between an age 65 retirement and an age 60 retirement gives you a $309.84 per month difference. With this much additional income, it will take you until 76 to cover the $40,729 difference gained by retiring 5 years early.

In morbid shortness, if you happen to live longer than 76, you’re better off retiring at 65.

What if I keep working and call in my CPP early?

Luckily, the government of Canada made some changes to the CPP in 2012 that allow you to start collecting CPP early and not have to quit working. This presents a great opportunity for reinvesting.

Depending on your appetite for risk, you may be able to achieve greater returns on that capital if you reinvest it. Taking your CPP early and putting it into your portfolio and continuing to support yourself with your job (in which you should be earning close to your peak), you can use those gains to support yourself to an even greater extent.

While you are still working you must continue to contribute to CPP but it serves you well as it will entitle you to greater contributions in the future.

Taking your CPP early may be risky of course, and is dependant on your retirement objectives, but it represents an interesting opportunity to take control of your finances. There are many cases in which this can work well for you.

Revisiting the previous example, if you reinvest that $40,729 early retirement bonus at 3% in a quality fund, we see enormous returns that far exceed what you would get with CPP.

When should I call in CPP?

Everyone’s financial situations are different. You may have a limited appetite for risk or an aversion to the financial markets. Getting a nice sized cheque without having to manage accounts, or work with your money appeals to many people. If you plan on living a long life, it is very likely that you will surpass the CPP break even point and prolonging your time to retire will be a great strategy for you.

I would fully recommend taking a close look at how you want to live in retirement. Plan your spending and identify what kind of lifestyle you want. If you want to live a simple life and collect a cheque every month then it may just be for you. If you are interested in growing your wealth, it may be better for you to take your CPP early. Everyone is different!

Thanks for reading!

Thanks for reading!

If anything on this blog interests you further, please do not hesitate to reach out to me via email at [email protected] I’d love to talk about my financial services and advice in Vancouver, British Columbia’s lower mainland, and Canada in general.

  • Brad Blair, CFP, CIM, FCSI, CHS.