# The Canada Pension Plan Mystery

Let’s face the facts estimating your CPP pension when you retire early is very hard to do.  For a lot of people doing it yourself is a bit of mystery.  So today is the step by step guide to doing your own estimate. Actually in all my calculations or looking for it I’ve only found one site that works: from the government of Canada.

The calculator lets you do a few interesting things.  First it let’s you see what you get if you start collecting the money between 60 and 70.  Also it allows you to change your average earnings at some point during your life which you can use to simulate an early retirement.

So here is the procedure to get your estimate:

1. Get a statement of contributions with a current estimate of your CPP benefits. You can either get a copy from online or request a paper copy to be mailed to you.  Or if you have the paperwork average your income from the year you turned 18 to now.  If you don’t have it you can still use the calculator, but the estimate is rough.
2. Got to this calculator at first you will deal with entering your date and month of birth and then do your OAS estimate.   We you get to the section about your CPP benefits do the following.
3. It will ask you if you have an estimate.  If so, select Yes.  Then enter in your estimate of your pension and the month and date of the estimate.
4. If you don’t have an estimate do the following.  Select No.  Then it will let you select your average earnings from when you turned 18 till now in \$5000 intervals up to  \$46,300 (the max).  I highly caution you to choose a lower number.  Most people forget how little they earned back between 18 and 25 and it will really drag down your average.  For example in my case if I didn’t have an estimate I would likely guess my current average is \$35,000.
5. Then at the bottom of either page it will ask if you want to see what happens if you take your CPP between 60 and 64.  I selected Yes.
6. Then pick your start age.  I took 60.
7. Then it will give you an estimate of your pension at 60. Hit Next.
8. Then it will ask do you want to estimate what happens if your future earnings change.  Here is where you can simulate an early retirement.  Select Yes.
9. Now you can pick two income estimates and an age when the first will stop and the second will start.  So if you expect to fully retire early choose the second estimate at zero.  If you plan to do some work till your 65 enter a very low number.  In my case I choose \$35,000 till age 45 and \$5000 from that point onwards.
10. Then it will provide a modified pension amount.  Again you can choose to take it early.  I selected Yes.
11. I picked 60.  Then I got my pension estimate of \$338 per month starting at age 60.

So there is your step by step guide the the wonder world of CPP estimates.  Oh, a point of caution.  The calculator may get buggy if you keep shifting back and fowards changing numbers.  So do one estimate stop and then restart the calculator if you want to try something else.  Enjoy.

# How much do you need to Retire – Version 3 – Part V

Alright after four long days we finally pull off this information together to see if I can retire at 45 (at least in theory). For your reference here are links to the rest of series:

Part I – Finding out your spending in retirement
Part II – Government Benefits
Part III – Company Pensions
Part IV – Retirement and Taxable Accounts

First a quick review of the numbers and when I expect to start collecting them.

From 45 to 60:
Here I only plan to use my taxable investment accounts, RRSP accounts and that \$2000/year dividends I mentioned.

From 60 to 65:
At this stage we expect to collect CPP (\$6660/year) and start to use my pension money (\$2344/year) and keep using the RRSP, taxable accounts and dividends.

From 65+:
I’ll be keep using my CPP, pension money, RRSP, dividends and OAS (\$12,054/year).

In order to make this clear I put together a spreadsheet to show how the money is being used at each stage. The far right column is what is required from the taxable accounts and RRSP each year.

So now to make this all work I need to simulate a draw down of the money in the RRSP’s and taxable accounts. To keep this fairly simple I’m going to merge the RRSP into one pool of money and assume I can split the withdrawal amounts proportionally between the accounts (ie: the RRSP pool is bigger so it will cover more of the expenses). I dig out that same calculator I’ve been using all week and enter the following for the first stage ages 45 to 60:

RRSP (45 to 60)

Start at \$224,652
Saving rate of -\$1189.87/month (this is just that 58% of the \$24,618/year in the spreadsheet)
At 4.0% for 15 years (I reduced the return to reflect a more conservative portfolio)
Results in \$116,118.71

Taxable Account (45 to 60)

Start at \$163,228
Saving rate of -\$861.63/month (this is just that 42% of the \$24,618/year in the spreadsheet)
At 4.0% for 15 years
Results in \$85,085.25

Ok so far so good, but I still need to keep using this accounts from ages 60 to 65:

RRSP (60 to 65)

Start at \$116,118.71
Saving rate of -\$754.67/month (this is just that 58% of the \$15,614/year in the spreadsheet)
At 4.0% for 5 years
Results in \$91,746.70

Taxable Account (60 to 65)

Start at \$85,085.25
Saving rate of -\$546.49/month (this is just that 42% of the \$24,618/year in the spreadsheet)
At 4.0% for 5 years
Results in \$67,657.07

Well that isn’t bad so far, but now I’m on to the really long haul ages 65 to 90:

RRSP (65 to 90)

Start at \$91,746.70
Saving rate of -\$172.07/month (this is just that 58% of the \$3560/year in the spreadsheet)
At 4.0% for 25 years
Results in \$160,512.73

Taxable Account (65 to 90)

Start at \$67,657.07
Saving rate of -\$124.60/month (this is just that 42% of the \$3560/year in the spreadsheet)
At 4.0% for 25 years
Results in \$119,544.86

What?!?! How did my numbers increase? Simple I wasn’t pulling off enough money to out pace the interest. So that means I have excess money in my retirement calculations. So obviously I have a bigger buffer than I thought even with my 1% reduction in investment performance. As a point of interest I tried lowering the interest rate to see if I could run out of money on the taxable account in that last run of time (65 to 90). So at 0.5% interest I would still have over \$36,000 at age 90. Basically as it stands I can’t run out of money regardless of how long I live. It also provides a nice buffer in case the government decides to cut back the OAS program on me.

Yet there is a hole in the above calculations. I forgot to account for my \$90,000 vacation fund back in Part I. Yet I haven’t used any money from down sizing a house and my total savings here isn’t my total free cash flow for the year (I could still save more). So in either case I feel I have enough back up plans to cover myself (for those who are truly curious you could recalculate the above with an extra \$3000 a year expense from ages 45 to 75 to see if I could do with any additional savings).

So how much is it going to cost me to retire at age 45? Well recall all of these calculations are in today’s dollars so at age 45 I should own my house and have around \$475,000.  So much for that million dollar price tag people keep going on about.

Have a great weekend everyone and let me know if I missed anything in the above.

# How much do you need to Retire – Version 3 – Part IV

So far this week we have looked at your yearly spending in retirement (Part I), government programs (Part II) and company pension plans (Part III). Today we are going to look at RRSP’s, taxable investment accounts and Tax Free Saving Accounts (TFSA).

1) RRSP

All of accounts are very similar in the fact they can be just about any investment product. The only real difference is how they are taxed. In a RRSP you get a tax refund on the income tax you originally paid for that money and then that money can grow tax free until you withdraw it (presumably in your retirement).

Despite the almost universal advice that investing in a RRSP is a good thing by most mutual fund companies and banks it actually doesn’t help some people. An RRSP is used to delay the tax not avoid it. So if your in the lowest income bracket already and you expect to be the same in retirement it really doesn’t give you much of a break (a TFSA might actually be a better choice). Yet as you climb tax brackets an RRSP becomes increasingly useful since you hope to avoid the high tax rate now and take it out at a lower tax rate in retirement.

Case in point my wife doesn’t have her own RRSP. Instead we buy her a Spousal RRSP which gives me a tax credit and puts the money in her name. The idea of the this is to split the RRSP’s I would normally buy between two people so when we pull them out in early retirement we can reduce our total tax paid on the money. So for example instead of withdrawing \$20,000 a year in my name, we can split the money up and only pay tax on \$10,000 each.

But can’t we split pensions now? Yes you can split pensions, but the government never said you could split an RRSP. In fact the only way an RRSP fall under those rules if if you covert it to a RIF and your older than 65. So keep buying those Spousal RRSP for early retirement.

In my case we have around \$18,100 in my RRSP (I’m transferring in my old pension from prior to my employer being bought out) and \$7900 in my wife’s Spousal RRSP. Using that same calculator from yesterday’s post, I input the following:

My RRSP is at \$18,100
Adding \$100/month personal plus \$225/month from work group RRSP
At 5.5% interest (to keep it in today’s dollars just like yesterday)
For 15 years, I end up with \$131,816

Spousal RRSP is at \$7900
Adding \$100/month personal plus \$168.50/month from my work group RRSP
At 5.5% interest
For 15 years, I end up with \$92,836So in total we will have \$224,652 to help fund our retirement. Note I haven’t put in my tax refund here.  I’m going to leave it out for now and see how I do in these calculations.

2) Taxable Investment Accounts

As I mentioned before a taxable account is similar to an RRSP with the choices you have to pick from. The major difference is how you are tax on your gains. You need to understand the differences between interest, dividends and capital gains. For details I suggest reading this. The overall summary is capital gains and dividends are better than interest in a taxable account.

Currently we are investing on average \$658.50/month into our taxable accounts.  Rather than giving me a headache and try to break out each account separately I’m going to treat them as one single account here.

Starting at \$13,029