How the pandemic could cost you part of your CPP retirement benefits
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Job losses resulting from the economic shutdown to fight COVID-19 could cost people thousands of dollars in lifetime Canada Pension Plan retirement benefits.
If you are not working, you and your employer do not make CPP contributions on your behalf. These lost payments could result in lower monthly CPP payments when you retire. As turns out to be the rule during the pandemic, people with middle and lower incomes are more vulnerable than those with higher incomes.
Rightly, everyone’s attention right now is focused on helping people survive the economic damage caused by the pandemic without accumulating large debts or defaulting on existing debt. This is the goal of the Canada Emergency Benefit, which pays out $ 2,000 every four weeks.
But it’s also essential to start accounting for the long-term effects of the pandemic on our personal finances. Retirement is a good place to start. People who have lost their jobs due to COVID-19 are not contributing to their registered retirement savings plans and tax-free savings accounts, which seems obvious and may be mitigated by higher contribution levels in the future.
However, the impact of job loss on CPP retirement benefits is invisible. “The only way to find out would be if you are one of those people who check your My Service Canada account monthly, or even annually, to see your estimated CPP amount,” said Doug Runchey of DR Pensions Consulting. .
Mr. Runchey recently calculated that the one-year maximum CPP contributions if you retire with the maximum retirement benefit at age 65 are worth $ 30.15 per month (this excludes CPP enhancements that have started a phase-in period in 2019). If a job loss reduces your income in 2020 and you only make half of the maximum CPP contribution, you could lose $ 15.07 per month in future benefits.
What you need to know about managing your finances during the pandemic
At what age should you start taking CPP? Try our globe calculator
A little background: The period during which you can contribute to the CPP ranges from the age of 18 to 65, or 47 years. You can ditch your worst eight years of salary (not counting years of raising children), which means your best 39 years of salary determine how much you get when you retire. By the way, the CPP post-retirement benefit allows you to earn additional retirement benefits if you are working between the ages of 60 and 70.
Another thing you should know about calculating CPP retirement benefits is the impact of the Maximum Annual Pensionable Amount (YMPE), which is the maximum amount of salary you pay CPP contributions on. This year’s YMPE is $ 58,700 – you must earn at least that much in 2020 for your CPP contributions to count towards a maximum retirement benefit if you retire at age 65.
Someone with a salary of $ 150,000 who lost their job in March and will not be working again until September 30 would be good when it comes to CPP. Their earnings for six months of employment in total would be $ 75,000, enough to push them into maximum CPP contribution territory.
Someone who earns $ 59,000 and works half the year would earn $ 29,500, or about half of the YMPE. Mr Runchey said the cost of lost monthly pension benefits if CPP were started at age 65 would be around $ 15.
This may seem small, but it adds up over a lifetime. At age 90, $ 15 a month adds up to $ 4,500.
The year of the pandemic could be one of your eight years of quitting, meaning it wouldn’t hurt your eventual CPP retirement benefit. But it’s not uncommon for people to have already accumulated eight years of low income by the time they reach their peak years in the workforce. For example, you might have earned only a part-time income or a modest income until your twenties when you finished your education and looked for full-time employment.
Losing CPP retirement benefits does not kill retirement per se, but there is a cumulative negative effect if a person is unable to save for retirement due to the pandemic or has to dip into their savings to stay solvent.
Unless your financial situation improves significantly after the pandemic, the best solution to losing retirement savings is to work longer and retire later. Expect the world of the 2040s and 2050s to have many more working people aged 65 and over.
More from Rob Carrick
Catch up Stress test: How to survive the economy of odd jobs • How to get out of debt • Is it time to buy a house? • Protect your finances against crises • Can you afford to live downtown? • The cost of children.
A 10-point pandemic personal finance checklist: Create a “wartime” family budget; stop worrying about bank deposits; clean up your big bank savings account; get relief from car payments; get pre-approved for a mortgage; FMH? Save $ 1,000 per month; record, record, record; build resilience by not buying anxiety; take into account the cost of mortgage deferrals; prepare for the second wave of financial distress.