CPP, Explained - Everything You Need To Know About The Canada Pension Plan (CPP vs OAS)

Summary

This video script delves into the crucial aspects of planning for retirement, emphasizing that it's not just a distant dream but a goal that requires proactive planning and action. It highlights the importance of saving and investing early for retirement, beyond just relying on government programs like the Canada Pension Plan (CPP) and Old Age Security (OAS). The narrative explains how retirement expenses encompass day-to-day living, emergencies, and leisure, underscoring the necessity of having a diversified retirement plan. Additionally, it provides insight into how the CPP works, including contributions, investments by CPP Investments, and the eventual payout structure, aiming to give viewers a comprehensive understanding of their full retirement picture.

Takeaways

• 😀 You need to save and invest for retirement in addition to government programs like CPP
• 💡 CPP takes contributions from your paycheck to fund your retirement income
• 📈 CPP Investments grows the CPP fund by investing contributions
• 💰 You can start taking CPP as early as 60 or as late as 70
• 🤑 The maximum CPP payout per year if you retire at 65 is about $15,700
• 😕 The average CPP payout is around $9,700 per year
• 🤔 CPP is designed to replace 25-33% of your pre-retirement earnings
• 🌄 CPP payments are taxable income
• ⏳ CPP Investments focuses on long-term growth and sustainability
• 💡 The full retirement picture includes your personal savings plus CPP

Q & A

What are the three main types of expenses one should expect during retirement?

The three main types of expenses during retirement are day-to-day expenses, emergency expenses, and money for leisure activities such as vacations or hobbies.

Why is investing important for retirement rather than just saving?

Investing is important for retirement because it helps in growing the saved money at a rate that potentially outpaces inflation, making it difficult to accumulate enough just by saving, especially considering the need for a substantial amount over a 30-year period.

What are the two major components of Canada's government retirement income system?

The two major components are the Canada Pension Plan (CPP) and Old Age Security (OAS), with an additional component being the Guaranteed Income Supplement for low-income retirees.

What are the eligibility requirements for Old Age Security in Canada?

To be eligible for Old Age Security, one must be a Canadian citizen or legal resident at the time of application, aged 65 or older, and have lived in Canada for at least 10 years after turning 18.

What determines the amount of financial return from the Canada Pension Plan?

The amount from the Canada Pension Plan is determined by the length of time and the size of contributions made during the individual’s working years.

What is the role of CPP Investments?

CPP Investments is tasked with managing and investing the funds collected through the Canada Pension Plan contributions to ensure the fund's sustainability and growth, aiming for long-term returns and managing risks through diversification.

What are the benefits of a long-term investing strategy for CPP Investments?

A long-term investing strategy allows CPP Investments to navigate through short-term market volatility, and by diversifying investments, they can achieve more stable and sustainable returns over time, benefiting the retirement funds of Canadians.

When can one start receiving financial benefits from the Canada Pension Plan?

One can start receiving financial benefits from the Canada Pension Plan as early as age 60 and as late as age 70, with the standard benefits given if starting at age 65.

What factors influence the amount received from the Canada Pension Plan upon retirement?

The amount received is influenced by the number of years and the amount contributed to the plan. Maximum benefits are received if one has contributed the maximum amount for at least 40 years.

How does the full retirement plan picture differ from just having savings or government benefits?

The full retirement plan includes not just savings or government benefits but a combination of personal savings, investments, and government programs like CPP and OAS to ensure financial security and cover all expenses during retirement.

Outlines

00:00

😅 The Reality of Preparing for Retirement

This segment introduces the common sentiment towards retirement, often sparked by daily routines that lead to momentary thoughts of longing for retirement, whether out of job dissatisfaction or future planning. It emphasizes that retirement is not a magical destination one simply arrives at but requires active and early preparation. The focus shifts from the usual advice of saving and investing for retirement to a broader view of the retirement plan, which encompasses more than just accumulated savings. It highlights the importance of understanding the full retirement picture, which includes managing day-to-day and emergency expenses, as well as funding leisure activities in retirement. The essence is to debunk the myth that retirement automatically happens at a certain age without adequate financial preparation, stressing the need for investment over mere savings to combat inflation and sustain one's lifestyle in retirement.

05:03

📊 Understanding Canada's Retirement Income System

This paragraph dives deep into the components of Canada's retirement income system, focusing on the mandatory contributions to the Canada Pension Plan (CPP) by employed Canadians aged 18 and over, except for those in Quebec who have the Quebec Pension Plan (QPP) instead. It explains the process and importance of these contributions, which are deducted from paychecks, and how these funds are managed by CPP Investments to ensure financial sustainability and growth over time. The narrative clarifies the transformation of the CPP from a simple pay-as-you-go scheme to a sophisticated investment model managed by CPP Investments since 1997. This model aims to generate sustainable, long-term returns through a diversified investment portfolio, ensuring the CPP can support retirees for decades. The segment concludes by detailing the strategic investment approaches that have allowed the CPP fund to grow significantly, showcasing the critical role of CPP Investments in securing retirement income for Canadians.

10:03

👵 Navigating CPP Benefits and Retirement Options

The final paragraph outlines the specifics of receiving Canada Pension Plan (CPP) benefits, including the flexibility in choosing when to start receiving payments, between ages 60 and 70, with adjustments based on the age of commencement. It details the eligibility criteria for CPP, emphasizing the necessity of having contributed to the plan while working in Canada. The amount one receives from CPP is meticulously explained, dependent on the length and amount of contributions, with a clear example of the maximum and average payouts as of 2023. The segment also touches on the taxable nature of CPP benefits and reiterates the CPP's role in the broader retirement income landscape, which only aims to replace a portion of an individual's pre-retirement income. The narrative stresses the importance of personal savings and investments in complementing CPP benefits for a comfortable retirement, thereby completing the full retirement planning picture.

Keywords

💡retirement

Retirement refers to the time when someone stops working, usually after reaching a certain age. It's presented as a goal that requires planning and saving enough money to fund expenses and lifestyle in the future. The script discusses key aspects of retirement planning like government pensions, personal savings and sustainable investing.

💡Canada Pension Plan (CPP)

The Canada Pension Plan (CPP) is a mandatory federal pension plan that aims to provide retirement income for employed Canadians. It involves contributions from paychecks over one's working life, which are invested by CPP Investments and paid back as retirement benefits. The video explains how CPP works and its role in the full retirement picture.

💡CPP Investments

CPP Investments is the organization that professionally invests CPP contributions in assets like stocks and bonds. Its goal is to achieve good returns to ensure the sustainability of CPP payouts for future generations. The video outlines how it grows the CPP fund and maintains longevity through diversification and long-term focus.

💡Old Age Security (OAS)

Old Age Security is a government pension that provides money to most Canadians 65+ who have lived in Canada for at least 10 years. It aims to supplement CPP and personal savings for a minimum level of income. Eligibility is based on age and residency, not work history or income contributions.

💡Guaranteed Income Supplement (GIS)

The Guaranteed Income Supplement provides additional money on top of OAS to low-income seniors in Canada. To qualify, one must already get OAS and be below a maximum household income threshold. It targets those most in need of government support in retirement.

💡saving

The video argues that just saving money is not enough for retirement preparedness because of factors like inflation and longevity. Investing is presented as a better way to grow retirement savings to adequate levels over time. But personal savings remains a key part of the overall retirement picture.

💡investing

Investing retirement savings in assets like stocks and bonds can produce higher returns over long periods, making it easier to save enough for 30+ years of retirement. The video advocates investing early and consistently to benefit from compound growth towards retirement goals.

💡expenses

Expenses like housing, healthcare, food and leisure remain in retirement and need to be accounted for. The retirement savings target is based on projected expense needs over the retired lifespan. CPP and OAS aim to cover a portion, while personal savings cover the remainder.

💡self-employed

Self-employed Canadians also pay into and receive CPP. But they contribute both the employee and employer CPP amounts themselves, since they have no employer. So contribution rates are double those of salaried employees.

💡Baby Boomers

The video mentions Baby Boomers to explain why CPP previously struggled with sustainability. This large demographic bubble reaching retirement simultaneously stressed CPP finances before investment returns were added to the model. Managing demographic ups and downs is crucial for CPP longevity.

Highlights

Discussing the everyday reality of looking forward to retirement and the importance of early planning.

Retirement requires active saving and investing, not just a passive wait for a magical age.

Explaining that retirement involves expenses similar to those during working years, emphasizing the need for financial preparation.

Highlighting the importance of saving for day-to-day expenses, emergencies, and fun in retirement.

The necessity of investing rather than just saving to combat inflation and achieve retirement goals.

Introduction to government programs like the Canada Pension Plan and Old Age Security as part of the retirement income system.

Detailed explanation of the Canada Pension Plan, its history, and its role in providing retirement income.

The transformation of CPP Investments to sustainably manage and grow contributions over time.

CPP Investments' strategy focusing on long-term returns and diversified investments to ensure the fund's growth.

The fund's significant growth to over $500 billion, with an average annual return of 10% over the past decade.

How CPP contributions during working years translate into retirement benefits.

Options for starting CPP payments between ages 60 and 70, with adjustments based on when you choose to begin.

The maximum and average CPP payout amounts as of 2023, illustrating the variation based on contribution history.

The importance of personal savings and investments in addition to CPP for a comfortable retirement.

Encouraging viewers to learn more about how their contributions to CPP are managed and grown over time.

Transcripts

do you ever wake up roll out of bed a

little bit later than you probably

should go make yourself a cup of coffee

that's gonna fuel the rest of your day

and then run over to your desk to log in

and get started you start working for

what feels like a while until you look

over at the clock and see that it's only

9 34 a.m then you sander your breath I

can't wait to retire hopefully that's a

slightly dramatic version because if

you're actually going through that I'm

sorry but I'm sure we can all relate to

thinking about retirement at some point

whether it's in an I hate my job moment

or just because we're picturing our

future and wondering where we'll be but

retirement isn't the magical destination

that we're just gonna stumble across and

then get to stick around this actually a

little bit of work that we have to do

now in order to make sure that we get

there and when I say work it doesn't

actually have to be very hard it just

has to be done and the earlier the

better but you've definitely heard us

talk about the whole you need to be

saving and investing your money for

retirement thing before so today we

actually wanted to get back a step and

talk about your full retirement picture

and the whole picture doesn't just

include the money that you save there's

this entire other blurry portion that's

going to be clear by the end of this

video but first we do need to start with

the basics okay so usually when we talk

about this topic we focus on how

retirement is an amount of money and

Modern Age so you have to be saving and

investing for retirement now a lot of

the time people think that retirement's

something that happens no matter what

you hit age 65 and then boom you get to

leave your job your career whatever it

is that you have going on the reality is

that we still spend money in retirement

right you still have your expenses for

housing like whether that's your rent

your mortgage just property taxes you

still have your phone bill maybe car

expenses you still buy groceries all of

the same expenses that you have had on

your last day of work you still have

those as soon as you stop working and

you're now in retirement now on top of

having money for those usual expenses

you probably also want to have some

additional money in case any emergencies

come up now that could be a health care

related emergency which is obviously a

big area of concern when you're aging it

could be a home related expense or

emergency like your roof leaking

something like that basically just any

type of emergency and on top of that a

lot of people also picture having some

sort of fun in retirement as well

whether that's vacations you want to

take hobby you want to do any type of

fun so that's money that you need for

those three different areas your

day-to-day expenses emergency expenses

and also for fun now how do you usually

pay for those three things when you have

a job and income coming in every month

you use the money that you're making or

maybe you use money that you've already

saved but either way you're topping that

money up every time you get another

paycheck now when you're retired you

don't have income coming in and you

potentially won't have that ever again

so that means you need to have saved

enough money so you can spend some every

month or every year to sustain yourself

for the rest of your life now I know I

just said the word save a bunch of times

but I really mean invest instead because

you probably can't actually just save

enough money throughout your working

years for your retirement now even if

you only spend 35 000 a year and think

that that's what you'll spend in

retirement too you still would have

needed to have saved over a million

dollars in order to have that much money

to spend every single year for a 30-year

period now it's pretty hard to save your

way up to getting to over a million

dollars and it also doesn't help you

keep up with inflation either so if you

invest that money instead you'll be able

to hit that amount you want to get to

but in this case a million dollars but

actually contribute a lot less yourself

so you need to be investing your money

now in order to be ready for retirement

but that isn't the full retirement plan

picture so investing your money on your

own for retirement is one part of being

ready for retirement but the other part

is receiving from different government

programs now there's two major parts

that Canada's government retirement

income system and that's the Canada

Pension Plan and the old age security

and there's also the guaranteed income

supplement that's a part of OAS now old

age security is for anyone who's either

a Canadian citizen or a legal resident

of Canada when they apply at the age of

65 or older and they must have lived in

Canada for at least 10 years after

turning the age of 18. the amount of

financial return you get from this

pension is based on how long you've

lived in Canada and the max amount is

based on having lived here for 40 years

now the money itself is paid out from

the general revenues of the government

of Canada so straight Government funding

for anyone who's lived here in Canada

for a set amount of years and not based

on how much you've made there's also the

guaranteed income supplement which is

additional money on top of OAS

specifically for low-income retirees and

listen in order to be eligible for this

one you have to already be receiving OAS

you have to be below the maximum income

limits so for this year if you're single

it's 20 952 dollars and if you're

married it's a little bit higher than

that but it also depends on whether your

spouse is receiving the funding as well

the last program is the Canada Pension

Plan or CPP now this is the main program

that we want to dive deeper into today

because if you're someone who's paid by

an employer or even if you're

self-employed the letters CPP definitely

look familiar to you so the CPP was

created all the way back in 1965 in

Canada by the federal government now at

the time retired Canadians were

struggling with actually having enough

finances to actually retire so this is

the solution that they came up with

creating a pension plan now the goal of

this pension plan was to cover 25 of a

worker's average lifetime earnings up to

a certain limit now to pay for this

program CPP is required to be paid into

by any and all employed Canadians aged

18 plus so if you have a job in Canada

and you're 18 or older then you have to

contribute a portion of your income to

the federal pension plan unless of

course you're in Quebec because they

have their own Pension Plan QP the idea

is that you pay into this pension fund

throughout all of your working years and

then when you retire you get financial

contributions paid back to you so you're

guaranteed to have some income in

retirement like I just said this isn't

something you can opt out of it's

actually mandatory to pay as you go now

how do you actually go about paying this

money to CPP well it works as a

contribution from the money that you

make at work so when you get your

paycheck you'll see a deduction line

right on there for CPP now the rates can

change every year and we'll explain that

in a second but in 2023 you're taxed on

CPP for a total of 5.95 and then your

employer also has to match that and pay

5.95 for a total of 11.9 percent now if

you're self-employed you have to pay

both taxes so for a total of 11.9 okay

so that's the rate that you

all the way until you reach higher now

in between you paying into the CPP and

retiring in the future something else

happens with those financial

contributions in between now originally

when the CPP was created the idea was to

have people just pay into the fund and

then receive payments back when they

retire but after a few decades they

realized that this wasn't a very

sustainable model think about it like

this younger people who are working

right now are paying for currently

retired people then when we're retired

in the future the new group of younger

working people will pay for us the

problem is that there's not always this

steady stream of people at all times

because of the Baby Boomers where there

were way more people born in one era

there would be more people retiring than

usual which means that more money is

needed so to better account for this and

manage finances sustainably in the long

run in 1997 after 32 years CPP

Investments was created as an individual

professional investment organization

we're actually working with CPP

Investments on this video which is

really exciting for us because it's an

organization that's already a part of

our Lives as people who are over 18 and

working in Canada now we're going to

explain more about what they do with the

CPP money while you're working and then

jump back into the contributions you've

received from the CPP once you retire so

now the money deducted from your

paycheck is taken and placed into a fund

that's managed by CPP Investments this

organization then invests those

contributions into Financial assets like

stocks and shares that the overall pot

grows the goal is to increase the fund

at a rate that's ideally higher than

inflation so that millions of Canadians

can retire and benefit from Financial

Security later in life their goal is to

earn the best possible investment

returns without taking on any

unnecessary risks they're also focused

on long-term returns because obviously

this is a long-term investing portfolio

with the goal of lasting for many

decades one thing I want to point out is

that having a long-term investing

strategy gives CPP Investments an

advantage because just like personally

investing for the long term you have the

time to ride through any short-term

volatility they also diversify their

portfolio in four different ways one is

asset diversification so the portfolio

is a mix of equities fixed income credit

real estate and infrastructure two is

risk diversification where they balance

exposures to different return risk

factors the third is geographic

diversification so the portfolio is

invested in a mix of developed and

emerging markets and also for a

strategic diversification where they use

several different investment

perspectives now since 1997 when CPP

Investments was created the fund has

grown to over 500 billion dollars and

the average annual return over the past

10 years specifically is sitting at 10

percent now you can also see this chart

on their website too that shows the

projected plans to continue to grow the

funds over the next several decades and

also keep in mind that this is at the

same time that a growing number of

Canadians are receiving benefits from

the CPP something else that's important

to know is that the financial

sustainability of the CPP is really key

now like we said before the goal of this

program is to last a very long time so

in order to make sure that that's

possible every three years there's an

independent review done on how

sustainable the CPP will be over the

next 75 years so in 2019 they did a

review to see if the CPP would be

sustainable until 2094 and then in 2022

they did a review to see if the CPP

would be sustainable until 2097. now the

last review is in December and again

they did confirm that the CPP was

sustainable for that timeline overall CP

PP Investments is a huge reason why so

many Canadians will benefit from the

Canada Pension Plan when they retire now

our contributions are a big part of it

but the CPP Investments portion is what

keeps the fund sustainable if you want

to hear more about how CPP Investments

works and what they invest in then check

out the link below in our description

box and also here on screen and a big

thank you to CPP Investments for working

with us on this video okay so you start

contributing to CBP when you turn a team

and get a job the money's taken out of

your paycheck and then put into the fund

and then CPP Investments grows the money

now the next thing you need to know is

how you can get financial benefit from

the fund for yourself when you retire

okay so the set retirement age for this

program is age 65 but you can choose to

start receiving Financial contributions

as early as age 60 and as late as age

70. now the standard benefits would be

paid to you if you chose to start

receiving at age 65. now if you went a

bit earlier you'd get slightly less per

month and if you went a bit later you'd

get slightly more per month you have to

apply to start CPP payments and in order

to actually qualify 5 for taking out CPP

you have to be at least one month past

your 59th birthday you have to start CBP

within 12 months and you have to

actually have contributed to CPP while

working in Canada so now the big

question that you probably have is how

much money do I actually get from CPP

well that's a great question now like I

said before the exact amount of

financial return that you get from CPP

is based on how long you contributed to

CBP and the size of those contributions

now you can get the absolute maximum

amount if you contributed for at least

40 or more years and for 40 of those

years you contributed the absolute

maximum amount as of 2023 the current

earning ceiling is 66 600 which means

that if you earn that much or more you

would contribute individually three

thousand seven hundred fifty four

dollars and of course if you include the

employer portion it would be a total of

seven thousand five hundred and eight

dollars and of course once again if

you're self-employed you would

contribute that total amount so the 7508

that's the maximum yearly contribution

which means that you'd get them maximum

amount back once you retire if you hit

the earnings ceiling for 30 years and

missed it for 10 years your amount would

be lower now according to the government

of Canada's website the maximum amount

that you can get per year if you retire

at age 65 is 1

306.57 now the average paid out that's

811.21 so if you receive the maximum

amount you'd get 15 678 dollars a year

on the other hand if you receive the

average amount you'd get nine thousand

seven hundred thirty four dollars a year

and when you get your benefits keep in

mind that it's taxable income so let's

say you don't earn an income anymore

from work because you're retired but you

do get ten thousand dollars from CPP per

year that means that you have ten

thousand dollars in income that's going

to be taxed also if that amount sounds

like a low amount to you per year

remember the CPP was only designed to

replace 25 of your earnings now that

amount is being changed to 33 over the

next like coming years but either way

it's still one quarter or one-third of

the savings that you'll likely need in

order to retire comfortably that's when

the full retirement plan picture comes

back into play the CPP helps you retire

but you need your own savings and

Investments too so now you have the full

retirement picture if you want to learn

more about CPP how it works and how CBP

Investments grows your contributions as

part of the fund remember to check out

the link for more information and once

again thank you to CPP Investments for

working with us on this video