Any questions about CPP?

Preparing for life after work. RRSPs, RRIFs, TFSAs, annuities and meeting future financial and psychological needs.
Dogger1953
Silver Ring
Silver Ring
Posts: 208
Joined: 04 Mar 2013 21:00

Re: Any questions about CPP?

Post by Dogger1953 » 04 Nov 2016 10:55

pmj wrote:Hi - with respect to Child-Rearing Dropout - must it be applied only to the years when one had a child under 7 - or can it be applied to other years that might have lower earnings (relative to YMPE) than those particular years?
Peter - The CRDO must be applied only to the specific years when you were the primary caregiver for a child under age 7.
DR Pensions Consulting (http://www.DRpensions.ca)

pmj
Gold Ring
Gold Ring
Posts: 2397
Joined: 27 Feb 2005 18:15
Location: Ottawa

Re: Any questions about CPP?

Post by pmj » 04 Nov 2016 12:16

Dogger1953 wrote:
pmj wrote:Hi - with respect to Child-Rearing Dropout - must it be applied only to the years when one had a child under 7 - or can it be applied to other years that might have lower earnings (relative to YMPE) than those particular years?
Peter - The CRDO must be applied only to the specific years when you were the primary caregiver for a child under age 7.
Thanks. That was what I expected - but the wording at the various sites I checked wasn't specific.
Peter

Patrick Hutber: Improvement means deterioration

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Estimating CPP or QPP

Post by Quebec » 16 Dec 2016 18:48

How to calculate your CPP retirement pension from Doug Runchey gives a full explanation of how CPP is calculated, but I am wondering if there is a simpler, rough method.
[*]The normal contribution period is from ages 18 to 65, i.e. 47 years. The 8 years with the lowest incomes as a proportion of the YMPE are dropped, leaving the best 39 years for the calculation.
[*]For retirement at age 60, the best 34.86 years out of 42 are kept.
[*]Also consider the Child-Rearing Provision, if applicable
[*]Divide each year’s pensionable earnings by the applicable YMPE
[*]Average these percentages and multiply by the current maximum pension at 65 or 60, depending on the case examined

I've done an equivalent calculation for QPP (dropping only 15% of the years, not 17% as for CPP) and I come to within 1-2% of what Retraite Québec estimates for me at 60 or 65.

I'll like to get some confirmation that my method is not flawed, since I can then apply it to early retirement calculations... Also I may add it to finiki.

Thanks!
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 16 Dec 2016 18:53

Quebec wrote: I'll like to get some confirmation that my method is not flawed, since I can then apply it to early retirement calculations... Also I may add it to finiki.
Quebec,

Here's the precise calculation for QPP: http://www.rrq.gouv.qc.ca/en/services/p ... rente.aspx

I've implemented it into a spreadsheet and I get identical values (after rounding) to my annual estimate available on http://www.rrq.gouv.qc.ca/en/services/s ... ation.aspx.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

Dogger1953
Silver Ring
Silver Ring
Posts: 208
Joined: 04 Mar 2013 21:00

Re: Estimating CPP or QPP

Post by Dogger1953 » 16 Dec 2016 20:10

Quebec wrote:
I'll like to get some confirmation that my method is not flawed, since I can then apply it to early retirement calculations... Also I may add it to finiki.

Thanks!
Quebec - Your method as described is not flawed and should give you a good approximation.
DR Pensions Consulting (http://www.DRpensions.ca)

pmj
Gold Ring
Gold Ring
Posts: 2397
Joined: 27 Feb 2005 18:15
Location: Ottawa

Re: Any questions about CPP?

Post by pmj » 16 Dec 2016 20:17

Selecting years to apply the Child-Rearing Dropout provision seems to be somewhat of an iterative process if the YPE/YMPE factors for any of those years were similar to your average YPE/YMPE factors.
Peter

Patrick Hutber: Improvement means deterioration

Dogger1953
Silver Ring
Silver Ring
Posts: 208
Joined: 04 Mar 2013 21:00

Re: Any questions about CPP?

Post by Dogger1953 » 16 Dec 2016 23:53

pmj wrote:Selecting years to apply the Child-Rearing Dropout provision seems to be somewhat of an iterative process if the YPE/YMPE factors for any of those years were similar to your average YPE/YMPE factors.
Peter - Selecting CRDO years is a 2-step process. The first step (I call this CRDO1) is to remove all years with zero earnings. Then you calculate a temporary lifetime average earnings and drop out any CRDO years that are less than that average (I call this CRDO2). You don't continually recalculate the average earnings as you drop out these CRDO2 years.
DR Pensions Consulting (http://www.DRpensions.ca)

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Re: Estimating CPP or QPP

Post by Quebec » 17 Dec 2016 07:16

longinvest wrote:Here's the precise calculation for QPP: http://www.rrq.gouv.qc.ca/en/services/p ... rente.aspx.
Yes, I know, but they are working with months, etc. Getting to within 1-2% of the estimate is good enough for me, especially on a Friday night... :-)
Dogger1953 wrote:Quebec - Your method as described is not flawed and should give you a good approximation.
Thanks, I appreciate that. If a few other people can try my simplified method for the QPP (only drop 15% of the years, as opposed to 17% for the CPP) and confirm they get within 1-2% of what Retraite Québec says for their pension estimate at age 60 and age 65, I'll add this to finiki.
longinvest wrote:I've implemented it [the complete method] into a spreadsheet and I get identical values (after rounding) to my annual estimate
.
Interesting. How are you dealing with the months? I vaguely remember working for only 3-4 months in 19xx while I was a student, but it would be painful to get the month-by-month details for the years when I got less than the YMPE. These low income years cannot be dropped in my case.
----
Added: I have to keep some zero income months anyway, so I guess the low income years are just taken as 12 months without trying to be fancy about selecting partial years
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 17 Dec 2016 08:58

Quebec wrote:
longinvest wrote:I've implemented it [the complete method] into a spreadsheet and I get identical values (after rounding) to my annual estimate
.
Interesting. How are you dealing with the months? I vaguely remember working for only 3-4 months in 19xx while I was a student, but it would be painful to get the month-by-month details for the years when I got less than the YMPE. These low income years cannot be dropped in my case.
Quebec,

The Régie probably doesn't know about your monthly income. All it cares about is the annual income, which is reported on your annual QPP statement.

For each year, you divide the income reported on your QPP statement by 12 to get the monthly amount. As a consequence, you can only have 0$ months in 0$ years.

For early retirement, the penalty varies between 0.5% to 0.6% per month. The (implicit) formula for the exact monthly penalty is actually:

0.5% + 0.1% X (monthly_annuity_before_penalty / maximum_monthly_annuity)

Another detail: you can remove a partial month. For a retirement at age 60, you remove the worst (60 - 18) X 12 X 15% = 75.6 months of income.

Give it a try. :wink:
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Re: Estimating CPP or QPP

Post by Quebec » 17 Dec 2016 12:55

I've prepared a spreadsheet with the proper/official method for the QPP as per the document linked by longinvest. The step by step explanations are clear. Yet I get estimation errors of 0.7% to 2.2% relative to my Statement of Participation, for retirement at 60 and 65. I.e. the error is similar to that of my simplified method. So either I'm doing something slightly wrong when implementing the proper/official method, or Retraite Québec is projecting my future income slightly differently than I am. It seems difficult to obtain the exact dollar amount even with the official method...
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 17 Dec 2016 13:15

Quebec wrote:I've prepared a spreadsheet with the proper/official method for the QPP as per the document linked by longinvest. The step by step explanations are clear. Yet I get estimation errors of 0.7% to 2.2% relative to my Statement of Participation, for retirement at 60 and 65. I.e. the error is similar to that of my simplified method. So either I'm doing something slightly wrong when implementing the proper/official method, or Retraite Québec is projecting my future income slightly differently than I am. It seems difficult to obtain the exact dollar amount even with the official method...
Quebec,

On your statement, there is a projection for retirement at ages 60 and 65 assuming you won't make any additional contribution and another assuming you'll contribute similarly to the latest years.

Do your calculations match, when projecting no additional contribution? Mine do match exactly with the projection on my statement (assuming no additional contributions).

If they happen to match, I would rather use my own projections of future income than the Régie's. :wink:
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Re: Estimating CPP or QPP

Post by Quebec » 17 Dec 2016 17:04

longinvest wrote:On your statement, there is a projection for retirement at ages 60 and 65 assuming you won't make any additional contribution and another assuming you'll contribute similarly to the latest years. Do your calculations match, when projecting no additional contribution?
Yes they now match (same dollar amount after rounding), but for age 60 I had to reduce the pension by 31.66% (using your formula), not 36% as misleadingly listed here. There is a footnote to the table that says ''The amounts apply to persons entitled to the maximum pension'', but this appears to apply to the dollar amounts when you look at the table. In fact it applies to the percentages too below the age of 65!!!! Grrrrrr. In the calculation instructions they do say that the adjustment factor varies from 0.5% to 0.6% a month, but no details are given.
longinvest wrote:0.5% + 0.1% X (monthly_annuity_before_penalty / maximum_monthly_annuity)
You figured this out by trial and error?
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 17 Dec 2016 17:33

Quebec wrote:
longinvest wrote:0.5% + 0.1% X (monthly_annuity_before_penalty / maximum_monthly_annuity)
You figured this out by trial and error?
Yes, along with a little bit of reasoning. I had my projections and those of my wife to help deduce the linear relation.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Re: Estimating CPP or QPP

Post by Quebec » 17 Dec 2016 18:30

There is support for your formula here:
If you are under age 65, your pension will be reduced for each month between the start of payment and your 65th birthday. The reduction factor will be 0,5% a month if your pension is very small and will be up to 0,6% if you are receiving the maximum pension. If you were born before 1 January 1954, the reduction factor will be 0,5% a month.
The most simple way to go from 0.5% to 0.6% is of course a linear relationship. I find it amazing that the average worker is supposed to guess the formula. Of course the average worker probably has not even looked at his Statement of Participation, but that's besides the point.
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 17 Dec 2016 19:29

Quebec wrote:I find it amazing that the average worker is supposed to guess the formula.
You're not alone.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Re: Estimating CPP or QPP

Post by Quebec » 18 Dec 2016 07:32

Longinvest, I've distilled what I've learned at finiki -- QPP -- DIY pension calculations to summarize our discussion. Please have a look...
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 18 Dec 2016 08:33

Quebec wrote:Longinvest, I've distilled what I've learned at finiki -- QPP -- DIY pension calculations to summarize our discussion. Please have a look...
Great! I would add an example of somebody retiring at 60 (with an average amount) and the consequences of claiming his QPP pension at ages 60, 65, and 70.

This can be illuminating. In particular, the increase for delaying from 65 to 70 (assuming one is not working during this period) is to multiply the age 65 pension amount by (65-18) / (70-18) X 1.42 = 1.28346, not by 1.42. (This is unlike CPP where there is a dropout provision for post age 65 years, allowing for an effective 1.42 factor).

Note: I'm ignoring the 85% factor for (65 - 18) and (70 - 18) because it applies to both numerator and denominator.

The higher the pension amount, the higher the increase for delaying from 60 to 65 (due to the graded 0.5% to 0.6% penalty). The factor, when not working during the delay period, varies between (60-18) / (65 - 18) / (1 - 5 X 12 X 0.005) and (60-18) / (65 - 18) / (1 - 5 X 12 X 0.006), or, more succinctly, between 1.27660 and 1.39628.
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Re: Estimating CPP or QPP

Post by Quebec » 18 Dec 2016 13:20

longinvest wrote:In particular, the increase for delaying from 65 to 70 (assuming one is not working during this period) is to multiply the age 65 pension amount by (65-18) / (70-18) X 1.42 = 1.28346, not by 1.42. (This is unlike CPP where there is a dropout provision for post age 65 years, allowing for an effective 1.42 factor).
But, in theory, if you have worked almost continuously from 18 to 65, you can use your general 15% dropout provision to get rid of the zero earning years from 65 to 70, and get the full 42% increase. I imagine that this is why they advertise 42%, even though it won't apply to many people. Your calculation assumes that the 15% dropout is fully consumed already and you are forced to add 5 years at zero earnings.
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 18 Dec 2016 14:38

Quebec wrote:
longinvest wrote:In particular, the increase for delaying from 65 to 70 (assuming one is not working during this period) is to multiply the age 65 pension amount by (65-18) / (70-18) X 1.42 = 1.28346, not by 1.42. (This is unlike CPP where there is a dropout provision for post age 65 years, allowing for an effective 1.42 factor).
But, in theory, if you have worked almost continuously from 18 to 65, you can use your general 15% dropout provision to get rid of the zero earning years from 65 to 70, and get the full 42% increase. I imagine that this is why they advertise 42%, even though it won't apply to many people. Your calculation assumes that the 15% dropout is fully consumed already and you are forced to add 5 years at zero earnings.
Quebec,

You're right! Let's try two examples.

Example 1

Worker works exactly 39.2 years at full Year's Maximum Pensionable Earnings (YMPE)* between 18 and 65 (chosen so that the non-employment is exactly 15% of age 70 dropout, so that any additional dropout over 65 is maximized).

* In 2016, the YMPE is $54,900.

If retires at 65:
39.2 / ((65 - 18) X 85%) = .98122657 of maximum 65 pension

If retires at 70:
39.2 / ((70 - 18) X 85%) X 1.42 = 1.25936652 of maximum 65 pension

Increase = 1.25936652 / .98122657 = 1.28346149

Example 2

Worker works exactly 44.2 years at full YMPE between 18 and 65 (chosen so that the dropped years at 65 start counting at 70):

If retires at 65:
min(44.2, 39.95) / ((65 - 18) X 85%) = 1 of maximum 65 pension

If retires at 70:
min(44.2, 44.2) / ((70 - 18) X 85%) X 1.42 = 1.42 of maximum 65 pension

Increase = 1.42 / 1 = 1.42

Conclusion

So, for age 70 retirement to increase the pension by 42%, one must have dropped 4.25 years at full YMPE at age 65. In other words, one must have worked at full YMPE from age 20.8 to 65!
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

User avatar
Quebec
Silver Ring
Silver Ring
Posts: 668
Joined: 24 Oct 2009 16:49
Location: Quebec City

Re: Estimating CPP or QPP

Post by Quebec » 20 Dec 2016 07:12

longinvest wrote:...This is unlike CPP where there is a dropout provision for post age 65 years, allowing for an effective 1.42 factor)...


Longinvest, do you have a source for this? I've read everything I could find about CPP on the canada.ca site and I only see the general drop-out of 17% and the child-rearing provision. Here is the specific text:
What is my contributory period and how is it used?

Your contributory period begins when you reach age 18 (or January 1, 1966, whichever is later) and ends when you either start receiving your CPP retirement pension, turn 70 or die (whichever happens earliest).

We use the contributory period to calculate the amount of CPP benefits that you may become eligible to receive.

The amount you get considers periods where you had zero or low earnings. A certain number of your lowest earnings years may be automatically dropped from the pension calculation under the so-called "general drop-out provision".

You should also request the "child-rearing provision" if you had zero or low earnings because you were the primary caregiver raising your children.
Imagefiniki, the Canadian financial wiki: a knowledge base of financial subjects written from a Canadian perspective

longinvest
Gold Ring
Gold Ring
Posts: 1391
Joined: 10 Sep 2012 17:26
Location: QC

Re: Estimating CPP or QPP

Post by longinvest » 20 Dec 2016 07:31

Quebec wrote:
longinvest wrote:...This is unlike CPP where there is a dropout provision for post age 65 years, allowing for an effective 1.42 factor)...


Longinvest, do you have a source for this?
Quebec,

Here's where I've read about it:

https://retirehappy.ca/how-to-calculate ... t-pension/
If you delay starting your CPP until after age 65, there is an additional dropout provision, known appropriately enough as the over-65 dropout (surprisingly, there is no acronym for this dropout.)
Bogleheads investment philosophy | Simple index portfolios | Lifelong Portfolio: 25% each of (domestic/international)stocks/(nominal/inflation-indexed)bonds | VCN/VXC/VAB/ZRR

KFried
Bronze Ring
Bronze Ring
Posts: 55
Joined: 03 Oct 2016 11:09
Location: Midtown TO

Re: Any questions about CPP?

Post by KFried » 26 Dec 2016 12:16

To CPPDogger:

Hi there and thanks for the service (civil and FWF),

Contributed to CPP for 15 yrs as FT employee (13yrs maximum, or maybe more, not sure). Last 5 yrs, as CPCC owner, contributed 30-50 % of maximum. I plan to contribute 5 more years. Considering I'll probably have 15 yrs or so of exclusion room, would it be more advantageous to contribute 4X50% or 2X100% of maximum ? Or it would not matter ?

Related: does it matter for final calculation if I contribute monthly or one lump sum yearly ? (Any compounding penalty ?)

Dogger1953
Silver Ring
Silver Ring
Posts: 208
Joined: 04 Mar 2013 21:00

Re: Any questions about CPP?

Post by Dogger1953 » 26 Dec 2016 14:36

KFried wrote:To CPPDogger:

Hi there and thanks for the service (civil and FWF),

Contributed to CPP for 15 yrs as FT employee (13yrs maximum, or maybe more, not sure). Last 5 yrs, as CPCC owner, contributed 30-50 % of maximum. I plan to contribute 5 more years. Considering I'll probably have 15 yrs or so of exclusion room, would it be more advantageous to contribute 4X50% or 2X100% of maximum ? Or it would not matter ?

Related: does it matter for final calculation if I contribute monthly or one lump sum yearly ? (Any compounding penalty ?)
KFried - It depends slightly on what age you apply for your CPP to start, but if you start at age 60 it will be based on your best 34.8 years (86 month dropout) or at age 65 it will be based on your best 39 years (96 month dropout). Assuming that you will have less than 35 years of contributions in total, your benefit amount will be exactly the same if you contribute 4x50% or 2x100%. Your contribution cost however will be slightly less if you contribute 4x50%, as you won't contribute on the first $3,500 of earnings (the Year's Basic Exemption) for each of 4 years instead of just for 2 years.
DR Pensions Consulting (http://www.DRpensions.ca)

KFried
Bronze Ring
Bronze Ring
Posts: 55
Joined: 03 Oct 2016 11:09
Location: Midtown TO

Re: Any questions about CPP?

Post by KFried » 27 Dec 2016 07:05

Dogger1953 wrote:. Your contribution cost however will be slightly less if you contribute 4x50%, as you won't contribute on the first $3,500 of earnings (the Year's Basic Exemption) for each of 4 years instead of just for 2 years.
Thx for the Basic Exemption pointer, which I had overlooked. Still deciding if it's worth contributing more than 50% of max/year

KFried
Bronze Ring
Bronze Ring
Posts: 55
Joined: 03 Oct 2016 11:09
Location: Midtown TO

Re: Any questions about CPP?

Post by KFried » 10 Jan 2017 23:47

Please consider the following scenario:

The mother emigrates to Canada with her two year old child. Stays at home till the child is seven, then works, contributes to CPP for 25 years and retires. Is she eligible for the child rearing provision ?

Thank you

Post Reply