CPP Deferral debate - Fred Vettese article discussion

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by leoc2 »

There may be another reason to start early. If you think your spouse will outlive you and you want maximize their benefit. The survivor's benefit is capped to a maximum that keeps it at or under the Max CCP value. There are various rules to complete the calculation. The info is here:
https://retirehappy.ca/cpp-survivor-benefits/

My thinking is this:
If you can figure out when your spouse's survivor's benefit is maxed then you may as well start your pension and invest it to create another source of survivor's income stream. In my case my spouse's pensionable income was reduced with several years of zero contributions. Some of the zero's can be eliminated using Child Drop Out provision. In my case I have savings and I can use the "longinvest" delay CPP strategy. Now I need work out the survivor benefit and see if any of my thinking makes any sense. Back to the spreadsheet.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by DenisD »

What if you expect to collect GIS and provincial low income benefits such as Alberta Seniors Benefit. Does it still make sense to delay CPP?
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by StuBee »

BRIAN5000 wrote: 30 Mar 2017 10:52
StuBee wrote: 30 Mar 2017 10:33 Does anyone have a quick and simple rule to ascertain when the negative effect of accumulation of zero contribution years outweighs the positive effect of CPP postponement?

StuBee
This may have some info http://www.moneysense.ca/save/retiremen ... -pensions/


"So for people in this situation, the net impact is that the payoff they would otherwise get for deferring CPP would be curtailed to around 4.7% per year. (That’s the general deferment factor of 7.2% minus the 2.5% from adding additional zero income years.) “You get a larger slice of a smaller pie, but you still get more pie in total,” says Runchey."
Thank-you Brian5000

So, on a net basis, there is no penalty (rather a lessening of a gain...) with the accumulation of zero contribution years. Therefore, postponement seems to be the best way to go as long as it is affordable.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by simplesimon »

Chuck wrote: 30 Mar 2017 13:32 The more I think about this, the more it seems like deferral is the way to go.

I can only see two obvious cases not to defer:

1) You simply can't afford to. You need the CPP at age 60 to cover your monthly needs. Reduced as it might be, you still need to take it.
2) You really fear you are going to die young AND you wish to maximize your estate (or bequest as some call it). It seems odd to hope to die young, but the theory here would be to spend the government money as soon as you can and save yours for your heirs. Of course, if you fail to die young, you will also fail to maximize your estate in this scenario as you will end up with less government money overall. So careful what you wish for.

Pretty much everyone else would appear to be better off by deferring.

Note: There is a 3rd possibility, per ghariton's posts, that you may feel you can take the CPP early, invest the proceeds, and then outperform the CPPIB by a sufficient enough margin to make the early payout reduction moot. This is very complicated to analyze, especially if you want to try and keep the investment risk level equivalent. So I am not going to try. My gut says it would be hard to pull off.
I agree with this view as well.

I retired at 57, I'm almost 59 now, and I am trying to figure out when to start CPP.

I'm lucky to have a DB pension, although it is unindexed, which makes me gravitate towards taking CPP later for inflation protection.

Everybody I know has either already taken, or will take CPP at 60, for all the usual reasons mentioned, which makes it more difficult to be a contrarian, and take it at 70.

To make the decision, I think you have to decide what you believe inflation is going to look like, select a rate of return that you think you can make on investments, pick an age that you think you will probably die, decide how much, if any amount you want to leave in your estate, then do NPV calculations on the cashflows for taking CPP, both early and late.

Unfortunately for me, I'm not smart enough to do this, because also involved in the math are; DB pension payments, OAS payments and when to start, investment savings in RRSP's, TFSA's and unregistered accounts, coupled with when and how to deconstruct those savings to support how much income you think you need each year to cover wants and needs through the various stages of retirement.

Layered on top of this is another set of the same items for my wife, along with the ever important effect that all of these variables have on taxation and income splitting.

Has anyone figured all of this out for themselves?
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Stan_W »

I'm planning to defer to age 70. I see it as an indexed annuity where I get $840 per year starting at age 70 for every $10,000 that I forgo.

In addition, I'll have an almost maximum CPP while my wife will have less than 40% of the maximum. This means that she will take full advantage of the survivor pension should I die first.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Shakespeare »

Has anyone figured all of this out for themselves?
The age at which you die dwarfs all other considerations, making a 5% spreadsheet irrelevant.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by simplesimon »

Shakespeare wrote: 30 Mar 2017 15:11
Has anyone figured all of this out for themselves?
The age at which you die dwarfs all other considerations, making a 5% spreadsheet irrelevant.

Do you feel lucky? Or not?
Well, I think it is a worthwhile exercise to at least try to figure this out. That's why I said to pick an age.

If you defer CPP and die young, first of all, as has been stated here several times, you personally won't care, and dying young will in most cases leave a bigger estate.

If you collect CPP early, and live a long time, depending on how much other inflation protection you have, you could be in trouble.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Spudd »

I feel like another good reason to take CPP early is if there's a big crash in the market. It would reduce the amount you need to draw from the damaged portfolio, lessening sequence of returns risk and allowing it a chance to recover.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by steves »

simplesimon wrote: 30 Mar 2017 14:33 Has anyone figured all of this out for themselves?
Yes, but it is not a walk in the park if you include the full effect of taxation, clawbacks, tax credits.... other sources of income, etc.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park »

Park wrote: 30 Mar 2017 12:42
Park wrote: 29 Mar 2017 21:40 When I retire, I've lost the ability to generate income from labor. I now rely solely on income from capital. I'm less diversified than I formerly was. There are certain financial risks that I'm now more exposed to: inflation risk, market risk and longevity risk.

CPP mitigates those risks: fixed income that is inflation indexed and has the credit risk of the government of Canada, which I"ll receive it as long as I live.

For a taxable investor in retirement, fixed income is needed and taxation of such income may be an issue. But the government has stacked the tax deck in favor of CPP. CPPIB doesn't pay taxes. I get a modest tax credit on my employee contribution. I get a tax deduction on the employer contribution. There are those who would say that I don't do as well, because I have to pay the employer portion. I would counter that the employer portion is already embedded in the compensation of those who only pay the employee portion. And one can share a pension with one's partner, which might decrease tax; such income splitting isn't possible for many income sources.

I'm unable myself to judge whether CPPIB manages money well. But I've never heard anyone argue that it does it poorly and its costs are too high.

Institutions can diversify their investments more readily than an individual can. I'm thinking primarily of alternative investments. CPPIB can and does invest in such alternatives. By deferring CPP, I"m getting alternative investment exposure and increasing my diversification. There are those who would make good arguments that alternative investment exposure isn't a good idea, and I don't dismiss those arguments. I think it very unlikely that I should personally be investing in alternatives. But Yale has done well with its alternative investments under Swensen. CPPIB is a big enough player to likely be able to profit from alternative investments. Of all my sources of possible retirement income, CPP has the greatest probability of benefiting from alternative investments. So I would consider the alternative investment exposure that I get with CPP to be an overall plus, although with some reservations.

In 2010 in the link below, Jamie Golombek estimated an average real return of 3%, for present CPP contributors. I assume that refers to the return of those who are self-employed. Undoubtedly, there are those who could invest and get a higher rate of return than 3%. But it would be difficult to get a better risk adjusted fixed income return. For purposes of comparison, the present return of RRBs is 0.68%. And I'm not sure whether the 3% takes into account survivor's pension.

http://www.jamiegolombek.com/media/jg-r ... sps-en.pdf

By having CPP, I diversify my risk. In retirement, I'll take income from my RRSP, TFSA and taxable accounts. If there are problems with those other sources of income, CPP will likely help.

Every year that I delay CPP, I get the equivalent of an inflation indexed annuity that pays 7-8%. When it comes to fixed income, I think it is very unlikely that I could find a better alternative. And I get that when I'm older, which is important. Assume a scenario, where my only source of income ends up being CPP. In such a situation, I'll have to think about going back to work. That's reasonable if I was 65, but less so if I'm 85. For those who think understandably that such a scenario is very unlikely, a reduction of 50% in your retirement income due to marital breakdown is more probable.

From the link below, max CPP at age 60 is $681.60 in 2016. At age 70, it is $1,512.30. I might be able to support myself on the latter, but I don't see that as a possibility with the former.

http://boomerandecho.com/when-to-take-c ... n-between/

What if the government changes the rules, and takes advantage of me? That is possible. But it could also do that to my RRSP, TFSA, and taxable accounts. When it comes to such shenanigans, I've diversified my risk.

Why don't I take CPP early, when my health permits me to enjoy the money more? I'd rather decrease the risk of me being poor at age 85.

What if I die at a comparatively young age? That is a very legitimate issue. There are people, who should take CPP as early as possible. Indeed there are some who should try to avoid making any CPP contributions. Those who die early increase the return of those who die late. But if you're reading this post, the probability is good that you'll live longer than the average CPP contributer, and will likely benefit from those who die early.

I've heard a variety of lifespans, as to when a delay until 70, pays off. The numbers I've seen range from 81 to 86. I'm not sure if those numbers take into account survivor's pension or tax reduction via pension sharing.

When I'm 59, I'll reexamine this issue every year until I"m 70, taking into account my health and any rule changes.
http://forums.redflagdeals.com/what-act ... a-1089150/

"For every year that you contribute after age 65, you can drop out a previous year of low or no contributions. This over-65 dropout is in addition to the general dropout"

http://www.moneysense.ca/save/retiremen ... ore-later/

"it’s easy to use up all your drop-out years if you spent a long time getting an education or just “finding yourself.” If you then stop working in your early 60s and don’t take CPP right away, you’ll immediately start adding more years of zero earnings to the calculation. This will lower your average pensionable earnings, which in turn will make your benefit go down...By my estimates, this factor in isolation can reduce your pension by as much as 2% to 3% for each year you delay taking CPP after age 60. So for people in this situation, the overall net cost of starting CPP early is liable to be 3% or 4% per year (that’s the current 6% overall reduction, minus 2% to 3%)."

That's from 2011. The current overall reduction is now 7.2%, not 6%. At that time, one could remove 15% of your lowest earning years in calculating your CPP. It's now 17%. It looks like what is written in the last link doesn't apply to those 65-70. See the link below.

http://www.michaeljamesonmoney.com/2013 ... g-cpp.html

"if you’re working beyond age 65 at a high income level, you’re allowed to replace an equal number of lower earning months with these after-age-65 earnings. And if you’re not working or working only minimally, you can simply drop out those over-65 months so that it doesn’t reduce your calculated retirement pension"
For me, this is an essay that makes me clarify my thoughts about CPP. I hope others will find it of use.

I hadn't read this thread entirely, prior to posting. So some of what I've written is redundant.

Brian5000 has previously pointed out that the increase of zero accumulation years between 60-65 decreases the benefit of deferral to 4.7%.

Longinvest quoted Fred Vettese, who stated that a CPP pension will likely increase more than usually quoted 8.4% per for each year of deferral between ages 65-70. If the CPP earnings ceiling increases by more than inflation between ages 65-70, that will also be reflected in an increased pension. And that earnings ceiling usually does increase slightly more than inflation.

Others have pointed out that when you think you're going to die may not be as relevant as I thought it was. If I'm certain that I'm going to die young, then taking CPP early makes sense. But there wouldn't be many individuals who are certain about that. Even if the probability is low that you'll have a long life, you have to consider that possibility. Based on one's risk aversion, there would be many individuals who would plan for a long life, even if the probability was low. Such individuals should still consider deferring CPP.

As others have pointed out though, if you think that there is a good chance you'll die at a comparatively young age and maximizing your estate is more important to you, CPP deferral makes less sense.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Shakespeare »

Spudd wrote: 30 Mar 2017 15:43 I feel like another good reason to take CPP early is if there's a big crash in the market. It would reduce the amount you need to draw from the damaged portfolio, lessening sequence of returns risk and allowing it a chance to recover.
Yes, that's an excellent reason, particularly if you have a modest portfolio. Sequence of returns risk is non-trivial.

Added: there is also legislation risk. Future governments might limit indexing or change clawback rules.
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Re: CPP Deferral debate - Fred Vettese article discussion

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Shakespeare wrote: 30 Mar 2017 16:10
Spudd wrote: 30 Mar 2017 15:43 I feel like another good reason to take CPP early is if there's a big crash in the market. It would reduce the amount you need to draw from the damaged portfolio, lessening sequence of returns risk and allowing it a chance to recover.
Yes, that's an excellent reason, particularly if you have a modest portfolio. Sequence of returns risk is non-trivial.
This can be addressed by planning well in advance of age 60.
longinvest, in a specific earlier example, wrote: In order to fill the gap between age 60 and age 70, he needs to put aside:
10 X 12 X $961.65 = $115,398 into a GIC ladder (and cash for the early payments)
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by patriot1 »

Shakespeare wrote: 30 Mar 2017 16:10 Added: there is also legislation risk. Future governments might limit indexing or change clawback rules.
An issue with with OAS for sure, but given CPP's assets are segregated I can't see how you could have a clawback, and any rule change (e.g. to indexing) requires federal-provincial consensus.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by longinvest »

Peculiar_Investor,
Peculiar_Investor wrote: 30 Mar 2017 09:30 Is there any chance there is a spreadsheet (or spreadsheets) that could be shared? Perhaps via our wiki article on Canada Pension Plan?
I have a personal spreadsheet I've built to estimate my future QPP pension, but it's not fully automated (it requires a manual selection of drop-out years). It would be an interesting project to build an easy-to-use CPP/QPP spreadsheet for Finiki. As with all my other shared spreadsheets, it wouldn't make use of macros so that users won't have to worry about security issues. (That's always a challenge).

OK. Thanks for the suggestion. I'm adding it to my set of projects. I'm not committing to any specific schedule, though.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by leoc2 »

leoc2 wrote: 30 Mar 2017 11:37
Peculiar_Investor wrote: 30 Mar 2017 09:30 Back to the topic at hand. I also appreciate longinvest's efforts to explain this topic with detailed examples, both in topic as well as here. As an early retiree, I've got lots of years of zero contributions and can see the day coming when the decision on early, normal or deferred CPP will be at hand. You've spiked my interest to starting to educate myself to understand the options and their implications.

Is there any chance there is a spreadsheet (or spreadsheets) that could be shared? Perhaps via our wiki article on Canada Pension Plan?
I found a CPP spreadsheet at:
http://www.holypotato.net/?p=1694


I will download it and try it later today.
+++++++++++++++++++++++++++++++++++++++++++++++++++++++++
Added: I tried it out and it works out to give me numbers similar to the spreadsheet I cooked up on my own using the sample calculation from Doug. Here is a link to Doug's calculation.
https://retirehappy.ca/how-to-calculate ... t-pension/

I repeat ... there is a great CPP spreadsheet at the Holy Potato website and you can adjust dropout years.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by gaspr »

longinvest wrote: 31 Mar 2017 08:12 Peculiar_Investor,
Peculiar_Investor wrote: 30 Mar 2017 09:30 Is there any chance there is a spreadsheet (or spreadsheets) that could be shared? Perhaps via our wiki article on Canada Pension Plan?
I have a personal spreadsheet I've built to estimate my future QPP pension, but it's not fully automated (it requires a manual selection of drop-out years). It would be an interesting project to build an easy-to-use CPP/QPP spreadsheet for Finiki. As with all my other shared spreadsheets, it wouldn't make use of macros so that users won't have to worry about security issues. (That's always a challenge).

OK. Thanks for the suggestion. I'm adding it to my set of projects. I'm not committing to any specific schedule, though.
Excellent news! After seeing what you have done with the brilliant VPW spreadsheet, I can hardly wait. :thumbsup:
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Peculiar_Investor »

leoc2 wrote: 31 Mar 2017 09:08 I repeat ... there is a great CPP spreadsheet at the Holy Potato website and you can adjust dropout years.
Thanks, added to the wiki.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by adrian2 »

leoc2 wrote: 31 Mar 2017 09:08 I repeat ... there is a great CPP spreadsheet at the Holy Potato website and you can adjust dropout years.
I would not call it excellent, but a first approximation. The author set as his target to estimate within a 5% precision, WADR, I'm aiming much higher.

I've built a spreadsheet based on Doug's articles (thank you, Doug) which takes into account everything relevant to our situation (date of arrival in Canada, child rearing dropout, general dropout, survivor benefit for each survivor, etc) . It also works on a monthly precision instead of the yearly approximation professed by Holy Potato.

I would have much more trust in the results of a spreadsheet by longinvest compared to HP.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by chufinora »

In Open Office I get an error "Err:509" for the results (C64:C74) all other cells look normal - Cannot parse out the equation in those cells to fix it

=(SUM(I$7:I6("I"&(I64+6-J64)))/(I64-J64))*H64*K64*L64

I am guessing there is something here that open office doesn't like but can't quite reverse engineer what the right equation is.

My Excel version (Mac 2008) fails to open the sheet (The file might be damaged or modified from its original format) - nothing unusual here Excel 08 on a modern Mac is increasingly un-reliable, which is why I have switched to Open Office for spreadsheets (And have found good compatibility up until this sheet.)




Correction just checked Excel version 08 not 10
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Norbert Schlenker »

chufinora wrote: 31 Mar 2017 13:08 In Open Office I get an error "Err:509"
Time to switch to Libre Office, which opens the sheet just fine.

Thanks to all above for an instructive discussion. I was prompted to make use of the Service Canada password I recently requested* to check on my very spotty CPP contribution history. I am way deep past the dropout limit - only about 15 years of contributions in total - and used the Holy Potato spreadsheet to (a) verify that I'm not doing myself harm by deferring and (b) comparing that calculation versus the current Service Canada estimate, which should be close to spot on as I turned 60 not long ago. The spreadsheet looks to be too low, about 7% lower than the Service Canada calculation, which is quite a discrepancy. I'm looking forward to seeing something more accurate thanks to adrian2 and longinvest. ;)

---------

* A word of advice based on a sad story. First the story. While doing my annual CVITP stint, I ran into a senior whose CPP and OAS slips had gone astray. She had moved in 2016 and the postal forwarding error had expired. While her CPP and OAS were direct deposited throughout the year, the slips mailed at the end of January didn't come. When she contacted Service Canada for copies to her new address, they flatly refused. For security reasons, they don't take changes of address over the phone (and good for them!). Her choices were to (1) visit a Service Canada office with multiple pieces of id in hand, or (2) open an online Service Canada account. (1) is fine for most Canadians but for us here involves a ferry trip and a blown day; (2) results in a temporary password being mailed to the address on file. The first wasn't particularly appealing and the second useless.

So the advice is: Open a Service Canada account before you move. Given the information available through the website, make sure you secure it with an excellent and unique password.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by kcowan »

We have our mail forwarded to Mexico (CP to Laredo TX and then UPS 3x a week). In mid-April 2016 I had not received anything but it had been on MyAccount since January. My Account is a godsend this year.

They also provide email addresses for audit responses! And they accept PDFs.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by leoc2 »

adrian2 wrote: 31 Mar 2017 12:48
I would not call it excellent, but a first approximation. The author set as his target to estimate within a 5% precision, WADR, I'm aiming much higher.
95% accuracy works for me as it is a tool to help create a plan. On the other hand, I too look forward to longinvests spreadsheet too. He does great work.

Sorry for shouting in a previous post. :oops:
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by leoc2 »

Norbert Schlenker wrote: 31 Mar 2017 13:49 ...
Thanks to all above for an instructive discussion. I was prompted to make use of the Service Canada password I recently requested* to check on my very spotty CPP contribution history. I am way deep past the dropout limit - only about 15 years of contributions in total - and used the Holy Potato spreadsheet to (a) verify that I'm not doing myself harm by deferring and (b) comparing that calculation versus the current Service Canada estimate, which should be close to spot on as I turned 60 not long ago. The spreadsheet looks to be too low, about 7% lower than the Service Canada calculation, which is quite a discrepancy. I'm looking forward to seeing something more accurate thanks to adrian2 and longinvest. ;)
...
Could the inaccuracy come from the Service Canada projections of CPP at 65 and 70 years old? IIRC they list your CPP today correctly and then they assume you make max CPP contributions for the projections from 60 to 65 and 65 to 70. Many of us would like Service Canada to tell us our 65 and 70 year old projections using zero contributions.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Norbert Schlenker »

leoc2 wrote: 31 Mar 2017 15:45
Norbert Schlenker wrote: 31 Mar 2017 13:49 ...
Thanks to all above for an instructive discussion. I was prompted to make use of the Service Canada password I recently requested* to check on my very spotty CPP contribution history. I am way deep past the dropout limit - only about 15 years of contributions in total - and used the Holy Potato spreadsheet to (a) verify that I'm not doing myself harm by deferring and (b) comparing that calculation versus the current Service Canada estimate, which should be close to spot on as I turned 60 not long ago. The spreadsheet looks to be too low, about 7% lower than the Service Canada calculation, which is quite a discrepancy. I'm looking forward to seeing something more accurate thanks to adrian2 and longinvest. ;)
...
Could the inaccuracy come from the Service Canada projections of CPP at 65 and 70 years old? IIRC they list your CPP today correctly and then they assume you make max CPP contributions for the projections from 60 to 65 and 65 to 70. Many of us would like Service Canada to tell us our 65 and 70 year old projections using zero contributions.
It was the 60 year old "take it now" number that was 7% lower on the spreadsheet than Service Canada's estimate. I ignored the Service Canada estimates for 65 and 70, because they have no idea how lazy I am or plan to be. ;)
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by simplesimon »

So many posts here, not sure if this was posted before.

I've used this spreadsheet already, and lots of other really good stuff here.

http://pabroon.blogspot.ca/2014/03/cpp-calculator.html
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