For most of us, retirement is a long way off. That shouldn’t stop you from thinking about your retirement plan. Having a solid retirement plan usually means starting early. Having a rough retirement plan in your 20’s and 30’s can help alleviate a lot of financial worry.

A big part of retirement planning revolves around government-run retirement plans like Canada Pension Plan (CPP) and Old Age Security (OAS).

The goal of CPP is to replace around 25% of your income in retirement, up to a maximum amount of $13,370/year, a figure that increases with inflation each year.

The 25% figure is rough because there are many factors that could affect your CPP. Being aware of these factors will help you create a good estimate of your government benefits in retirement. Knowing how much you’ll receive from the government will then help you estimate how much you need to save yourself.

Actual CPP Payments Are 38% Below Max

You don’t want to plan for the maximum CPP only to learn that you’ll be getting less. The average CPP benefit in 2017 is $8,221/year. That’s 38% below the max of $13,370/year.

Simply planning for the max CPP could get you into a lot of trouble. Your annual retirement income could end up short by over $5,000 per year! That’s a huge gap to make up.

On the flip side, you don’t want to plan for a lower CPP benefit only to learn you’ll be getting much more. This could lead you to save too much money for retirement.

Saving too much for retirement means you’re needlessly delaying spending that you could be enjoying today. There’s a balance between spending today and saving for tomorrow.

When estimating your CPP benefit there are a few factors to consider.

(If you want help calculating your CPP benefit give PlanEasy a try. We handle all the tough calculations to give you a CPP estimate based on your unique situation).

Factor #1: Your Income Before Retirement

Income is the largest factor in determining your CPP benefits. If you earn above a certain amount, something called the “maximum annual pensionable earnings”, then you’ve got a good chance of getting the max CPP (not considering the other factors below of course).

CPP is designed to replace approximately 25% of your income up to the max. For 2017, the maximum annual pensionable earnings is $55,300/year. This amount increases with inflation each year. Above this amount any extra earnings won’t count towards your CPP (thankfully you also stop making the 4.95% contribution after crossing this amount too).

If you make above $55,300 and continue to do so until retirement then you’ll likely get the maximum CPP.

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Factor #2: The Type of Income

One mistake people sometimes make is that they think all types of income count towards their CPP contributions.

In fact, for most people it’s only employment income that counts towards their CPP. Income from investments or rentals doesn’t count. Here is a detailed list of payments that require CPP deductions.

Individuals who are self-employed need to make both the employee and employer contribution (a total of 9.9% of income) otherwise this income won’t count towards future CPP benefits.

To get an idea of your past earnings and CPP contributions you can get your Statement of Contributions from Service Canada.

Factor #3: Number of Low Earning Years

Did you know that CPP is based on your earnings from the age of 18 all the way until retirement but it ignores a certain percentage of your low earning years? This is called the general drop-out provision.

You’re allowed to drop 17% of the lowest earning months between the ages of 18 and the date you start receiving CPP. For someone who retires on their 65th birthday, they’ll be able to drop 8 of the 47 years between ages 18 and 65. Those years are dropped automatically when the government calculates thier CPP benefit.

Knowing this can greatly improve the accuracy of your retirement planning.

For example, quitting work at age 60 but delaying CPP until age 65 will eat up 5 of the 8 years you’re allowed to drop.

Low earning years during university and then grad school could eat up 6 of the 8 years you’re allowed to drop.

If the number of low earning years is greater than 17% that can lead to a lower CPP benefit.

Factor #4: Years Spent Caring for Small Children

Parents who are the primary caregiver for small children get a special drop-out when calculating CPP.

If you had (or plan to have) low earning years while caring for a child below the age of seven then you’ll get a special drop-out called the Child Rearing Provision.

These low earning years will be dropped from your CPP benefit calculation. This means you could still receive the maximum CPP (provided you consider the other factors as well) even if you had low income for a long period of time while caring for your small children.

If you have been (or are planning to be) a stay-at-home parent this can make a big difference to your retirement planning.

My wife is the primary caregiver for our two small children. The child rearing provision will allow her to drop a total of 9 low earning years from her CPP calculation. Depending on the other factors this could increase her CPP benefit by $2,500 per year in retirement!

Owen Winkelmolen

Owen Winkelmolen

Founder of PlanEasy Inc.

An avid traveler, father and personal finance expert. Owen's goal is to make financial planning easy. He believes that objective and straightforward financial planning is something that every Canadian should have access to. Find out why.


  1. Passivecanadianincome

    Nice post Owen. Good to know. I had no clue. I really wonder though if cpp will still be around when I retire 20-30 yrs from now. The baby boomers will probably use up the money in the fund. I saw some stat awhile ago that there will be more people pulling cpp then putting it in when the boomers retire.

  2. Bob Lin

    Factor #5: Resided in Another Country During Working Years

    I guess the factor title says it all. I’ve yet to discover what the impact will be on our CPP as we’ll only have made about 23 years of contributions due to our arrival in Canada in our 30s, and our planned pre-60 retirement.

    We are however, entitled to a pension from our former country for the years that we worked there.

    • Owen

      Great point Bob!

      CPP is a contributory pension program, so impact can be as simple as counting those years as non-earning years. This means you’ll receive less CPP but this should be made up somewhat by the pension from your former country.

  3. Patricia

    Hi Owen,
    I left Canada for a decade and did not earn a pension in the US (had a business with husband). Would this count as a drop out period or must there be qualfying reason, such as education? Was not child-rearing during this time.

    • Owen

      Hi Patricia, sorry for my late reply! Was in Barbados for a few days.

      CPP is entirely based on contributions and we all get a standard 17% “drop out” for the months between age 18 and age 65 (or the age you start CPP if before age 65). These drop outs automatically cancel your lowest earning years starting with the years you made $0 contributions to CPP.


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