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.


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.

    • Rob

      Hi Owen, I am on cpp disability. Cpp contribution years are dropped on years on cpp disability with no employment income. If I cash in an rrsp, $10,000 for example will it effect my cpp contribution for that year? Will it turn it back into a $0 year?

      • Owen

        Hi Rob, thanks for the question. Your RRSP withdrawal will not have any affect on CPP contributions that year, but there might be other affects you want to consider. I would recommend speaking with an advice-only financial planner before making a large RRSP withdrawal.

  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.

  4. Cathy

    Hi Owen, I was born in Canada but spent most of my career teaching overseas ( no jobs here when I graduated). I was surprised that my CPP statement says my benefits will be less when I turn 65 then the statement I had from 20 years ago. I assumed that with cost of living increases, the payments would be somewhat larger since my early career contributions were in the fund and have been there for 20 years. I am now retired at 60 and concerned that if I wait till 65 I will have even less because I have so many drop out years. I know convention says I should wait till 65 but will that have an even greater negative impact? Should I apply now or wait till 65? Any advice is greatly appreciated.

    • Owen

      Hi Cathy, this highlights one of the issues with the CPP estimate that gets sent out by the government. The CPP estimate they provide assumes that a person will continue to earn and contribute at the same average income until age 65. For anyone retiring early, taking time off work, or working outside of Canada, that estimate is unfortunately incorrect.

      The only way to get a good estimate is to take your current CPP Statement of Contributions and future expected income and estimate CPP based on the start age. We do this on the PlanEasy platform. This helps us estimate what CPP will actually be based on actual contributions and actual income.

      Taking CPP early or late is a very tough decision. It depends on many factors. For example, if you expect to receive GIS benefits throughout retirement then taking CPP early can be helpful to reduce clawbacks. If you plan on having a long and healthy retirement then delaying CPP can provide a much larger inflation adjusted “pension”.

      Here are a few previous articles that may help you make that decision, or I would also recommend booking a free Discovery call with on our our advice-only financial planners to see if there is an opportunity to take CPP now or delay…


  5. Dwayne

    When you delay CPP benefits from 65 to 70 for the 42% increase, and you already have more than 8 years of low/no income before age 65, does the decrease in benefits from non-contributing years eat up all of the 8.4% annual increase? Thanks!

    • Owen

      Great question Dwayne! This is an important consideration for those choosing to delay CPP benefits.

      From age 60-65 any zero or low earning years will act as a drag on CPP benefits if there are also 7+ zero or low earning years in the past. From age 60-65 delaying CPP will provide a benefit from the actuarial adjustment of +0.6% per month but will also create a small drag by adding additional zero earning years.

      But, from age 65-70 this is not the case because there is a special drop out provision if delaying CPP from age 65 to 70. This drop out eliminates the drag from the additional zero or low earning years between age 65-70. This means delaying CPP from age 65-70 will benefit from the full actuarial adjustment of +0.7% per month.

  6. Marina

    Hi Owen, I came to work in Canada as an older adult. My earnings from 2007 to part of 2011 are pretty low. However, from middle 2011 to present it varied from somewhere in mid 20 000 up to high 50 000s. I am planning to start my CPP in June 2023, when I’ll be 65. I see some years are dropped automatically, which to me is a concern. Although 2007-2010 certainly need to be dropped, I don’t want to lose any of my other lower earning years as I’m wondering whether that might not make CPP lower than if I just include all years from 2011-2023, seeing that I don’t have a lot of earning years.
    I had child and some spousal support before 2010, but I assume that has nothing to do with CPP contributions. Thanks for your time.

    • Owen

      Hi Marina, the CPP calculation will drop the lower earning years and lead to a higher average benefit, the calculation will not reduce your CPP benefit.

      If you’re planning to start CPP in early/mid 2023 anyway then you may want to consider starting it now in Dec 2022. Due to a quirk in the way CPP benefits are calculated it could be better to start CPP in Dec 2022 versus early 2023. Here is a Globe and Mail article with details. This may not apply in your situation but you should be aware of this unique opportunity…

  7. Colleen

    Hi there. I live in Canada. I collect a survivors CPP. But when I turned 55 I got a incurable disease. I am now turning 60 with a very low CPP survivors income. My question is. Is there another CPP survivor pension that I can apply for since my illness.

    • Owen

      Hi Colleen, there is the CPP Disability Pension that you may qualify for. I would recommend speaking with your doctor and Service Canada.


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