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When collecting disability, retiring early is an option. But find out how that can impact disability income and retirement plans.
I have a brain injury and I’m collecting CPP disability of $15,000 a year, along with a workplace disability income of $16,000 a year. I am 61 years old, married, and I can’t figure out if I should retire now and start my pension or wait until I turn 65. My pension projections show that, if I retire now, I will get $29,905 a year, indexed, dropping to $20,034 a year at age 65. If I wait to start my pension at age 65, I’ll get $23,034 a year. I’m told that if I retire now and start my pension, my workplace disability income will stop. But I’m not sure what will happen to my CPP disability pension. Should I retire now and start my pension or wait until age 65?
—Wilma
Wilma, to summarize, I will try to answer these two questions for you:
Let’s deal with your CPP question first. To qualify for and maintain CPP disability income, your disability must regularly prevent you from doing any type of substantially gainful work. “Substantially gainful work” is defined as earning income. Essentially, if you earn more than $18,503, the maximum CPP DI benefit for 2023, you will most likely be cut off.
There is a grey income earning range between $6,600 and $18,503 a year, in which your CPP DI may be reduced or even eliminated. In this range, it is difficult to estimate the impact on CPP DI because CPP deals with people on a case-by-case basis.
The good news for you, Wilma, is that CPP uses earned income as the measure of your ability to work and earn an income, and not passive income. Passive income is basically the income you didn’t have to work for to receive. That includes company pensions, registered retirement savings plan (RRSP) and/or registered retirement income fund (RRIF) withdrawals, rental property income, and so on. With a few exceptions, passive income will not affect your CPP.
So, the answer to your first question is: Yes, your CPP disability income will continue if you retire now and start to collect your pension.
Now, is that what you should do? Like most things concerning money and retirement, it depends on factors like math, your lifestyle and spending behaviours, tax and group health benefits.
If you retire and start your pension now, you will be replacing $16,000 a year with $29,905 annually for the next four years, before you turn 65. That’s an extra $13,905 a year, or an additional $55,620 over four years.
After 65, your lifetime pension will be $20,034 a year, rather than $23,034, if you waited until turning 65 before retiring. So, after age 65 you will have $3,000 less a year in today’s dollars. If I divide that $3,000 into $55,620, that tells me it will be 18.5 years before the pension pays out the same amount of money if you retired now rather than later at 65. That makes age 79 the break-even point for you. The best mathematical choice for starting your pension is at age 65 should you live beyond age 79.
A few things will shorten or extend the break-even point, though. For example, you may save and invest the additional $55,620 you earned by starting your pension now. Do that and the break-even point will extend beyond age 79.
My question for you is: Is that what you want to do? Wouldn’t you prefer to spend or enjoy the extra $55,620 now, rather than save it for the future? And will you need the extra $3,000 a year after age 65?
There’s research that suggests most couples reduce their annual spending by 2.4% every year after age 65, meaning that you may not need that extra $3,000. You will have your CPP, Old Age Security (OAS), your pension, and whatever other income assets your partner may have.
Speaking of your partner… You should consider taxes and pension splitting. As a couple, you will want to look for ways to reduce the tax paid by the higher earning partner. One way to do this is through pension splitting. Is there enough of a difference in you and your partner’s income that your marginal tax rates are different? If so, then there may be a pension income splitting opportunity which may be affected based on your retirement date. Check with your advisor.
What may be a larger consideration is what happens with your group health benefits once you retire. I don’t know if you are paying for group benefits now, but it is very possible you will be paying for the benefits once you retire. Any payments you make will reduce the extra pension income received between now and 65 and reduce your break-even point.
Which best matches your lifestyle and need for security? To keep things simple, ask yourself if you’d like the extra income today to enjoy, or if you’d want to give it up so you could have an extra $3,000 of income from 65 on.
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Wouldn’t be important to note that CPP Disability stops at age 65 and is automatically converted to CPP (unless you ask for the start of regular CPP to be delayed creating a few low income years if need be for tax efficiency for drawing down some RRSP)?