Working past 65 is the duct tape of retirement planning.

It’ll fix a lot of problems. If you were unable to save enough to retire, working past 65 helps you put more money away and reduces the number of years you’ll draw on your savings. Working longer can also add to your Canada Pension Plan retirement benefits, which means more guaranteed, inflation-protected money for as long as you live.

“If you work after age 65, you can really increase your CPP quite a bit,” said Doug Runchey, a pension consultant and co-creator of an online CPP calculator.

You’ve read lots of coverage from our personal finance and investing team on how delaying the start of your CPP benefits from 65 to as late as 70 can increase your retirement benefit by as much as 42 per cent. But if you delay and keep working, you can potentially build an even bigger benefit.

CPP retirement benefits are calculated using your annual income between the ages of 18 and 65. You can drop out eight of your lowest-earning years, which means 39 of the 47 years from 18 to 65 are under consideration. You may also be able to drop up to seven or so years if you take time off to raise your children.

Even with the drop-out years, the calculation of your retirement benefit typically reflects a mix of low- and higher-earning years. This explains why the average monthly CPP retirement benefit for new recipients last fall was $758.32, which was $548.25 less than the 2023 maximum of $1,306.57.

Your CPP retirement benefit can only increase by working longer, by adding higher-earning years into the calculation of your benefit and through the 0.7-per-cent increase in your benefit for every month you delay from 65 to 70. Mr. Runchey said low earnings from employment past the age of 65 have no effect on the calculation of your benefit.

The average retirement age rose to 65.1 years last year from 61.6 years in 2000, but early retirement is still on the minds of a lot of people. You can start CPP as early as 60, but that means a reduction in your benefits of up to 36 per cent. There’s yet another way your CPP benefits could be negatively affected if you retire before 65 – think of it as the reverse of how working longer can get you closer to the maximum retirement benefit.

Each year you’re retired before 65 is a zero-earnings year, and this can affect the calculation of your benefits if you plan to start CPP at 65.

Retiring at 60 and collecting CPP at 65 means adding five zero-earning years to the calculation of your benefit. If you earned a high salary from the start of a career that began in your early 20s, then retiring early might still leave you with the maximum benefit you’d qualify for at 65. But if that’s not the case, then retiring early could very well produce a lower CPP benefit than if you wait until 65.

It might sound like the problem for early retirees is delaying CPP and thereby adding zero-earnings years. What if you start CPP immediately upon early retirement – would that give you the best chance at maximizing benefits?

Mr. Runchey said you still do better as an early retiree if you wait until 65 or later to start your benefits. Essentially, the loss of 0.6 per cent of your benefits for every month you start CPP before 65 costs you more in the end than adding more zero-earnings years to the calculation of your benefit.

Author: Rob Carrick for The Globe and Mail