Because the Financial Independence Hub was moved Monday to a new server to accommodate ever-rising volumes of web traffic, we took the liberty of posting the normal Monday “Hub” blog at sister site FindependenceDay.com. The guest blog below is on optimizing CPP benefits: the same subject as my Financial Post column that ran online Monday under the headline: Optimizing Your CPP is no trivial exercise. Now let’s get it from the horse’s mouth: Doug Dahmer. — Jonathan Chevreau
By Doug Dahmer, Emeritus Retirement Income Specialists
Special to the Financial Independence Hub
Canadians are an easy going and trusting people. Every year thousands of people, across the country, carelessly start their CPP payments and in the process forego hundreds of thousands of dollars in payments to which they are entitled.
I call this “The Great Canadian Pass Up.”
To ensure you fully appreciate the value of making the right decision, before you elect to a start your Canada Pension, Emeritus Retirement Income Specialists has created a powerful tool called the CPP Optimizer. Give it a try at: www.cppoptimizer.com.
Most people seriously underestimate their lifetime CPP income entitlement:
Your CPP benefits are a big deal. For a couple, where both spouses have regularly contributed to the CPP plan, the lifetime CPP income they can anticipate will likely exceed $700,000. Consequently it represents an important strategic contributor to the creation of a sustainable retirement income. Therefore, decisions about this benefit need to be taken seriously.
Reliance upon “conventional wisdom” can be very costly
The Canada Pension Plan was introduced in 1965. Over the subsequent 48 years, the rules surrounding the calculation of your benefit entitlement remained virtually unchanged. It is little wonder that conventional wisdom of when to start to collect your CPP became deeply entrenched and readily available.
The rules have changed
However, in 2012 the rules around CPP changed, with little fanfare and even less understanding of the full implications.
If you are a couple, the real confusing news is that your specific choice of start dates can have a significant and unanticipated impact upon how much your surviving spouse receives as widows allowance. Since wives, in general, continue to outlive their husbands, they become the unfortunate beneficiary of the outcome of a less than optimal choice.
The value of making the right decision often exceeds $100,000.
The cumulative difference between selecting your optimal CPP start dates versus an uninformed poor decision, often exceeds $100,000. Unfortunately, like a magnet, outdated and dangerous conventional wisdom is drawing people toward selecting start dates that are far from optimal.
There are no “Un-Do” buttons
Since there is no undo or redo button, once you begin to collect your CPP, far too many people do not recognize their error until after they have no recourse. They then spend the rest of their lives looking back in regret at the significant sum of money they unintentionally left on the table.
Seldom is one spouse’s start date the best start date for the other.
Previous generations grew accustomed to simply starting their CPP as soon as their employment years ended. After all, the sooner you start, the longer you collect, the more you are likely to receive. That may seem logical, but it is now seldom the best answer.
Don’t get me wrong: longevity continues to be a very important variable when determining each of your optimal start dates. While none of us know how long we will live, it is definitively beneficial to make an educated guess as part of the optimization process. This is particularly relevant if you anticipate a long interval where a surviving spouse will be left fending for them self.
In these situations the relevance of the complex rules relating to the amount a surviving spouse is entitled to becomes extremely significant.
Getting the Best Answer is Important – But Not Easy!
Attempting to determine your optimal start dates, on your own is far from easy. The number of complicated mathematical calculations that need to be completed is daunting: individually each partner has a total of 121 start date options to choose from– every month between the month they turn 60, through to their 70th birthday, inclusive.
However, as a couple, the permutations of one partner’s 121 choices with the other partner’s 121 choices explodes into a whopping 14,641 different combinations of start dates that need to be considered if you want a comprehensive analysis. If this is overwhelming, the complexity of the survivor benefits make it even more difficult.
Take the daunting and make it do-able
Emeritus as part of its C3 Retirement Income Planning Process has developed the CPP Optimizer tool to ensure you get your best answer quickly and easily.
Visit www.CPPOptimizer.com or Google: CPP Optimization.
It has made this tool available on a complimentary basis to help generate awareness of, and credibility for, the value a Retirement Income Specialist can add to the second half of your life.
Many opportunities for making “Better Decisions”
Optimizing your Canada Pension Plan is simply the first of a long list of opportunities we look to, to discover how our clients can make better decisions. Better decisions on important issues which ultimately lead to hundreds and hundreds of thousands of incremental dollars of income and net worth during your draw down years. CPP Optimization represents the low hanging fruit. The financial benefits really start to get exciting once we begin to incorporate better decisions as they relate to tax planning during your draw down years. Again, retirement tax planning is an area where conventional wisdom is leading people astray.
Make the best decision
In closing, please be sure to give your CPP benefits the respect they are due. Start by discovering the value of making the right decision. Feel free to contact us. You will be engaged in a short discussion of due diligence to ensure that all important elements have been given proper consideration. Then you can receive your prescribed optimal start dates.
With a little work, thought and the right tools you can get much closer to maximizing the benefits you are entitled to.
It will be the easiest money you didn’t pass up.
It will be the easiest money you didn’t pass up.
Doug Dahmer, CFP, is founder and CEO of Emeritus Retirement Income Specialists. With offices in Toronto and Burlington, Emeritus’ C3 process is one of the industry’s most comprehensive retirement planning processes.