All posts by Financial Independence Hub

CPP timing: A case study for taking benefits at age 70

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By Michael J. Wiener

Special to the Financial Independence Hub

There are many factors that can affect your decision on whether to take CPP at age 60 or 70 or somewhere in between.  Here I do a case study of my family’s CPP timing choice.

Both my wife and I are retired in our 50s and had periods of low CPP contributions because of child-rearing and several years of self-employment.  So, neither of us is in line for maximum CPP benefits.  If we both take CPP at age 60, our combined annual benefits will be $11,206 (based on inflation assumptions described below).

The “standard” age to take CPP is 65.  If you take it early, your benefits are reduced by 0.6% for each month early.  This is a 36% reduction if you take CPP at 60.  If you wait past 65, your benefits increase by 0.7% for each month you wait.  This is a 42% increase if you wait until you’re 70.

However, there are other complications.  If you take CPP past age 60, any months of low CPP contributions between 60 and 65 count against you unless you can drop them out under a complex set of dropout rules.  If my wife and I take CPP past age 65, we won’t be able to use any dropouts for the months from 60 to 65, so we’ll get the largest benefits reduction possible for making no CPP contributions from 60 to 65.  Fortunately, CPP rules don’t penalize Canadians any further if they have no contributions from 65 to 70.

Inflation indexing

Another less well-known complication is that before you take CPP, your benefits rise based on wage inflation.  But after your CPP benefits start, the payments rise by inflation in the Consumer Price Index (CPI).  Over the long term, wage inflation has been higher than CPI inflation.  So, when you start taking CPP benefits, you lock in lower benefit inflation.

In this case study, I’ve assumed 2% CPI inflation and 3% wage inflation.  These assumptions along with the CPP rules and our contributions history led to our annual benefits of $11,206 if we take CPP at 60.

If we wait until we’re 70, our combined annual CPP benefits will be $29,901.  However, don’t compare this directly to the figure at age 60 because they are 10 years apart.  If we take CPP at 60, it will grow with CPI inflation for those 10 years.  The following table shows our annual CPP benefits in the two scenarios: early CPP at 60 and late CPP at 70.

Age Early CPP Late CPP Age Early CPP Late CPP
 60    $11,206  75    $15,081   $33,013
 61    $11,430  76    $15,383   $33,674
 62    $11,658  77    $15,690   $34,347
 63    $11,891  78    $16,004   $35,034
 64    $12,129  79    $16,324   $35,735
 65    $12,372  80    $16,651   $36,449
 66    $12,619  81    $16,984   $37,178
 67    $12,872  82    $17,324   $37,922
 68    $13,129  83    $17,670   $38,680
 69    $13,392  84    $18,023   $39,454
 70    $13,660   $29,901  85    $18,384  

 

$40,243
 71    $13,933   $30,499  86    $18,752   $41,048
 72    $14,211   $31,109  87    $19,127   $41,869
 73    $14,496   $31,731  88    $19,509   $42,706
 74    $14,785   $32,366  89    $19,899   $43,560

It would certainly feel good to start collecting CPP benefits when we’re 60, but by the time we’re 70, we’d never notice that our payments could have been 119% higher.  That’s why we plan to wait until we’re 70 for our CPP benefits. Continue Reading…

Organize your Small Business finances with these 6 steps

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By Gary Bordeaux

Special to the Financial Independence Hub

Owning a business comes with a great deal of freedom, but also with substantial financial responsibility. No matter what business you are in, making a profit is job one. The key to successful money management is organization. These six steps can help.

1.) Schedule

Set aside a block of time each day for minor operations such as scanning paper documents or entering figures into accounting software. One day each week, take an hour to monitor expenses, calculate profits and review the accounting.

2.) Separate

When you first start out, it may seem silly to keep personal funds separate from business funds. After all, you may be dealing with small amounts and infrequent activity. However, if you plan to grow the business, there will come a time when you need to know what belongs to the business and what belongs to you. It is cleaner and simpler to separate finances from the start, rather than trying to untangle your commingled funds later. Your business should have its own bank account and credit card as soon as it has a name, structure and business license.

3.) Prepare

If you have employees, you need to set aside money for several types of payroll deductions including federal income tax, Medicare and Social Security. Your state or province may require income tax and other employee taxes as well. A paystub generator can  help you and your employees keep current on state and federal requirements. Accuracy is paramount.

Avoid a surprise tax bill by setting aside a percentage of the company’s earnings from the start. Consult with a tax professional to get an annual or quarterly estimate, then reserve an appropriate amount of money each month.

This works with more than just taxes. You can prepare for any quarterly or annual expense if you know it is coming. Suppose you face an annual regulatory fee of $10,000. Simply set aside $833 each month, then when the bill comes due you can pay with ease. Even better, automate the process by having your financial institution sweep the $833 from the debit account to savings on the same day each month.

4.) Track

You need a good filing system, either paper or digital. A functional system allows you to retrieve information easily and quickly. It should be simple and intuitive, yet flexible enough to grow with your business. General categories may include: Continue Reading…

Long-term investors tiptoeing back into Emerging Markets

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Franklin Templeton/Getty Images

By Andrew Ness, Franklin Templeton Investments

(Sponsor content)

The COVID-19 pandemic has tested health systems, social and economic structures throughout the world this year. Global financial markets took a hit during the severe downturn last spring, and emerging markets typically bore the brunt of negative sentiment as investors sought safety above all: first to be abandoned and slower to recover.

Over the past six months, a renewed appetite for risk has brought investors back to emerging markets. But as the second wave of the pandemic takes its toll on economic activity over the next few months, will they stay?

Defying stereotypes

Historically, emerging markets have been lumped together at the far end of the risk/reward spectrum, outperforming developed markets in good times but substantially underperforming in bad. The perception of unpredictable politics, unsatisfactory governance and unhealthy levels of debt has lingered since the 1980s. This misperception attracts speculators who ride the market up, make a quick profit and sell off just as quickly.

We would argue that this is a mistake. From our vantage point as veteran investors ― not speculators ― in the emerging markets, we see that traditional perceptions and today’s realities do not always match up. Closing the gap reveals long-term growth opportunities in resilient, but less familiar, businesses.

Which one is the mature market?

Emerging market businesses have evolved from the early days, when opportunities were limited and difficult to access, and the years when successful companies were primarily tied to the commodities boom. Today, companies domiciled in emerging markets are increasingly at the leading edge of technology and innovation. Corporate governance has improved, and global accounting standards have made company finances more transparent. Greater re-privatization and allocation of more private capital are signs that investors are making more long-term commitments to these markets.

No one has a monopoly on entrepreneurship, and as the pandemic has starkly revealed, some “developing” countries are proving more resilient and better able to manage the pandemic than their ostensibly more developed counterparts.

Emerging markets are not monolithic

While countries like China and India offer a large opportunity set, smaller nations such as Korea, Taiwan, Mexico and Malaysia also harbour great opportunity and have proven their resilience during the pandemic. For example, glove manufacturers in Malaysia have recently seen a dramatic surge in demand, driven by COVID-19. We believe it is important to keep an open mind and cast a wide net.

Emerging Asia, the first area to experience the pandemic, may also be the first to recover. In the last quarter, for example, stocks in China rose as its economic resurgence gained pace, with industrial production and retail sales beating growth expectations in September. Strong corporate earnings led Taiwan’s market advance and robust technology exports contributed to that economy’s third-quarter rebound. In Indonesia, the government relaxed coronavirus curbs in Jakarta and passed a job creation law aimed at reducing regulations and boosting investments: all in the space of a single quarter.

Beyond the pandemic

As the prospect of a vaccine providing immunity to COVID-19 grows brighter, those with a longer-term vision are looking beyond the pandemic to economic recovery and opportunities for meeting other global challenges: climate change, overpopulation, disappearance of habitat and biodiversity, among others. We think emerging market companies will be an integral part of the solution. Continue Reading…

4 simple tips for building your Nest Egg and Retiring Early

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By Lisa Bigelow 

Special to the Financial Independence Hub

Retirement! For many of us, it’s an event so far in the future that it almost seems unreal. Taking active steps to plan and invest for the “golden years” feels unnecessary.

Yet as anyone who’s lived through their 30s and 40s can share, those decades go by quickly. And if you want to retire early, the worst thing you can do is wait to start saving or unintentionally sabotage your portfolio.

Long story short, if you want to retire early (and wealthy), you’ll want to start now. But what does “start” mean when it comes to saving for retirement?

The answer is surprisingly complex. The good news is that learning how to build your nest egg won’t consume all of your free time. With attention and discipline, you can retire early: so let’s get started.

1.) Visualize your future and figure out what that costs

You wouldn’t renovate your kitchen without choosing a style and establishing a budget. Think of building your nest egg the same way: you need a goal and a plan to get there. Sure, you know you want to retire early. But what does retirement look like for you once you’re there? Do you want to travel? Live in your hometown? Play bridge? Take piano lessons? Visualizing your retirement home base and how you’ll spend your free time will help you set your savings goal.

Envisioning a loose plan for what you want your post-work life to look like is a great start. But you’ll also need to take into account inflation and investment returns, among other factors. AARP’s retirement calculator can help you understand where you’ll need to be financially in order to achieve your goal. It will also help you prioritize the actions you’ll want to take now so you can actually get there later.

2.) Pay off debt and reapply the payments

Debt is a normal part of life for most Americans. Buying a home or paying for college often requires taking out a loan, and so does starting a business. Borrowing responsibly in these areas can help you get ahead financially, but other kinds of debt, like high-interest credit card payments, can hinder your retirement savings efforts.

First, if you have education debt and think the scholar-”ship” has sailed, think again. There are actually scholarships that pay off education debt for borrowers who have already graduated. And if you have excellent credit, you can also look into refinancing your student loans.

If you have credit-card debt, personal loans, or other high-interest payments, prioritize paying off those balances in full. If the payments were manageable for your budget, repurpose those payments into building your nest egg instead. Bonus: once you’ve paid those debts, your credit score will probably rise. And that helps you qualify for lower rates when refinancing or taking out a new fixed or adjustable-rate mortgage.

3.) Get sneaky with microsavings so you can live life along the way

Small dollars add up fast. That’s great news for people who want to enjoy life and save for retirement at the same time. If you’re aggressive with microsavings, you’ll have an easier time affording life’s little niceties and still be able to save for retirement at the same time. Continue Reading…

Canadians turn to digital advice amid Covid uncertainties

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By Michael Walker, Royal Mutual Funds Inc.

Special to the Financial Independence Hub

In today’s digital world, we haven’t forgotten the importance of ‘old school’ methods to help people keep on top of their finances. Every November, as part of National Financial Literacy month, financial planners across the country talk to Canadians about the importance of having a plan in place to guide their financial future; one that takes into account the unexpected and which can be adjusted as lives change. You can make a plan on a pad of paper, you can create it on your laptop, your tablet or your mobile device. The important thing is to set it down so you can review it and make adjustments as your life changes.

What’s proving to be a real game-changer, however, is the access Canadians now have to financial advice through digital channels: particularly now, when economic uncertainty due to COVID-19 has many Canadians asking what lies ahead for their financial future.

Canadians who have seen their savings and investments negatively impacted by the pandemic have been seeking reassurance about what lies ahead for their financial future. They want to know how their retirement plans have been affected; will they need to work longer than expected? How can they rebuild their ‘just in case’ fund? Will they still be able to contribute to RESPs for their children or their grandchildren?

Increasingly, as physical distancing has meant Canadians are unable to meet in person with their financial advisors, we’re seeing Canadians turn to digital means to get answers to their financial questions. We already had well-established digital channels at RBC providing digitized advice and insights in place ahead of the arrival of the pandemic. When the number of clients seeking digital advice surged, we were able to quickly respond to their needs and not only provide digitized advice, but also connect clients remotely to our advisors.

Free digital advice accessed 24/7 from home or office

MyAdvisor – only available at RBC – is a key example. This free digitized advice service helps clients create a personalized plan online and provides access to the expertise of our advisors – all from the comfort of their homes and workspaces. Clients can readily view a complete picture of their financial accounts – even those held at other banks – on interactive screens. They have real-time, 24/7 access to their personalized plan through MyAdvisor’s digital dashboard and can see the impact of their money decisions before they make them. They also can get the advice they need, when they need it, by connecting with one of our advisors in their local community through live video, phone and, where possible, in person.

To give you an idea of how many Canadians are now seeking digitized advice supported by the expertise of our advisors, there are now over two million clients connected through MyAdvisor: twice the number as last year. Between April and September of this year, the number of clients logging in increased 21% and video appointments jumped to 20% from 2%. During that same timeframe we also saw a huge increase – 80% – in completed appointments, where clients went beyond logging in to look at their financial picture; they booked appointments and then met with our advisors. Continue Reading…