By Matthew Ardrey, T. E. Wealth

Special to the Financial Independence Hub

The rules on how CPP works changed as of January 1, 2012 with full integration of the changes to be implemented by this coming January (2016).

As this is a part of almost every Canadian’s retirement, it is important for everyone to have a good understanding of how to maximize this government benefit.

What is the best age to take CPP?

This is a common question from many people approaching retirement. How will these changes affect when you should take the pension to maximize the benefits payable to you?

First, a brief look at the changes implemented. Previously, if you chose to take your CPP early or defer past age 65 the reduction or increase in your pension was 6% per year, or 0.5% per month, to a maximum of 30%. Upon full implementation, the reduction for taking CPP early will be 7.2% per year, or 0.6% per month, to a maximum of 36%. The increase in pension from deferring, which is already fully implemented, is 8.4% per year, or 0.7% per month, to a maximum of 42%.

From a purely mathematical perspective, the following are the breakeven points for taking CPP under the new rules. We will touch on how your personal retirement circumstances may effect this decision in a later blog.

If the effects of inflation are ignored, by the time the pensioner reaches age 73, the total CPP received is greater by taking it at 65 instead of 60. Similarly, by deferring CPP to age 70, the total CPP received is greater when the pensioner reaches age 81 than if taken at 65. If inflation of 2% is factored into the calculation then the breakeven ages drop to just before 72 and just after 79 respectively.

What happens if I keep working after taking CPP?

Continue Reading…

By Douglas Hoyes

Special to the Financial Independence Hub

You may find yourself with both debt and accumulated RRSP savings. This often happens when people are enrolled in automatic savings programs at work or when debt accumulates due to illness or time off work late in life.

You may wonder if it makes financial sense to cash in your RRSP to pay off your debt. Every situation is different, so there is no one correct answer that will apply in every case, but there are two main factors to consider:

• Your expected return versus the cost of debt; and
• The size and type of debt you carry.

Perhaps the most important factor will be the return you expect to receive on your RRSP versus the interest you are paying on your debt. The higher the interest you pay on your debt, the more likely it is that you will want to consider using your RRSP to pay off your debt. For example, if you owe $10,000 on credit cards with a 20% interest rate, and you are earning 1% in a GIC in your RRSP, cashing in your RRSP to pay off the debt, and saving  20% interest, may make sense.

Taxes may complicate calculations

Of course, the math is not quite that simple because taxes must also be considered. If your marginal tax rate is 50%, you need to cash out $20,000 from your RRSP to generate the $10,000 required to pay off your debt.

That leads us to the next consideration. Will withdrawing funds from your RRSP solve your debt problem and will you have time to replace those savings before retirement? $10,000 in debt may appear to be a manageable amount, but what if you have $70,000 in unsecured debt (which happens to be the amount owed by seniors when they became insolvent in our recent Joe Debtor study)?

In many cases, individuals can be insolvent even while having savings inside their RRSP. If your only significant asset is your RRSP, and if you don’t have the income to service your debt, another option to consider may be a consumer proposal or personal bankruptcy.

What if you go bankrupt?

But if you go bankrupt, don’t you lose your RRSP?

In most cases, no. Continue Reading…

By Catherine Swift

Special to the Financial Independence Hub

The campaign of Working Canadians to save the $10,000 limit on Tax-free Savings Accounts is really gaining momentum.

We have always known Canadians love their TFSAs for their simplicity, flexibility and as a valuable tool to permit tax-efficient retirement savings.

Just this week our campaign was bolstered by an Angus-Reid public opinion poll, which reveals that the promise by the new federal government to reduce the TFSA limit is opposed by a majority of Canadians. So of the 11 million who have money in a TFSA, more than 5.5 million of them like the higher limit of $10,000 implemented by the Conservative administration earlier this year.

As well they should. The facts have convincingly shown that the justifications the Liberals claim to support the limit reduction – that “TFSAs are mostly a tool for the rich and cost the treasury too much in foregone revenue” – are just plain wrong.

All we want is pension parity for the middle class

Continue Reading…

By Som Seif

Special to the Financial Independence Hub

I think we can all agree that investing in the U.S. stock market is a valuable exercise. There are global companies in the U.S. that are great long-term stocks that we should own as well as important diversification benefits that Canadians achieve by investing away from Canada.

Canadians like to invest at home, but what we really need to understand is that Canada’s stock market is one big illiquid sector bet. Our market is dominated by three major sectors – financials, energy and commodities. On the other hand, the U.S. stock market is huge, with deep and broad representation across all the major industry sectors. That said, investing in the U.S. comes with a unique challenge that you don’t have when investing at home: currency risk.

There are two ways to approach fluctuating currency when investing in the U.S. market. The first is to adopt a thesis by which you buy into the U.S. market knowing and accepting that there will be times when the U.S. dollar strengthens or weakens versus the Canadian dollar. The second is to use a currency hedge solution. There are advantages to each approach.

To hedge

For those of us who are individual investors, hedging is generally not a good option. You need to accept the currency risk when investing in individual U.S. stocks. Continue Reading…