All posts by Jonathan Chevreau

Inflation is getting to retirees and some pre-retirees, Fidelity survey finds

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2024 Fidelity Retirement Report (CNW Group/Fidelity Investments Canada ULC)

More than four in five (82%) Canadian retirees say inflation is having a negative financial impact on them in retirement, according to a just-released report from Fidelity Investments Canada ULC.

The 2024 Fidelity Retirement Report also found that 43% of pre-retirees say the rising cost of living is delaying when they think they will retire. In addition, 59% of retirees report helping their non-student adult children in retirement: both with day-to-day expenses as well as big-ticket items like home purchases, weddings and even education savings for their grandchildren.

“It comes as no surprise that retirees are feeling the bite of inflation. Other macroeconomic issues such as a slowing economy, rising rates and volatile markets are also common factors that have negatively affected retirees financially,” says the report, “Pre-retirees are also feeling the pinch. We find that compared with last year, a larger share of pre-retirees are considering delaying their retirement in response to the rising cost of living.”

As you can see from the graphic below, the percentage of pre-retirees who plan to retire later than originally expected rose from 37% in the 2023 survey to 47% in the new 2024 edition.

While less than a third of those already in retirement have worked in some capacity once they have left full-time work, most pre-retirees anticipate that they will work at least part-time once they’re retired, according to the report.

While Fidelity cites rising inflation as one reason for this trend, it also says “most pre-retirees would like extra money for recreational purposes.” Further, the report says, “We also find that there isn’t a clear relationship between those working in retirement and their level of household income, suggesting that in general, many Canadians may be working or anticipating working to maintain a higher material standard of living, rather than just to keep up with the rising cost of essentials.”

 

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Retired Money: How to double CPP benefits while also hedging against inflation and longevity

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My latest MoneySense Retired Money looks in more detail at the National Institute of Ageing’s recent series of papers on CPP (and OAS). As the Hub reported on April 11th, few Canadians are aware that delaying CPP benefits to age 70 can more than double (2.2 times actually) eventual monthly benefits compared to taking it early at age 60. That blog reproduced a chart from the NIA that showed just how much money Canadians are leaving on the table by NOT deferring benefits as long as possible.

The other major chart from the NIA paper is reproduced above, showing just how important most retirees view the guaranteed inflation-indexed income that CPP and OAS provide. As the new column points out, for many retirees — especially those who worked most of their careers in the private sector and don’t enjoy a Defined Benefit employer pension — CPP and OAS are the closest thing they’ll have to a guaranteed-for-life inflation-indexed annuity.

The new MoneySense column focuses on how delayed CPP benefits not only generate higher absolute amounts of income  but also carry with it the important related benefits of more longevity insurance and inflation protection.

You can find the full column by clicking on this highlighted headline: How to double your CPP income.

It features input from several well-known retirement experts, including noted finance professor and author Dr. Moshe Milvevsky, retired Mercer actuary Malcolm Hamilton, author and semi-retired actuary Fred Vettese, TriDelta Senior Financial Planner Matthew Ardrey and the lead author of the NIA report, Bonnie Jean MacDonald.

Delaying CPP is “the best annuity-buying strategy you can implement.”

Milevsky sums it up well, when he says “delaying CPP is the best ‘annuity-buying strategy’ you can implement. Everything else is just Plan B.” Audrey makes a similar point: CPP is “an annuity and an indexed annuity at that … This helps protect the purchasing power of this income stream through retirement. Many people wish they had an indexed DB [defined benefit] pension and in fact we all do. It is the CPP.”

You’ll probably see much more press on this topic as the NIA is releasing a paper each month between May and December. May 8th will be general education on the Canadian retirement income system while July 17th will explain the mechanics of delaying CPP (and QPP) benefits.

Federal Budget 2024 features $53 billion new spending over 5 years; rise in capital gains inclusion rate for wealthy

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Prime Minister Justin Trudeau’s 8th federal budget features $52.9 billion in new spending over five years, according to the CBC.

You can find the 430-page budget — titled Fairness for Every Generation — at the Department of Finance website here.

Released at 4 pm Tuesday, the wealthiest 0.13% of Canadians will be hit with a higher capital gains inclusion rate: as of June 25, the inclusion rate will rise to 66% for capital gains  in excess of $250,000 a year, and this will also apply to corporations.

You can find details at the Globe & Mail’s coverage here. (may only be viewable by subscribers.) For those who can’t access, it says:

“The budget doesn’t make any changes to income tax rates, nor does it include an explicit wealth tax. Instead, the tax hikes are focused on capital gains … as of June 25, the inclusion rate on capital gains realized annually above $250,000 by individuals – and on all capital gains realized by corporations and trusts – will rise from one-half to two-thirds.­”

The lifetime capital-gains exemption for Canadians will rise from $1-million to $1.25-million, the Globe says, and “The total capital-gains exemption from the sale of a principal residence will not change.” Speaking on CBC, G&M columnist Andrew Coyne called it an “underwhelming” document.

Coyne’s G&M column on the budget bore the scathing headline A government with no priorities, no anchors, and when it comes to growth, no clue. Subscribers can read it here.

A typical passage from his piece:

“…. there is not a single measure in the budget aimed at boosting investment generally – as opposed to the usual slew of measures aimed at diverting investment

into the government’s favoured sectors: artificial intelligence, ‘clean’ technologies, and so on.”

Jamie Golombek’s take on Taxes

Here is  what CIBC Wealth’s tax guru, Jamie Golombek, had to say in the Financial Post.

The federal budget released on Tuesday did not contain a general tax rate increase for the wealthy, but the government did announce that the capital gains inclusion rate will be going up and it amended the draft alternative minimum tax rules in response to concerns of the charitable sector .

On the rise in the capital gains inclusion rate, Golombek says “the $250,000 threshold will apply to capital gains realized by an individual, net of any capital losses either in the current year or carried forward from prior years  .. Capital losses carried forward from prior years will continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This effectively means that a capital loss realized at the current 50 per cent allowable rate will be fully available to offset an equivalent capital gain realized after the rate change.”

MoneySense’s Jason Heath

Fee-only financial planner Jason Heath penned this insightful analysis for MoneySense. He covers everything from the higher capital gains inclusion rate to impact on entrepreneurs, housing, renters and much more.

Rob Carrick’s Personal Finance report card

G&M personal finance columnist Rob Carrick created a personal finance Budget report card here. He gave Taxes a C-minus grade, Housing a B, Junk Fees a C and Open Banking a D, and Saving for postsecondary education an A.

On the other side, the Finance department says an Improving economy means higher tax revenue: $20 billion in new revenue in five years. The $40 billion deficit is projected to stay more or less pat till 2025/2026, after which it starts to inch down.

$46 billion next year on payments on the Debt

Here’s initial coverage of the budget from National Post. There, it reports that Ottawa will spend $480 billion next year, including $46 billion in payments on the national debt. Among the highlights mentioned:

“Among the new spending is more money for home building, including tax measures that allow first time buyers to take more money out of their RRSP for a down payment and to delay when they start repaying the money.There is also $1.1 billion for interest-free student loans and grants, more funding for the Liberal daycare program and for the first phases of national pharmacare that will cover insulin and contraceptives. There is also funding for a new disability benefit and money for artificial intelligence research.”

Mix of Bad Economics and Bad Politics

Also in the National Post, Philip Cross dubbed the budget “a continuation of the Trudeau government’s orgy of spending financed by debt and higher taxes.”

Sample passage:

“Besides being bad economics, the government’s massive spending is bad politics because it antagonizes most provinces without any obvious electoral return from its spending.” Continue Reading…

Should Millennials prioritize paying down Debt over saving for Retirement?

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Image via Pexels: T. Leish

Paying down Debt versus Saving for Retirement has always been one of those conundrums facing every generation.

As a semi-retired baby boomer myself, I was a bit late to both the housing party and Retirement savings exercise.

Once I got married in my mid 30s, buying a house and paying down a mortgage was our priority, although two reasonable incomes made it possible to do both: pay off mortgage debt while also saving for retirement and enjoying some tax savings through the RRSP.

Certainly, I’ve always believed paying down debt on high credit-card interest is a priority, certainly over TFSAs. I think TFSAs are great but it’s hard to beat the guaranteed return of paying down interest being charged at 20% or so per annum.

Mercer’s latest Retirement Readiness Barometer

Now a new report from Mercer Canada released earlier this week — the fifth annual Mercer Retirement Readiness Barometer (MRRB) —  warns that millennials and younger Canadians who divide their disposable income between saving for retirement and paying down debts could find themselves delaying their retirement by one or two years compared to if they focused solely on paying down debt in the short term.  

The MRRB says that in today’s economic climate of elevated interest rates, a 30-year-old with $30,000 of personal (non-mortgage) debt could retire one year earlier with $125,000 more in savings if they solely focus on paying off debt within 10 years, before then shifting focus to saving for retirement. 

But if that individual instead splits disposable income between saving for retirement and paying down debt for the entire period until retirement at age 65, it can take more than three times as long to pay down the debt. 

These findings assume a 30-year-old worker is earning $70,000 and can allocate 5% of their income either to paying down debt or saving for retirement; with the interest rate on their debt being higher than the expected rate of returns of their investments. 

Higher interest rates may help retiring Boomers

Interestingly, despite the MRRB’s focus on the young, it does mention boomers near retirement age and the importance of financial literacy surrounding decisions on what to do with retirement savings as they transition into a period where they are no longer working.

The second infographic shown below shows that while high interest rates make it tougher for young people to get out of debt, boomers already at or near Retirement may find higher interest rates to be an advantage as they retire. It explains that “in an elevated interest rate environment, retirees may have windows of opportunity, although financial literacy will be required to navigate various retirement income options.”

I recently touched on this in a MoneySense Retired Money column on the need to wind up RRSPs at the end of the year you turn 71: in most cases, cashing out and paying stiff taxes is not advised, so most people either convert to a RRIF and/or  use the funds to buy a life annuity from an insurance company. Part 2 of that column will run later in April.

You can find the full Mercer release from Tuesday here.

Background on Mercer Retirement Readiness Barometer

The MRRB measures the age in which different persons can comfortably retire based on participation in an employer-sponsored Defined Contribution plan and the government-provided CPP/QPP and OAS. Mercer defines Retirement readiness as a 75% probability of not running out of money before death if an appropriate level of income is maintained throughout retirement. For a 30-year-old, that is 66% of pre-retirement income. It assumes that for each year until 65 the interest rate on the debt is 10% per year and the expected rate of return on retirement savings is 6%. For the 65-year-old retiring today, it’s assumed that the investment in a retirement income product is 40% in equities and 60% in fixed income at retirement. By age 80, it assumes this mix grades down to 20% equities and 80% fixed income.

Included is an infographic, the major elements of which I’ve reproduced below.

 

 

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How to more than double your CPP benefits

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While it’s well known that the longer you wait to start receiving CPP benefits, the higher the payout, a series of papers debuting today from the National Institute on Ageing (NIA) highlights the fact that:

a) Many Canadians don’t realize that CPP benefits taken at age 70 are a whopping 2.2 times what they are if taken at the earliest possible age of 60. Indeed, a 2018 Government of Canada poll found an amazing two thirds of us didn’t understand that the longer you wait, the higher the CPP payout will be.

b) Despite this fact and despite being often mentioned in media personal finance articles, most Canadians nevertheless take CPP long before age 70.

You can see at a glance in the chart shown at the top the dramatic rise in free government money that can be obtained by waiting till 70.

The paper’s lead author is   Bonnie-Jeanne MacDonald, PhD, FCIA, FSA, Director of Financial Security Research for the National Institute on Ageing at Toronto Metropolitan University.

Addressed chiefly to Canadian baby boomers, MacDonald and three contributors say upfront that deciding when to start taking CPP (or the Quebec Pension Plan) is “one of the most important retirement financial decisions they will make.”

Not only are benefits begun at age 70 2.2 times higher than they would be if taken at age 60, but “these higher payments last for life and are also indexed to inflation.”

So it’s a baffling that 90% choose to start CPP at the traditional mid-way point between these extremes: age 65.

Starting with the paper being released today, the NIA will publish seven papers in total aimed at educating consumers about these decisions.

It’s not as if most Canadians don’t already realize how important CPP will be to their income. Indeed, with traditional Employer-Sponsored Defined Benefit pension plans becoming increasingly rare outside the public sector, for many the CPP, together with Old Age Security, will be the closest many retirees will come to having a guaranteed-for-life inflation-indexed pension. According to a 2023 NIA survey on Ageing in Canada, 9 out of 10 recipients say their CPP/QPP pension is an important source of their retirement income, with 6 out of 10 saying it’s essential and they can’t live without it.

The chart below illustrates this:

The initial paper being released today observes that similar dynamics are at work in the United States with its Social Security system. Academic literature there finds that “delaying claiming is almost always the optimal decision from an economic perspective.”

CPP offsets the 2 big bogeymen of Inflation and Running out of Money

A larger CPP income obtained by waiting till 70, or at least past 65, helps new retirees address two of their biggest fears, the NIA says: Inflation and running out of money before you run out of life. It finds that 37% fret about inflation and 22% worry about running out of money in old age. Continue Reading…