Victory Lap

Once you achieve Financial Independence, you may choose to leave salaried employment but with decades of vibrant life ahead, it’s too soon to do nothing. The new stage of life between traditional employment and Full Retirement we call Victory Lap, or Victory Lap Retirement (also the title of a new book to be published in August 2016. You can pre-order now at VictoryLapRetirement.com). You may choose to start a business, go back to school or launch an Encore Act or Legacy Career. Perhaps you become a free agent, consultant, freelance writer or to change careers and re-enter the corporate world or government.

CPP Payments: How much will you receive from Canada Pension Plan?

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Canada Pension Plan (CPP) benefits can make up a key portion of your income in retirement. Individuals receiving the maximum CPP payments at age 65 can expect to collect nearly $14,000 per year in benefits.

The amount of your CPP payments depends on two factors: how much you contributed, and how long you made contributions. Most don’t receive the maximum benefit. In fact, the average amount for new beneficiaries is just over $8,000 per year (as of March 2019).

CPP Payments 2019

The table below shows the monthly maximum CPP payment amounts for 2019, along with the average amount for new beneficiaries:

Type of pension or benefit Average amount for new beneficiaries (March 2019) Maximum payment amount (2019)
Retirement pension (at age 65) $679.16 $1,154.58
Disability benefit $980.24 $1,362.30
Survivor’s pension – younger than 65 $439.37 $626.63
Survivor’s pension – 65 and older $311.99 $692.75
Death benefit (one-time payment) $2,394.67 $2,500.00
Combined benefits
Combined survivor’s and retirement pension (at age 65) $869.86 $1,154.58
Combined survivor’s pension and disability benefit $1,096.12 $1,362.30

Now, you may not have a hot clue how much CPP you will receive in retirement, and that’s okay.

The good news is that the government does this calculation for you on an ongoing basis. This means that you can find out how much money the government would give you today, if you were already eligible to receive CPP. This information is available on your Canada Pension Plan Statement of Contribution. You can get your Statement of Contribution by logging into your My Service Canada Account, which – if you bank online with any of the major banks – is immediate.

Related: CRA My Account – How to check your tax information online

If you’d prefer to send your personal information by mail you can request a paper copy of your Statement of Contribution sent to you by calling 1.877.454.4051, or by printing out an Application for a Statement of Contributions from the Service Canada Website.

Note that the information available to you on your CPP Statement of Contribution may not reflect your actual CPP payments. That’s because it doesn’t factor in several variables that might affect the amount you’re entitled to receive (such as the child-rearing drop-out provision). The statement also assumes that you’re 65 today, which means that later years of higher or lower income that will affect the average lifetime earnings upon which your pension is based aren’t taken into consideration.

CPP is indexed to Inflation

Canada Pension Plan (CPP) rate increases are calculated once a year using the Consumer Price Index (CPI). The increases come into effect each January, and are legislated so that benefits keep up with the cost of living. The rate increase is the percentage change from one 12-month period to the previous 12-month period.

CPP payments were increased by 2.3 per cent in 2019, based on the average CPI from November 2017 to October 2018, divided by the average CPI from November 2016 to October 2017.

Note that if cost of living decreased over the 12-month period, the CPP payment amounts would not decrease, they’d stay at the same level as the previous year.

CPP Payment Dates

CPP payment dates are scheduled on a recurring basis a few days before the end of the month. This includes the CPP retirement pension and disability, children’s and survivor benefits. If you have signed up for direct deposit, payments will be automatically deposited in your bank account on these dates:

All CPP payment dates 2019

  • December 20, 2018
  • January 29, 2019
  • February 26, 2019
  • March 27, 2019
  • April 26, 2019
  • May 29, 2019
  • June 26, 2019
  • July 29, 2019
  • August 28, 2019
  • September 26, 2019
  • October 29, 2019
  • November 27, 2019
  • December 20, 2019

Why Don’t I Receive The CPP Maximum?

Only 6 per cent of CPP recipients receive the maximum payment amount, according to Employment and Social Development Canada. The average recipient receives just 59 per cent of the CPP maximum. With that in mind, it’s best to lower your CPP expectations when calculating your potential retirement income. Continue Reading…

Financial Planning & the Retirement Earworm: Focus should change to Financing for Longevity

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By Mark Venning, ChangeRangers.com

Special to the Financial Independence Hub

At last, a headline that helps us progress, moving us to change the later life narrative with respect to the issue of financial planning.

“Longevity planning will be a central mission for advisers of the future.” In a brief July 22, 2019 article in Investment News with this headline, Ryan W. Neal cites their recent roundtable discussion on the Future of Financial Advice, where “industry leaders agreed longevity planning will increasingly play a role in how advisers work with clients, especially in the face of fee compression and automated investing.”

This is a welcomed repeated echo, from my persistent suggestion to financial planners since 2011 that the replacement phrase for “retirement planning” should be “financing for longevity.” My presentation at the Canadian Institute of Financial Planners 16thAnnual Conference in June 2018 was titled around just that: Changing Client Conversations Mind-set Shift. Financing for Longevity.

One of my key points for this audience was that this means a recognition of changing patterns in client conversations, related to money and financial management. Conversations need to reflect shifts in generational experiential differences and thus the need to help clients re-frame their attitudes and expectations. The future of financial planning is no longer exclusively a Boomer-centric market.

Financing for Longevity, more echoes  

Neal in his article refers to Joseph Coughlin, founder of MIT’s AgeLab and author of The Longevity Economy (2017). In another 2019 Investment News article comes one more echo in this call – from Coughlin, “(the financial planning)profession is at a new frontier to create an entirely new business around longevity planning …. We are done with retirement – the word, the idea, the products, the conversations were really good, for my father. But not for the next generation.”

Another echo from Lynda Gratton & Andrew Scott in their book The 100-Year Life(2016). In chapter 7 on Money, they talk about “financing a long life.” Earlier chapter 2 on Financing, part of this longevity planning is geared around “working for longer.” Pensions or no pensions aside, they submit,“The simple truth is that if you live for longer then you need more money. This means either saving more or working for longer.”

Continue Reading…

The Pros and Cons of Dividend Investing

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My latest MoneySense Retired Money column has just been published, which you can retrieve by clicking on the highlighted headline: The Pros and Cons of Dividend Investing.

As with most of the Retired Money articles I write for the site, the piece looks at dividend investing from the perspective of someone in their 60s who is nearing retirement or semi-retired, as well as full retirees in their 70s.

It notes there are two major schools of thought on income investing.

In his book, You can retire sooner than you think, author and financial planner Wes Moss makes the case for retirees 60 or older having 100% of their portfolio in income-generating vehicles: whether interest, dividends, rental income from REITs or other securities: “Everything should be paying you an income from age 60 on.”

But there is a “total return” camp that argues total returns are what counts, whether generated by capital gains or cap gains combined with a growing stream of dividend income. In his series of “Stop doing” blogs, Toronto-based advisor Steve Lowrie argued investors should Stop chasing dividends.

One of the most romanticized ideas in personal finance?

Also in the total-return camp is PWL Capital portfolio manager Benjamin Felix, who tackled this in a Q&A column where a young Gen Y investor asked how he could create an all-dividend portfolio so he could retire early. Felix has said dividend investing is “one of the most romanticized ideas in personal finance”—citing a 2013 study by Dimensional Fund Advisors (DFA) that found 60% of U.S. stocks and 40% of international stocks don’t pay dividends, plus the fact that Warren Buffett declared dividends should not matter in making great investments. So, he concluded, an all-dividend approach would lead to “poor diversification.” Felix also dispelled the misconceptions that dividends are a guaranteed source of returns, offer protection in down markets, and that companies that grow their dividends necessarily beat the market. Continue Reading…

Renting in Retirement

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By Benjamin Felix, for Boomer & Echo

Special to the Financial Independence Hub

Canadians value few things more than a home that is owned outright. This might be especially true for retirees. The thinking seems to be that once your mortgage is paid off, your housing expenses evaporate. Unfortunately, this could not be further from the truth.

The alternative, renting, is often frowned upon. Renting is seen as throwing money away. The reality is that renting in retirement can make a lot of sense, both financially and psychologically, when it is properly understood.

The first step to accepting renting as a sensible housing choice is understanding the financial aspect of the decision. To compare the financial implications of renting and owning we need a common ground. That common ground is unrecoverable costs.

Unrecoverable Costs

Rent is an unrecoverable cost. It is paid in exchange for a place to live, and there is no equity or other residual value afterward. That is easy to grasp.

Owning also has unrecoverable costs. They are less obvious and usually get missed in the renting versus owning discussion. An owner of a mortgage-free home still has to pay property taxes and maintenance costs, both unrecoverable, to maintain their home. Each of these costs can be estimated at 1% of the value of the home per year on average.

In addition, an owner absorbs an economic cost for keeping their capital in their home as opposed to investing it in stocks and bonds. This economic cost, or opportunity cost, is a real cost that an owner needs to consider. Estimating this portion of the cost of owning is harder to do. It requires estimating expected returns for stocks, bonds, and real estate for comparison with each other.

Expected Returns

Estimating expected returns is not an easy task; it starts with understanding historical risk premiums. The market will demand more expected return for riskier assets, and this relationship is visible in historical returns.

For stocks, bonds, and real estate, the Credit Suisse Global Investment Returns Yearbook offers data going back to 1900. Globally, the real return for real estate, that’s net of inflation, from 1900 through 2017 was 1.3%, while stocks returned 5% after inflation, and bonds returned 1.9%. If we assume inflation at 1.7%, then we would be thinking about a 3% nominal return for real estate, a 6.7% nominal return for global stocks, and a 3.6% nominal return for global bonds.

To keep things simple and conservative, we will assume that real estate continues to return a nominal 3%, while stocks return an average of 6%, and bonds return 3%.

The Cost of Capital

With a set of expected returns, we can now start thinking about the cost of capital. Every dollar that a home owner has in home equity is a dollar that they could be investing in a portfolio of stocks and bonds. A retiree is unlikely to have an aggressive portfolio of 100% stocks, so we will use the 5.10% expected return for a 70% stock and 30% bond portfolio. The 2.10% difference in expected returns between the portfolio and real estate is the opportunity cost carried by the owner.

It is important to note that asset allocation, which is a big driver of these numbers, will depend on many factors including other sources of income like pensions, tolerance for risk, and portfolio withdrawal rate.

Comparing Apples to Apples

Adding up the unrecoverable costs, we now have 4.10% of the home value between property tax, maintenance costs, and the cost of capital. This is the figure that we can compare to rent.

A $500,000 home would have an estimated annual unrecoverable cost of $20,500 ($500,000 X 4.10%), or $1,708 per month. If a suitable rental could be found for that amount, then renting would be an equivalent financial decision in terms of the expected economic impact.

Other Financial Considerations

So far, we have looked at pre-tax returns. Taxes could play an important role in this decision. Increases in the value of a principal residence are not taxed. Income and capital returns on an investment portfolio are taxed. Continue Reading…

How to prepare for a market meltdown

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By Mark Seed

Special to the Financial Independence Hub

The mere thought of a stock market crash gets many investors riled up.

Maybe it shouldn’t, but don’t blame yourself or others.  That’s simply our lizard or caveman brains hard at work. The reality is, we’re naturally wired to be bad investors.

This is because the same area of our brain (the amygdala) that responds to fight or flight for the last 100,000 years sees financial losses as the same way as a big, mean, nasty grizzly bear running after us. So, whether this big bear (a big financial bear at that) is real or just perceived as being real, our brains do not discriminate.  Our hearts will race, our palms will get sweaty and we’re apt to click the keyboard and sell a stock or a bond or anything in between based on our fight or flight response.

Watching what goes up go down, way down

Watching your investment portfolio crash can and would likely be, devastating.  So, with our amygdala fully engaged, we’ll have higher levels of cortisol running through our bodies to fight the stress.

Our risk appetite will sink and during higher periods of market calamity, that means we’ll probably act in the opposite ways we should:

We’ll sell low instead of buying low or holding the line.

Needless to say, I think market volatility and watching your portfolio go down can have detrimental affects on the portfolio you’ve worked so hard to build.  If you’re an investor who might panic and react, when your investments drop in value, you might incur major long-term consequences.

Thanks to a reader question of late (adapted slightly below), I thought I’d highlight some things to consider (and what I think about and do) to prepare for a market meltdown.

Hi Mark,

With all the news of late, I’m really not sure how to prepare my portfolio for a market correction exactly.

Most of my stocks (I don’t have bonds or GICs or fixed-income-oriented ETFs) have unrealized gains. 

My TFSA is full of Canadian bank stocks and Enbridge.  My RRSP has some utilities.

Within my non-registered account, I have a mix of banks, insurance, utilities, CNR (Canadian National Railway), and telecom stocks, ALL with gains. I know if I sell anything in my non-registered account, I will pay tax on my capital gains. If I buy back some of the same stocks when the market dips during or after a correction, I will have a revised adjusted cost base (that I need to calculate).

I do have a cash wedge to use, to buy some stocks when the market corrects, but otherwise everything is tied up.  So, what can I do to help prepare for any correction?  What are you doing?

Great questions!  Boy, lots to unpack there.

In no particular order, here are some key things I would consider (and what I’m doing) to prepare yourself for any market meltdown.

1.) Review your risk tolerance

Will you make a portfolio change, including selling stocks and buying more bonds, when the equity market drops 10%?  20%?  30%?

I think knowing this answer or these answers is key.

The best time to put any plan in place is before you need it.  Financially or otherwise…

That means when it comes to investing, think about your risk tolerance today and identify what you might do in those situations above.  If you think you’ll sell assets when the market is down 10% or maybe 20% (or more!), you probably have too many equities as a % in your portfolio.  And that’s OK!  It simply means you need a more balanced stock-to-bond mix and/or you might need a more global, well-diversified portfolio that you could ride out.

Consider some of these low-cost, highly diversified ETFs to build your portfolio with.

What I am doing?

I’ve reviewed my financial plan a few times over in recent years and I’m rather confident I will not sell any of my Canadian dividend-paying stocks or my U.S. ETFs (disclosure:  I own U.S. dividend ETF VYM) when they are down 20% or even down 30% in price.

I have a plan to live off dividends – to some degree. 

Doing so helps me stick to an investing approach I thoroughly believe in.  Besides that belief, I would be absolutely shocked if some of these companies stopped paying all their dividends, in a prolonged market downturn, all at the same time.XIU August 2019

Image courtesy of iShares.  FYI:  A boring buy and hold strategy with XIU would have earned you ~ 7% over the last decade.  Basically, your money doubled in those last ten years.

2.) Embrace (and learn from) market history

Rather than trying to time the market, beat the market, outsmart the market – the list goes on – I think it’s very helpful to remember that crashes have happened and consequently, they will happen again.

This was a great tweet I found recently – something to remind yourself about when it comes to market history: Continue Reading…