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.

Should you take early CPP benefits or defer as long as possible?

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By Chris Nicola

Special to the Financial Independence Hub

One question that often comes up about Canada Pension Plan (CPP) benefits is whether to take it earlier or later. If you Google this, you’ll get different answers: some say take it early, others say take it later. It seems the experts don’t quite agree, so I wanted to do a thorough analysis myself.

Jim Yih explains that the break-even between taking CPP at 60 vs. 65 is at age 77. In other words, if I live past age 77 I’ll be better off my taking CPP at 65 rather than 60. Based on this he concludes that one should probably start taking CPP at 60, just to be sure. However, I’m still left wondering: “Am I more, or less, likely to live past age 77?”

Now, before I dive into the analysis, let me quickly explain how taking CPP earlier, or later, works. Assuming you will be age 60 after 2016, the CPP early and late withdrawal rules work like this:

  • If you take CPP before 65, you take a 7.2% penalty per year on your CPP payments (up to 36% at age 60)
  • For each year you wait after 65, you gain an 8.4% increase in your CPP payments (up to 42% at age 70)

On face value, 42% more does seem like a pretty compelling case for waiting, but, is it? The catch here is that, it will depend on how long you live. Will you live long enough to capitalize on the larger payments, if you wait to start taking CPP? The real question is: Are you, statistically speaking, going to receive more, or less, total CPP by waiting?

The hard working mathematicians at Statistics Canada have provided us with this handy table, which shows how long the average Canadian can expect to live until, given they have already reached a particular age. What I’m interested in, is what age the average person at age 60 can expect to live until.

Males maximize CPP at 68, women at 70

Currently, a man at age 60 can expect to live another 23 years (age 83), and a woman about 26 (age 86). As these are averages, they seem like reasonable numbers to use for our analysis, and age 60 is the earliest point at which we are able to consider taking CPP.

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Integrate eldercare into financial planning or pay the price

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By Susan Hyatt

Special to the Financial Independence Hub

People plan for retirement to live how they want in their ‘silver years.’ But have you thought about including eldercare in those plans? Most have not and when reality sets in people are shocked at the cost.

Several years ago I was on a consulting assignment in the United Kingdom when both my elderly parents went into crisis at the same time. To make matters worse, they were divorced and lived in separate towns. Still, I figured I could work it out. I had consulted for governments and global technology companies all over the world with expertise in healthcare. In Canada I helped government bring the healthcare system into the electronic age. I figured I knew the system.

I returned to Canada only to find that, despite all my experience and contacts, it was a challenge to navigate my parents through the healthcare system into new living quarters, due to their dementia and inability to live on their own. I had 40 years of professional experience in the healthcare industry, and discovered that in all this time little had changed. The hospital system is well funded, but after discharge from hospital you are on your own and pay for out-of-pocket costs.

After six months wandering through the maze of eldercare options, I put my retirement plans on hold and started a professional services company that delivers crisis management and planning services for the elderly. We offer seniors and their families advice in estate planning and life planning.

Boomers slow to formalize eldercare plans

We always see people, including those of high net worth, who don’t include eldercare costs in their financial and estate planning. Too many Baby Boomers have not formalized plans for growing old or designated who should care for them. Indeed, people refuse to plan ahead or even talk about aging. Adult children don’t want to question their parents about plans involving money management, never mind health issues that may already be developing.

Today many seniors – especially those with health or mobility issues – talk about whether or not to stay at home. The ‘gold standard’ used to be that you stayed at home as long as possible. But for how long and at what cost?

Before, family members might have taken care of you. But now families are dispersed and most of your neighbours work. So you must pay for help yourself.

Bill Gates’ dementia campaign

Bill Gates just announced he is donating $50 million to Alzheimer’s research and discovery. He realizes there is a dementia epidemic and Alzheimer’s is a leading cause. As he says in his blog, almost 50% of people who live into their 80s will get Alzheimer’s. But health care costs are prohibitive. Current estimates in the U.S. indicate that health care costs and eldercare costs for those suffering from Alzheimers will be five times the costs for normal aging.

Seniors and their adult children must start thinking about a lot of factors if a parent becomes ill. What exactly is Dad’s prognosis? How long will he be able to walk? How long will it be before he’s in a wheelchair? If he stays in the house, what modifications are needed and how much will they cost? What about home care? All, this takes time and expertise, and people need a plan to cost out the options.

Where to start? It’s a good idea to create a family playbook with clear plans and expectations to help reduce the emotional and financial strain that may be ahead. At Silver Sherpa, we use a holistic assessment approach. We assign a Client Director to work with the senior and their family to navigate through key quality-of-life factors such as health issues, legal and financial preparedness, family dynamics, and the needs and wants for living accommodation. This is a proactive approach. It lets our clients recognize the warning signs of an impending crisis and respond in advance rather than slip into chaos.

Canadians are beginning to understand that they must pay for out-of-pocket costs associated with aging, and as care needs increase, those costs could skyrocket. Earlier this year CIBC released a study called ‘Who Cares: The Economics of Caring For Aging Parents,’ and it’s an eye-opener. According to the study, in 2007 about 14% of Canadians were aged 65 and older, but now it’s 17%, and in ten years it will be 22%. Today, 30% of working Canadians with parents over the age of 65 have to take time off from work for eldercare duties.

40% are uncomfortable talking about eldercare/illness

The study also found that 40% of respondents were uncomfortable talking about eldercare and illness because they figured their parents would think they were after their money, and that only 23% of Canadians with a parent 65 or over have a financial plan for their senior years. What’s more, Continue Reading…

Retired Money: How to boost retirement income by 50%

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PUR Investing’s Mark Yamada

My latest MoneySense Retired Money column looks at an academic paper written by two Canadian investment pros, which explains how retirees can boost retirement income by as much as 50%. You can find it by clicking on the highlighted headline here: How to boost your retirement income by 50%.

In the recent Fall issue of the Journal of Retirement, PUR Investing Inc. president and CEO Mark Yamada and colleague Ioulia Tretiakova, the firm’s director of quantitative strategies, published a paper titled “Autonomous Portfolio: A Decumulation Investment Strategy That Will Get You There.” Click here for a summary.

Yamada and Tretiakova observe that the combination of rising life expectancy, minuscule interest rates and declining availability of employer-sponsored Defined Benefit pension plans is making retirement an anxious proposition, especially for the Baby Boom generation that is even now starting to storm the barricades of Retirement: 10,000 Baby Boomers retire every day in the United States, and roughly 1,000 a day in Canada.

Little wonder that one study (Allianz 2010) found 61% of those aged between 45 and 75 were more afraid of running out of money than of dying! Sure, you can decide to work a little longer, which lets you save more and cuts down the years you’ll need to withdraw an income, but there’s a limit to how long you can work (or find willing employers or clients). Ultimately, health and time are not on your side!

The full article describes Yamada’s Decumulation Investment Strategy, which is designed to let retirees better manage both retirement income and the probability of ruin.

Dynamic Constant Risk & Spending Rules

Unfortunately, the investment industry relies on historical risk and return data to project future returns, somewhat like navigating a car by peering through its rear-view mirror. Yamada aims to keep portfolio risk constant by reducing portfolio risk when market volatility rises and to increase portfolio risk when volatility falls (hence the term DCR, which stands for Dynamic Constant Risk). Continue Reading…

CPP will be there for future generations, CPPIB head reassures Advocis

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CPPIB president and CEO Mark Machin

My latest Financial Post blog looks at the misplaced perception that the Canada Pension Plan (CPP) might not be there for future generations. Click on the headline to retrieve the full article: No reason to fear CPP’s stability, CEO Machin says, but people do it anyway.

Mark Machin is president and CEO of the Canada Pension Plan Investment Board (CPPIB.)  Speaking Tuesday to financial advisors attending Advocis Symposium 2017 in Toronto, he said “unlike virtually every other industrial country in the world,” Canada “has solved its national pension solvency issues.”

While you could argue that even America’s Social Security system is not solid for the next generation of American retirees,  the CPP is on a solid actuarial footing. Canada’s chief actuary says CPP is sustainable over 75 years, assuming a 3.9% real [after-inflation] rate of return: CPPIB’s 10-year annualized real rate of return is 5.3%.

Despite this, many Canadians — and perhaps some of their advisors — continue to profess their belief that the CPP won’t be around for them by the time they retire. 64% believe either that CPP will be out of money by the time they retire, or don’t know whether it will be there to pay them in retirement, Machin told Advocis.

Half of retirees greatly rely on CPP

However, in practice, Canadians tend to have more faith in the CPP than they claim: 42% of working-age Canadians expect to rely on the CPP when they retire (up from just 13% 15 years ago). In 2016, more than half of Canadians who are actually receiving CPP said they rely “to a great extent” upon it.

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How Group Annuities can help employers protect Defined Benefit pensions

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Source: Mercer Pension Health Index published October 2, 2017

By Brent Simmons, Sun Life Financial

Special to the Financial Independence Hub

Recently, employees and retirees of Sears were stunned to learn they may not receive all of their defined benefit (DB) pension when it declared bankruptcy. They learned their pension plan was underfunded and the company had requested that it be allowed to stop making the contributions required by Ontario laws. The plight of Sears employees and retirees has left many Canadians wondering if their DB pension plan is healthy and if their DB pension is safe.

The pension challenge

With a DB pension plan, a company promises their employees a pension for life and is responsible for paying the pension: whatever the cost ends up being. The problem is that low interest rates and choppy equity markets have made the funding level of many pension plans look like a roller roaster ride. This can be seen in the chart at the top of this blog.

Another challenge facing pension plans is that Canadians are living longer, meaning that pensions need to be paid for a longer time. A common rule of thumb is that one year of additional life expectancy at age 65 can increase the cost of the pension plan by 3% to 4%.

In a tough economy, the need to contribute to a pension plan can often come at a time when a company’s core business is also facing financial difficulties. If a company becomes bankrupt, then the company likely won’t be able to pay the contributions owed to the pension plan and employees may indeed face a shortfall in its pensions.

How Group Annuities protect their employees’ pensions 

The good news is that a growing number of Canadian companies are taking steps to protect their employees’ pensions. They are buying group annuities to transfer the financial risk of their pension plans to insurance companies, which are subject to strict regulations and must have funds on hand at all times to pay promised pensions. With a group annuity, an insurer assumes responsibility for providing the pensions to a company’s retirees in exchange for a fee, and the retirees continue to receive their promised pension.

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