Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.
When I started in the business in September of 1993, it was a great time for new client acquisition. The reason is simple: there were so many new clients to be had – in the form of first-time investors. As interest rates plummeted from their all-time highs in the early 1980s, the fulcrum began to shift. Specifically, as the risk-free rate (anything that could be attained on a guaranteed basis) dropped, people became increasingly willing to absorb risk.
Starting around 1982, the long-term macro trend that continues to this day began. That year marked the cyclical high in long-term interest rates (in the mid to high teens!) along with a multi-generation low in price/earnings ratios (well into the single digit range!). For nearly 40 years, interest rates have been seeing a secular decline, while market valuations the world over have been creeping up. The correlation is predictable. As rates drop, people are prepared to take on increasingly large amounts of risk in their quest for financial reward. Totally understandable.
Rates are essentially at Zero
Now that rates are essentially at zero throughout the developed world, the trend has become acute. The question that people might now be asking themselves is: will people stay out of traditional income investments for the foreseeable future? Continue Reading…
Even before we met, as individuals, Billy and I have always loved to travel.
I have written about my cross-country adventure on the back of a motorcycle when I was 19. Billy also traveled with his van to Guatemala in the 1970s and back again to his hometown of Cincinnati, Ohio.
As a couple we lived and journeyed through Europe for six months before we purchased our restaurant in Santa Cruz, California.
These trips were life-changing experiences and we just got hooked on adventure.
When we left the traditional work force in 1991, we sold everything and began to travel the world. These experiences forced us to be flexible even when we didn’t want to be.
Power outages
For instance, when we lived on the tiny island of Nevis, West Indies, every afternoon or early evening, the power in our home would go out. It could happen at 4pm or at 7:30, but it would happen. Lights would go out and the TV would click off (right as the plot thickened in the movie we were watching). The pump bringing water to the kitchen sink or toilets wouldn’t work without the electricity, so things like doing the dishes, taking a shower or using the restroom had to be prepared for in advance.
We read books by flashlight or had discussions on future travel plans.
No running water!
Speaking of taking a shower, in Nevis we shared the Governor of Nevis’s home with other housemates who were opening the Nevis Four Seasons Resort on the island.
Aside from us and Billy’s best friend who was the head chef, all the rest of the roomies were young twenty-somethings and used to First World Living. One young woman would start her hot shower, go to the kitchen, toast bread, smother it in peanut butter and jelly, eat the sandwich, then return to a steam-filled bathroom with the water still running and take her hot shower.
As natural water-savers ourselves, we thought this was over the top.
However, we had no idea how much so, until one day … we found out the cistern was empty. The only way the tank was filled was by rain that fell or by water trickling out of the city’s pipes from 10 am to 11 am daily. And by trickle, we mean drizzle by drop.
Our spectacular house in Nevis, West Indies with a view of the Atlantic Ocean
We were out of water, with all the conveniences that running water brings to living, so how were we going to take a shower?
Being in the tropics, rain came fairly regularly, like every other day or so. One morning around 9:30, it was a typical tropical downpour. Billy and I saw the flooding of water through the gutters and into our rain barrels and we both grabbed towels and soap. Moving a barrel and standing under the drainpipe of the gutter we lathered up and enjoyed this pleasure of a beautiful shower out in nature. The jungle and sugar cane fields pushed up against our house, and we had a straight shot of Nevis’ volcano. Spectacular.
Then … the rain stopped.
Oh Lord. There we were, soaped up, naked, and out in our back yard when the maid popped in for her thrice weekly cleaning. Continue Reading…
For some reason, people seem wired to want to take their CPP and OAS benefits early, myself included. They grasp for reasons to justify this emotional need even though a rational evaluation of the facts often points to delaying the start of these pensions to get larger payments. I recently read about another emotional reason to justify taking CPP and OAS early.
We can choose to start taking CPP anywhere from age 60 to 70, but the longer we wait, the higher the payments. Less well known is that we can start taking OAS anywhere from age 65 to 70 with higher payments for waiting loger. It’s hard for us to fight the strong desire to take the money as soon as possible, and we tend to latch onto good-sounding reasons to take these pensions early.
But the truth is that most of us have to plan to make our money last in case we live long lives. Taking CPP and OAS early would give us a head start, but the much-higher payments we’d get starting at age 70 allow us to catch up quickly. If we live long lives, taking larger payments starting at age 70 is often the winning strategy.
Here I examine reasons to take these pensions early, ending with a longer discussion of the reason newest to me. Many of these reasons are inspired by other writing, such as a Boomer and Echo article on this subject. However, you’ll find my discussion different from what you’ll see elsewhere.
Let’s start with the best reason.
1.) You’re retired and out of savings
This is a good reason to take pensions early if you’re really running out of savings other than a modest emergency fund. However, just wanting to preserve existing savings isn’t good enough on its own. It makes sense to do a more thorough analysis to see what you’re giving up in exchange for trying to preserve your savings.
2.) You have reduced life expectancy
If you’re sufficiently certain that your health is poor enough that you’d be willing to spend down every penny of your savings before age 80, then this is a good reason to take pensions early. This is very different from “I’m worried I might die young.” If as you approach age 80 you would try to stretch out your savings in case you live longer, this has repercussions all the way back to how much you can safely spend today. Almost all of us have to watch how we spend now in case we live a long life. In this case you need to do a thorough analysis to see what you’re giving up in exchange for taking pensions early.
3.) You have long periods before age 60 with no CPP contributions
If you don’t work after age 60, but delay taking CPP until 65, the 5 years without making CPP contributions can count against you. Everybody gets to drop out the lowest 17% of their contribution months in the CPP calculation. So, if you never missed a year of CPP contributions from age 18 to 60, you can just drop out the years from 60 to 65, and you won’t get penalized. But if you had many months of low contributions over the years, then having additional low months from 60 to 65 will reduce your CPP benefits.
I am in this situation. However, from 60 to 65 you go from receiving 64% to 100% of your CPP plus any real increase in the average industrial wage. Taking into account all factors, I expect my CPP to rise by about 47% by delaying it from 60 to 65. This is less than it could have been without the penalty of not working from 60 to 65, but it is still a significant increase.
Delaying CPP further from 65 to 70 is a simpler case. There is a special drop-out provision that allows you to not count the contribution months between 65 and 70. CPP benefits increase from 100% of your pension at 65 to 142% at 70.
CPP benefits rise significantly when you delay taking them. Even if you can’t use your 17% drop-out for all the contribution months from age 60 to 65, you may still benefit from delaying CPP.
4.) You want to take the CPP and OAS and invest
People don’t generally get this idea on their own. It often comes from a financial advisor. You’re unlikely to invest to make more money than you’d get by delaying CPP and OAS, particularly if you pay fees to a financial advisor.
5.) The government might run out of money to pay CPP and OAS
The government might introduce wealth taxes on RRSPs too. Despite what you might have heard from financial salespeople, CPP is on a strong financial footing. Many things may change in the future. It doesn’t make sense to overweight the possibility of cuts to CPP or OAS.
6.) You want the money now to spend while you’re young enough to enjoy it
My wife and I are retired in our 50s. When I analyze how much we can safely spend each month, the number is higher when we plan to take both CPP and OAS at 70. That’s right; we can spend more now because we plan to delay these pensions. It works out this way because CPP and OAS help protect against the possibility of a long life. Continue Reading…
My latest MoneySense Retired Money column has just been published and looks at the twin topic of RRSPs that must start to be converted to a RRIF after you turn 71, and the related fact that the TFSA is a tax shelter you can keep adding to as long as you live. You can find the full column by clicking on the highlighted headline: How to make the most of your TFSAs in Retirement.
Unlike RRSPs, which must start winding down the end of the year you turn 71, you can keep contributing to TFSAs for as long as you live: even if you make it past age 100, you can keep adding $6,000 (plus any future inflation adjustments) every year. Also unlike RRSPs, contributions to Tax-free Savings Accounts are not calculated based on previous (or current) year’s earned income. Any Canadian aged 18 or older with a Social Insurance Number can contribute to TFSAs.
Once you turn 71, there are three options for collapsing an RRSP, although most people think only of the one offering the most continuity with an RRSP; the Registered Retirement Income Fund or RRIF. More on this below but you can also choose to transfer the RRSP into a registered annuity or take the rarely chosen option of withdrawing the whole RRSP at one fell swoop and paying tax at your top marginal rate.
Assuming you’re going the RRIF route, all your RRSP investments can move over to the RRIF intact, while interest, dividends and capital gains generated thereafter will continue to be tax-sheltered. The main difference from an RRSP is that each year you must withdraw a certain percentage of your RRIF and take it into your taxable income, where it will be taxed at your top marginal rate like earned income or interest income. This percentage start at 5.28% the first year and rises steadily, reaching 6.82% at age 80 and ending at 20% at 95 and beyond.
Some may be upset they are required to withdraw the money even if it’s not needed to live on. After all, you’re gradually being forced to break into capital, assuming you abide by some version of the 4% Rule (see this article.)
in 2020 only, you can withdraw 25% less than usual in a RRIF
For 2020 only, one measure introduced to cushion seniors from the Covid crisis was a one-time option to withdraw 25% less than normal from a RRIF; so if you turned 72 in 2020 you can opt to withdraw 4.05% instead of 5.4%. Continue Reading…
Long-time readers of this blog will know I remain many years away from full-on retirement – so I have tons of time to consider when to take our Canada Pension Plan (CPP) benefit and our Old Age Security (OAS) benefit.
For those who might be closer to retirement age and/or you want to know when to take CPP or OAS, make sure you read these posts below!
One factor rarely covered on many blogs or financial forums is the subject of survivorship benefits for either program. It can be a major factor when determining when to take CPP or OAS for some.
What are the pros and cons of taking CPP or OAS early or late, when you factor in survivorship benefits?
Doug Runchey; DRPensions.ca
Like other financial subjects, I have my own ideas based on our financial plan but I wanted to talk to an expert. I reached out again to Doug Runchey, a pension specialist who has more than 30 years of experience working with both CPP and OAS programs.
In our latest discussion, we tackle the survivorship subject and what general rules of thumb apply.
Doug, welcome back. Good to chat again and I hope you’ve been well …
Thanks for having me back again Mark.
I always appreciate the outreach for a take on this important subject. I agree, this isn’t talked about enough: how survivorship factors into government benefits decision-making.
For those folks not familiar with the benefits of CPP, can you remind them about the factors they should consider – when to take CPP?
The most important thing is to know exactly what your real choices are, because the numbers on your SOC or online at the MSCA website are not always very accurate. Once you have accurate numbers, you should consider factors like life expectancy, taxation, impact on other benefits (e.g., GIS), estimated expenses and other income streams.
When to take your CPP should be integrated with your overall financial retirement plan.
As we discussed in a previous post, there are some reasons to take CPP or OAS as early as possible:
you need (and want) the money to live on now (probably the biggest reason)!
you have good reason to believe that you have a shorter-than-average life expectancy; take the money now and spend as you please.
you already have a good reliable defined benefit pension with full indexing and the CPP and OAS are “gravy”;
you want to delay taking your portfolio withdrawals since you may wish to maximize the amount of money in your estate; and/or
you are a “bird in hand” investor so you take Canada Pension Plan money now while you can.
Great reminders. So, what about the survivorship benefits of CPP? How are these calculated? Should that play into the decision, when to take CPP?
They should Mark.
CPP survivor’s pensions are based on two different formulas, depending on the age of the surviving spouse.
For now, let’s just consider the formula for survivors over age 65 and that is 60% of the deceased contributor’s “calculated CPP retirement pension.”. By “calculated,” I mean prior to applying the age-adjustment factor if they started receiving their retirement pension before/after age 65. This 60% is reduced however, if the surviving spouse is also in receipt of their own CPP retirement pension, under what are known as the “combined benefit” calculation rules.
These combined benefit calculation rules should definitely be a factor in deciding when to take your CPP if the survivor’s pension is in play prior to making that decision, but probably not otherwise.
Shall we look at an example, from a couple that prefers the “bird in hand” income?
To demonstrate these combined benefit calculation rules, let’s use an example where the husband’s calculated CPP was $1,000 and the wife’s calculated CPP was $700.
If they both took their CPP early at age 60, they would each receive 64% of their calculated CPP, which would be $640 for the husband and $448 for the wife.
If the husband passed away at age 70, the wife would normally be eligible for 60% of his calculated CPP, which is $600. Under the combined benefit rules though, that amount is reduced by 40% to $360.
As a result, the survivor’s retirement pension is increased by a “special adjustment” in the amount of $86.40 (36% of the $240 reduction to the survivor’s pension). The net combined benefit that the wife would receive is then $894.40 (her original retirement pension of $448, the reduced survivor’s pension of $360 and the “special adjustment” increase to her retirement pension of $86.40). Continue Reading…
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