Longevity & Aging

No doubt about it: at some point we’re neither semi-retired, findependent or fully retired. We’re out there in a retirement community or retirement home, and maybe for a few years near the end of this incarnation, some time to reflect on it all in a nursing home. Our Longevity & Aging category features our own unique blog posts, as well as blog feeds from Mark Venning’s ChangeRangers.com and other experts.

Retired Money: RRSP must start winding down after you turn 71 but TFSA is a tax shelter that lasts as long as you do

Posted By |

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…

CPP survivorship benefits (and OAS Allowance for low-income Survivors)

Posted By |

By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

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!

These are the best options when to take CPP.

Should you defer CPP to age 65 or even age 70? Here’s when to consider that.

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:

  1. you need (and want) the money to live on now (probably the biggest reason)!
  2. you have good reason to believe that you have a shorter-than-average life expectancy; take the money now and spend as you please.
  3. you already have a good reliable defined benefit pension with full indexing and the CPP and OAS are “gravy”;
  4. you want to delay taking your portfolio withdrawals since you may wish to maximize the amount of money in your estate; and/or
  5. 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…

CPP timing: A case study for taking benefits at age 70

Posted By |

By Michael J. Wiener

Special to the Financial Independence Hub

There are many factors that can affect your decision on whether to take CPP at age 60 or 70 or somewhere in between.  Here I do a case study of my family’s CPP timing choice.

Both my wife and I are retired in our 50s and had periods of low CPP contributions because of child-rearing and several years of self-employment.  So, neither of us is in line for maximum CPP benefits.  If we both take CPP at age 60, our combined annual benefits will be $11,206 (based on inflation assumptions described below).

The “standard” age to take CPP is 65.  If you take it early, your benefits are reduced by 0.6% for each month early.  This is a 36% reduction if you take CPP at 60.  If you wait past 65, your benefits increase by 0.7% for each month you wait.  This is a 42% increase if you wait until you’re 70.

However, there are other complications.  If you take CPP past age 60, any months of low CPP contributions between 60 and 65 count against you unless you can drop them out under a complex set of dropout rules.  If my wife and I take CPP past age 65, we won’t be able to use any dropouts for the months from 60 to 65, so we’ll get the largest benefits reduction possible for making no CPP contributions from 60 to 65.  Fortunately, CPP rules don’t penalize Canadians any further if they have no contributions from 65 to 70.

Inflation indexing

Another less well-known complication is that before you take CPP, your benefits rise based on wage inflation.  But after your CPP benefits start, the payments rise by inflation in the Consumer Price Index (CPI).  Over the long term, wage inflation has been higher than CPI inflation.  So, when you start taking CPP benefits, you lock in lower benefit inflation.

In this case study, I’ve assumed 2% CPI inflation and 3% wage inflation.  These assumptions along with the CPP rules and our contributions history led to our annual benefits of $11,206 if we take CPP at 60.

If we wait until we’re 70, our combined annual CPP benefits will be $29,901.  However, don’t compare this directly to the figure at age 60 because they are 10 years apart.  If we take CPP at 60, it will grow with CPI inflation for those 10 years.  The following table shows our annual CPP benefits in the two scenarios: early CPP at 60 and late CPP at 70.

Age Early CPP Late CPP Age Early CPP Late CPP
 60    $11,206  75    $15,081   $33,013
 61    $11,430  76    $15,383   $33,674
 62    $11,658  77    $15,690   $34,347
 63    $11,891  78    $16,004   $35,034
 64    $12,129  79    $16,324   $35,735
 65    $12,372  80    $16,651   $36,449
 66    $12,619  81    $16,984   $37,178
 67    $12,872  82    $17,324   $37,922
 68    $13,129  83    $17,670   $38,680
 69    $13,392  84    $18,023   $39,454
 70    $13,660   $29,901  85    $18,384  

 

$40,243
 71    $13,933   $30,499  86    $18,752   $41,048
 72    $14,211   $31,109  87    $19,127   $41,869
 73    $14,496   $31,731  88    $19,509   $42,706
 74    $14,785   $32,366  89    $19,899   $43,560

It would certainly feel good to start collecting CPP benefits when we’re 60, but by the time we’re 70, we’d never notice that our payments could have been 119% higher.  That’s why we plan to wait until we’re 70 for our CPP benefits. Continue Reading…

The 13 biggest Life Insurance mistakes: Experts’ perspectives

Posted By |

 

By Lorne Marr, CFP

Special to the Financial Independence Hub

There are numerous life insurance mistakes Canadians are making, and who qualifies better to talk about these mistakes than life insurance experts? We asked numerous life insurance experts to weigh in on the top life insurance mistakes they have seen throughout their careers.

You can find a summary of their replies in the above chart, with more detailed explanations following in their segments (% shows how often a particular mistake has been mentioned).

The top three mistakes are:

1.) Putting off your life insurance purchase until it is too late, or not getting life insurance at all (especially in your younger years).

2.) Not doing a needs analysis and not understanding all possible risks resulting from being underinsured.

3.) Not leveraging the benefits of a permanent life insurance policy due to its higher cost, though there are numerous benefits to this product in the long run.

Tony Bosch, Development Hub Financial

Tony Bosch – Executive Vice President Broker Development Hub Financial

“Life insurance is a key component in most financial and estate plans”

Three key mistakes people make when purchasing life insurance:

  1. Not doing a needs analysis: The first step in any life insurance purchase should be to do a proper needs analysis. People often fail to look at the big picture when buying life insurance. The calculation of how much insurance you need should be more detailed than just having your mortgage paid off or replacing a certain multiple of your income. In determining your life insurance needs it is necessary to determine what amount is actually necessary to “allow your family to maintain their standard of living and pay off outstanding debt”under “less than ideal circumstances,” factoring in that the grieving process and the time to recover emotionally may take several months or even years. Life insurance should provide “financial confidence.” allowing a family time to adapt and adjust to life without a loved one.
  2. Product selection: Life insurance, unlike most forms of insurance, can come in a variety of payment options from low cost term insurance to permanent policies that can build substantial tax sheltered cash values and can help solve estate planning needs and/or serve as an alternative investment. The problem arises when the product selection overrides the need. Clients with a limited budget may be attracted by product features causing them to choose a permanent product with a lower face amount than is required. A family with three kids may like the idea of a shiny sports car but may need a mini van. It is critical to first define the amount of protection required and then choose the product or combination of products that meet this need within a given budget.
  3. Choosing a solution based on price and/or convenience rather than contract guarantees and flexibility: A simple example may be purchasing loan or mortgage insurance through a lending institution. Although this may seem like an easy and convenient solution, it may require additional underwriting at the time of claim, which could result in a claim being denied. A basic renewable and convertible term plan underwritten by an insurance company may take a little more time to set up, but in most instances provides a better and more flexible policy that can adapt to your changing needs.

Life insurance is a key component in most financial and estate plans. Working with an experienced and trusted independent advisor will help make sure you and your family get the life insurance you require with the flexibility to adjust to your changing needs.

Michael Liem, Canada Protection Plan

Michael Liem – Canada Protection Plan Regional Vice President

“Don’t put it off until it is too late.”
  1. Putting it off until it is too late: Even though Canada Protection Plan can help get life insurance for people with medical or lifestyle issues, I think it is always best to get insurance when you don’t need it and when you are healthy. It’s not how much you can afford, but rather how healthy you are that gets you the best insurance options.
  2. Not telling anyone about your life policy: People get a life insurance policy but when they pass away, some beneficiaries don’t even know about it. I always suggest that advisors should acquire contact information for the beneficiaries and where possible, introduce themselves because these beneficiaries will most likely be contacting the advisor to make a claim.
  3. Regularly reviewing a client’s policy: So many advisors provide the initial policy but never review them. People’s lives are constantly changing and they may need to adjust or add more coverage. If an advisor never contacts their client, then they should not be surprised when the client switches their business to another advisor.
Lawrence Geller, L.I. Geller Insurance Agencies

Lawrence Geller – President of L.I. Geller Insurance Agencies

 “Everyone has asked to either renew the existing policy or buy a new policy.”

Of the many people who have assured me over the years that they only needed life insurance for a maximum of 10 years, every one has asked to either renew the existing policy or buy a new policy to replace the one that was renewing. Even then, most have deluded themselves by thinking that they would not need the coverage when the term of the contract ended, and almost all have wanted coverage at the end of the term.

Not a single client who bought a guaranteed paid up whole life policy has ever told me that they made the wrong choice of coverage, although many have told me that they wished that they had purchased a larger amount of life insurance.

Daniel Audet – Vice President Assumption Life

Daniel Audet, Assumption Life

“Don’t gamble on being uninsured.”

The top life insurance mistake, from a consumer’s perspective, has to be the choice to gamble on being uninsured (or underinsured).

LIMRA reported a year ago in 2019 that 32 per cent of Canadian households do not have any life insurance coverage, while 56 per cent of Canadian households do not have any individual life coverage. Everyone would agree that there are more pleasant things to consider and address than the risk of dying prematurely, and that may be the reason why so many Canadians are shying away from a proper assessment. More likely, the observation comes from a knowledge gap of the risk and associated loss. Many Canadians would not necessarily consider themselves as gamblers, meanwhile the chosen approach of not buying insurance (or not buying enough) is very similar to that of a gambler’s behavior. The gambler “invests” a little wager with a small probability of a large payoff. In comparison the non-insured “saves” paying a small premium hoping he/she wouldn’t die with a significant financial burden. Both types of gamblers have small amounts involved when compared to what is at stake, and the odds of the event, while relatively small, can have a significant impact. They are just at both ends of the spectrum: the casino gambler hoping for the big win, and the life gambler neglecting to consider the major financial loss.

Turning a blind eye to the needs of paying final expenses, replacing income, paying off the mortgage, or paying the estate bills, and choosing not to be insured (or underinsured) is essentially just like gambling the financial state of the loved ones left behind. Several Canadians, when asked why they do not own life insurance, have stated they could not afford it (27 per cent) or that they had other financial priorities (25 per cent). Continue Reading…

When do most people start taking CPP benefits?

Posted By |

Recently I previewed Fred Vettese’s completely updated and revised edition of Retirement Income For Life. I’m giving away an extra copy of the book and asked readers to enter to win by sharing when they took (or plan to take) CPP. The results were interesting.

The vast majority of responses were in favour of deferring CPP to age 70 (41%). One quarter of responses favoured taking CPP at age 60. And, nearly one-quarter of responses favoured taking CPP at age 65.

 

CPP Start Age # of Ppl % of Ppl
60 62 24.9%
61 4 1.61%
62 4 1.61%
63 4 1.61%
64 1 0.40%
65 57 22.89%
66 4 1.61%
67 5 2.01%
68 3 1.2%
69 3 1.2%
70 102 40.96%

 

Deciding when to take CPP is a key consideration of your retirement income plan. What I found interesting about the responses was the rationale or the stories behind these decisions. For instance, there is a lot of misinformation about the Canada Pension Plan: that it is government run (it’s not), that it will become insolvent before you collect benefits (it won’t), and that you could do better investing the money on your own (not likely).

These misconceptions can lead to poor decisions. It’s estimated that just 1% of CPP recipients elect to take their CPP benefits at age 70. Clearly more education is required.

Several of the responses in favour of taking CPP early showed this lack of knowledge or a perceived bias around the CPP program.

Some retired early and took CPP early to “avoid too many zero contribution years.”

  • While it’s true that your calculated retirement pension may decrease with each year of zero contributions, the amount of the decrease is typically less than the amount of the increase you’d get by deferring CPP (0.6% per month to age 65 and 0.7% per month to age 70).

    CPP expert Doug Runchey uses the example that by waiting you will receive a larger slice of a smaller pie, but you will almost always receive more pie.

One response called CPP a “legal pyramid scheme.” Continue Reading…