Tag Archives: CPP

When do most people start taking CPP benefits?

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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…

Preparing for Retirement: Understanding new spending patterns

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BoomerandEcho.com

Last time we talked about boosting retirement savings during your final working years. In an ideal world you’ll have the double-effect of being in your peak earning years while your largest financial obligations are in the rear-view mirror.

In the real world, however, many Canadians are faced with an uncertain retirement because they lack adequate savings, don’t have a company pension plan, they’re still carrying a mortgage, line of credit, or even (gasp!) credit card debt, or they’re still providing financial support to their adult children.

Preparing for Retirement

Much like preparing for a new addition to the family, or for one spouse to stay home with the children full-time, preparing for retirement is about understanding new spending patterns.

If your final working years aren’t spent in savings overdrive mode, perhaps there’s time to test out your retirement budget in the year or two before you retire. You might as well try living on 40 – 60% of your income while you’re still working to see if it’s realistic.

If it’s not, there’s still time to adjust course by altering your income expectations, working longer (and saving more), or revisiting your investment strategy. Speaking of which …

Investing in Retirement

One of the biggest worries for retirees is outliving their money. That’s why it’s crucial to have a proper investment strategy in retirement. Investors don’t simply sell their stocks and move to bonds, GICs and cash once they retire. Canadians are living longer and our portfolios need to be built to last.

One strategy to consider is the bucket approach. The idea is that while retirees need cash flow, they also need a diversified portfolio of stocks and fixed income. Your first bucket is for immediate needs and should contain one or two years’ worth of living expenses in easy-to-access cash. Bucket two is for medium-term needs and is filled with bonds or GICs. Bucket three is meant for long-term needs and so it’s typically filled with stocks, ETFs, or index funds.

Also read: A better way to generate retirement income

Understanding CPP and OAS benefits

Whether you think you’ll rely on government benefits or not, it’s important to understand how CPP and OAS benefits work and how they might impact your retirement income plan.

The maximum monthly payment amount for CPP in 2020 is $1,175.83 [if taken at 65], but the average monthly amount for new beneficiaries is actually $696.56. You can take CPP as early as 60, but the amount is reduced by 0.6% for every month you receive it before 65.

Alternatively you can delay taking CPP until as late as age 70. In this case your pension amount will increase by 0.7% for each month you delay receiving it up to age 70. Continue Reading…

Retired Money: A new CPP calculator, and why I took my CPP at 66

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MoneySense.ca: Photo created by senivpetro – www.freepik.com

My latest MoneySense Retired Money column has just been published and looks at CPP survivorship issues. Tucked in there I reveal for the first time my personal decision to take the Canada Pension Plan at age 66, which I did last summer a few months after reaching that

It was more of a cash flow issue in light of the fact that just prior to this, my wife had left her full-time and well-paid job in the transportation industry. But I mention another consideration: the quirky CPP survivorship rules. Now I realize most couples in their 60s don’t dwell on our mortality much if they are in good health and keep care of themselves. And bear in mind my decision was long before the Coronavirus pandemic, which disproportionately affects seniors.

The first of a two-part series on this issue you can find by clicking on the highlighted headline: When is the best time to start taking your CPP payments?

We will look at the followup tomorrow.

Normally, those ready to retire contact Service Canada to get a record of past CPP contributions. They send you benefit estimates (both for CPP and OAS) some months before you turn 65 but you can also obtain this information before or after by visiting Canada.ca. There you can find a CPP/OAS calculator provided by Ottawa, providing an estimate of expected sources of income.

Doug Runchey and David Field team up on a new CPP calculator

While OAS is straightforward, optimizing CPP is surprisingly complicated, so much so that Doug Runchey (one of the country’s preeminent experts on both programs) provides calculation services to help individuals make optimal decisions on timing the start of benefits. Runchey used to be at Service Canada, so is intimately familiar with the ins and outs of the timing of receipt of these programs. Continue Reading…

7 ways retirees can weather the Coronavirus storm

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By David Field, CFP

Special to the Financial Independence Hub

If you’re a retiree or looking to retire soon, the COVID-19 Coronavirus is likely causing you anxiety about your finances: and I want to help relieve it.

As a financial planner, I’ve spent the last couple weeks providing guidance to my clients during this tumultuous time.

While I have no medical advice to offer (nor should I), nor do I have any way to predict the future, I’ve heard some very dangerous generic advice regarding people’s personal finances.

Simply advising people to “wait for the markets to go back up, and all will be well” ignores the fact that you may need income now, meaning you can’t just “wait it out.”

If you are retired, or looking to retire soon, here are seven actions you can take now to help reduce your financial anxiety.

1.) Create or maintain a cash reserve

Having cash easily accessible gives you options, especially in stressful times. There is a lot of noise out there in the financial media suggesting that “stocks are on sale right now,” and, as a result, you should allocate some of your resources to buying them.

If you are close to retiring (in the next year or so), or you are retired, I advise you to make sure you have enough cash to cover your living expenses for the next three years.

Then, and only then, if you have cash left over then you may want to take advantage of depressed stock prices.

2.) Sell your bonds, not your stocks

If you need to create cash, don’t sell your stocks: sell your government bonds. Assuming you have a balanced investment portfolio, you likely have government bonds somewhere in there.

With stocks decreasing, along with interest rates, those bonds have increased in value. This is why you have government bonds as part of your portfolio. (Be careful: don’t mistake government bonds for corporate bonds when selling your bonds.)

If you are in balanced mutual funds or ETFs, you may not be able to sell just your government bonds. If you sell your balanced mutual funds or ETFs to create your cash reserves, you’ll likely suffer some investment losses: but those losses should be much smaller than if you were to sell all-equity funds or ETFs.

Human behaviour causes us to want the safety of government bonds when we see our stocks decreasing in value: that means we’re selling stocks at a discount and buying government bonds at super-high prices. Try to avoid this behaviour, as it means your portfolio will get hurt on both sides.

3.) Postpone your retirement date, if you can

If you were planning on retiring soon, I recommend delaying implementing that decision by at least a few months. (The exception would be if you have a defined benefit pension that will provide most of your retirement income, and which gives you a defined retirement date.)

Once you start your retirement income, which is likely to come from many different sources, it can be difficult — or even near impossible — to make changes. With the COVID-19 virus changing the narrative every day, there’s a ton of uncertainty out there; meaning it is likely prudent to hold off retiring if you can.

In addition, if your employer needs to reduce its workforce in response to the current crisis, there may be some attractive options or financial offers that provide incentives for you to retire. If this happens, any kind of severance will provide an income cushion before you start your retirement income.

4.) Cut back spending

The math is very basic: If you reduce what you spend, then you will require less income from your investments.

While this is always the case, right now cutting back might be easier than ever. With vacation plans cancelled or postponed and no sports, music or performances to go to, it may be easier to save money than if you’ve tried in the past.

5.) Expecting a refund? File your 2019 tax return ASAP Continue Reading…

They have $1.2 million in their 50s and no pensions: can they retire?

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A million dollars isn’t what it used to be, especially C$ and with no employer pension

By Mark Seed, MyOwnAdvisor

Special to the Financial Independence Hub

 

They say a million bucks or so ain’t what it used to be … but I still think that’s a pile of money.

Which begs the question: does this couple with C$1.2 million in invested assets have enough to retire on?

Before we get into this latest case study however (thanks to a reader question by the way, I’ve changed the names of the readers for privacy reasons), this is a great time to remind you I’ve done other case studies like this on my site before: there are a few on this Retirement page in particular.

Mike and Julie want to spend $50,000 per year. Did they save enough?

This couple believes they could fulfill their early retirement dreams at age 52. What does the financial math say?

This single senior hopes he can retire at age 60 on a lower income. Is it possible?

What is enough for some is not enough for others

Passionate readers of this site will know I believe personal finance is personal. What works well for some investors or families will not work at all for others.

You need to carve your own financial path.

The 4% rule says you should be able to ‘safely’ withdraw 4% of your original portfolio each year, adjusted for inflation, for at least 30 years and have a reasonably high chance of having money left over.

This means, in more practical terms based on this rule, that a $1.2 M portfolio should be able to last ~ 30 years (or more) by withdrawing $48,000 in year 1 of retirement ($1.2 M x 0.04), then increasing that amount over time with inflation.

That said, while having a core spending plan is all fine and good, it’s also having flexibility designed into your plan that is essential for success. You need to consider your spend on travel, hobbies, home renovations but also the ability to cover emergencies and more during retirement.

Rates of return also matter

The potential sequence of many bad years in the stock market could crush a retirement plan if you’re not careful. Also, while less risky portfolios (i.e., more fixed income portfolios) might fluctuate less in the short term, over the long term this will have a big impact on your returns. This means a more conservative portfolio can actually increase the risk of running out of money …

Karla and Toby case study

To help us figure out if this couple, who has a seemingly healthy $1.2 M in the bank, have “enough money” I’ve once again enlisted the help of Owen Winkelmolen, an advice-only financial planner (FPSC Level 1) and founder of PlanEasy.ca.

Owen let’s get into it!

Sure Mark!

Case study overview

First off, I want to say Karla and Toby are in a very good financial position for retirement with over $1M in financial assets in their 50s. That is excellent.

That said, they face some risk in the future. Let’s look at the information and numbers they sent you:

  • Karla, was and remains stay at home mom, Age 54. 
  • Toby, marketing manager, makes $110,000 per year now. Age 56. Toby wants to retire early next year in January when he turns 57. You told me they would love to start their winter renting from a Florida condo: sounds great!
  • They have lived in Canada their entire life. (re: they expect CPP and OAS benefits to come).
  • They live in Calgary, Alberta and own their home. 
  • They have no debt other than $19,000 Line of Credit (LOC) balance used for a recent vacation and monies borrowed to fund their adult daughter’s wedding earlier this year.
  • Karla has no workplace pension whatsoever although Toby has a small LIRA from a former employer to draw down.

 Portfolio assets:

  • They have $700,000 in combined assets within their RRSPs; invested in a mix of costly mutual funds.
  • Toby has $50,000 in his Locked-In Retirement Account (LIRA). Invested in similar mutual funds above.
  • They have $150,000 (combined) invested within their TFSAs. They hold a mix of Canadian REITs and a few Canadian bank stocks. 
  • They’ve got about $50,000 cash in an interest savings account.
  • Toby has $250,000 invested in a taxable/non-registered account that includes a mix of cash, U.S. stocks and some Canadian dividend paying stocks.

All told, they have about $1.2 million in investable assets and their home value is estimated at $550,000.  They are considering selling their home as they get older and renting, including renting property in Florida each winter. 

You also told me they have one car, now paid for, a 2014 Range Rover SUV and no plans to get a new one until at least five years from now. 

Mark those are great details to start some analysis with …

Owen’s analysis

Based on what details you shared with me Mark, because a large portion of their desired retirement spending will come from their investment portfolio, this creates a high risk of running out of money if they were to experience a period of poor investment returns in the future.  We’ll get into that in a bit. Continue Reading…