When is the right time to start taking CPP?

When is the right time to start taking CPP?

Many Canadians, especially those nearing retirement age, have the same question: when should I start taking CPP (Canada Pension Plan)? As with many things in finance, the answer is: it depends on your unique circumstances and in this case, the various types of retirement income you expect to receive.

The first step towards determining when to begin taking CPP is logging on to your CRA account and finding out the amount of pension benefit you are entitled to. In the most simplistic terms, this taxable amount is based on contributions made by you, your spouse, and employer(s) throughout your working career and will vary from person to person.

Canadians are eligible to begin taking CPP at the age of 60 however, this doesn’t necessarily mean all Canadians should. For every month prior to the age of 65 an individual collects CPP, there is an automatic reduction in benefits of 0.6%. Essentially, the earlier someone begins taking CPP, the smaller the monthly amounts they will be entitled to over the lifetime of the benefit. Consider the following example:

A 30-year-old man in 2020 with a gross annual income of $50,000 has an annual retirement income goal of $31,000 and a life expectancy of 85. The difference between starting to take CPP at 60, 65, and 70 are as follows:

  • 60: $5,349 annually or $445.75 monthly = $133,725 total over 25 years
  • 65: $8,358 annually or $696.50 monthly = $167,160 total over 20 years
  • 70: $11,868 annually or $989.00 monthly = $178,020 total over 15 years

Shorter life expectancies in the past contributed to the common belief that people should begin taking CPP as soon as they were eligible so as to get the maximum return on their lifetime of contributions. The example above demonstrates how this sentiment isn’t necessarily accurate, especially with Canadians living longer and potentially spending more years in some type of long-term care.

Once you know the monthly benefit amount you expect to receive, you need to then consider what other sources will make up your retirement income –  Old Age Security (OAS), personal savings, employer pension plans, rental income and even part-time employment.

While CPP is based on salary and years in the work force, OAS is determined by the number of years spent as a Canadian resident. The maximum pension amount available (must have an annual income below $128,137) is $613.53 monthly. Other benefits available include Guaranteed Income Supplement (GIS), Allowance, and Allowance for the Survivor. An advisor can help you proactively plan for different scenarios in which taking these benefits might be necessary. The earlier you begin planning for retirement, the better equipped you will be to handle the expected and unexpected later in life.

Knowing generally what your income will look like in retirement – between CPP, OAS, savings, etc. – will help you determine your expected tax bracket. It may seem obvious, but this especially matters when withdrawing from registered savings accounts because the higher your tax bracket, the more tax you will have to pay to do so.

For individuals with robust retirement savings, it might make sense to delay taking CPP or OAS so they occupy a lower tax bracket and can avoid paying taxes unnecessarily. Conversely, it might make sense for those with more modest savings to begin taking pension benefits earlier.

Personal retirement savings are often held in an RRSP until the time comes to withdraw or convert the account to a Retirement Income Fund (RIF) and begin taking a regular income. This conversion can be done anytime but must occur by the end of the calendar year when you turn 71. Without a clear retirement plan/timeline, it can be all too easy to accidentally miss important deadlines and opportunities to maximize benefits.

There is no set formula for determining when to begin taking CPP but there are several complex factors to consider. The best way to approach the question of when to start taking CPP – and avoid potential consequences like incurring unforeseen taxes – is to consult an advisor with a comprehensive knowledge of estate and retirement planning. Everyone’s situation is unique and ever changing and the solutions to their financial needs must be also. If you have questions about the Canada Pension Plan or need help with retirement and estate planning, connect with us.

Will I have enough?

Will I have enough?

‘Plan for retirement.’ This phrase is something many of us have heard since the time we landed our first full-time job. But even now, as it was back then, it is a pretty vague directive.

When we are younger it translates to putting money away, likely into a registered account. And for anyone under 25 that’s a great first step. Sock away money and let compound interest work for you. Perfect. Done and done.

However, as you get older this approach to retirement planning should evolve and become more formal, with defined goals and a clear plan. A plan that can grow and change as we do, adapting to our lives and goals. This is when the question ‘will I have enough’ begins to become part of the discussion.

If we peel everything away, each of us faces the fear of NOT having enough saved by the time we retire to live out our retirement years in relative financial comfort and provide enough income to meet our lifestyle goals. For some, this fear can stop us from working with an advisor to build a plan. Check out our blog ‘There is No Time Like Now’ to learn more on this topic.

The easiest way to face any fear you have about the retirement nest egg you are building is to learn the facts. Work with a financial advisor to build a retirement plan based on both your current reality and your future goals.

One of the first considerations is the type of retirement you want. Do you hope to travel? Will you move into a different home? Do you or will you have a vacation property? How many vehicles will you have? All choices have an impact on your income needs during retirement.

Any company-based pension plans or savings plans and their income during retirement need to be considered, in addition to RRSPs, non-registered and TFSA savings you are putting aside for retirement. Company-based pension plans are less common today than in the past, but if you have one, the income they will generate during your retirement need to be factored in to your retirement income planning.

In addition, any government income you will be eligible for during your retirement need to be taken into account for retirement income planning. Old Age Security (OAS) and Canadian Pension Plan (CPP) are two common government benefits many of us look forward to receiving. There are some options in terms of when you can begin receiving these benefits. Your specific situation should be reviewed to know what is in your best interest. There are strategies available to ensure you maximize your income options and minimize annual taxes.

For many of us, the concept of retirement planning feels like a distant concern; one that ‘future me’ will be better equipped to deal with. In fact, the earlier you can start, the better. There’s a Chinese proverb that says, “The best time to plant a tree was 20 years ago, the next best time is right now”.

Find a financial advisor you trust and connect with them to help you build your retirement income plan.

A study of Canadians done by the Investment Fund Institute of Canada found households who worked with an advisor had as much as 2.73 times more assets after 15 years compared to identical non-advised households.

You will benefit in many ways from having a financial planner — an expert in your corner keeping your best interests as their priority. They will work with you on a customized plan, help you stay on track and modify as needed. To review your personal financial plan and projection for your retirement income, please feel free to connect with us.

There is No Time Like Now

There is No Time Like Now

“Do the best you can until you know better. Then when you know better, do better.” ~ Maya Angelou

There can be some unexpected emotions at play for those in the early stages of financial planning. Besides the normal ‘geez what DO I want my life to look like when I’m in retirement?’ confusion, people may find themselves grappling with more complex, uncomfortable feelings like guilt and shame.

Why do people feel guilt or shame? It may be because they feel like they should have ‘saved more by now’ or have a belief that ‘everyone is saving and planning better than I am’. It is important to remember that financial literacy is not “common sense” and figuring how and where to start building a plan can be overwhelming, even with professional guidance.

But here’s the thing. Establishing a financial plan is one of the most effective ways to replace guilty feelings toward money with a sense of control and empowerment. A recent study done in the U.S. shows a correlation between amount of savings (not necessarily income) and overall happiness; the more you have, the greater your sense of well-being. In other words, there is no point feeling guilty about what you have or haven’t done to date because it’s already done. So, let the guilt and shame go and commit to building a plan and taking steps forward.

You have likely heard the ‘rules of thumb’ when it comes to investing. “Save 10% of your income”, is one of the better known ‘rules’ and is often the one that can cause people the most anxiety. These ‘rules’ are actually more like ‘in ideal situations, it is best to’. For example, if saving 10% of your income is not possible for your lifestyle, then lower it. Even one per cent is better than zero. The earlier you can begin saving for your future, the more impact compound interest will have on your investments.

Selecting an experienced financial advisor will bring outside, unbiased insight into your current situation and determine the best road forward. A good financial advisor will work with you to move your plan towards where you want to be in the future. As life, circumstances, and demands on our resources change, a good advisor will review and modify your plan to keep you working towards your goals and ultimately, a sense of well-being.

Regardless of all the ‘rules’ of investing, they don’t apply equally to every investor and may not apply at all, in some cases. Your best bet is to work with a financial advisor to build your long-term plan, work on achieving it, and modify as needed.

Be kind to yourself. Financial planning reality is different for everyone and taking any steps in the right direction is a move forward.

Connect with us to learn how you can learn how to start today and ease your mind.

Sources

https://www.psychologytoday.com/ca/blog/changepower/201406/is-your-piggy-bank-source-happiness

 Ally Bank survey. “New Ally Bank Survey Links Money to Happiness”