Monthly Archives: October 2011

When Should I Take My CPP

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When Should I Take My CPPI am turning 60 next year and wondering if I should take my CPP early along with the penalties or should I wait a few years and then take my CPP with fewer penalties? That is the question that is faced by many people every year. The common theme that I hear is “Take it Now”.  From close friends to financial advisers, they all seem to agree. Don’t wait to take your CPP you could be dead early and miss out entirely. But what about the economics of taking it early?

I decided to do a few calculations and this is what I came up with. If you have suggestions or disagree with this approach, please leave a comment with details in the comment field. This is a pretty common decision that many people are faced with. There are lots of ideas about what to do regarding taking your CPP earlier than age 65. Comments and ideas are very welcome.

When Should I Take My CPP  – at 60?

Canadians have always been able to collect their CPP before turning 65 (the earliest you can start is age 60), although there is a penalty that depends on when you start receiving the benefit. As a rule, the pension is reduced by 0.5% for each month prior to turning 65. If you start at 60, for example, you will reduce your benefit by 30%, making it considerably less than if you wait until 65.

That’s the dilemma I faced myself as I approach turning 60 and I am considering the pros and cons. As it turns out the math is pretty simple. I assumed that I would start taking my CPP at 60, and would live for 15 years after that. With a 30% penalty, my income from CPP would be a total of $133k excluding any increases from indexation.  If I wait until 65, there will not be any penalty when I begin collecting. But I will only collect for 10 years under this assumption. The total is $108k. So obviously I am further ahead if I only collect for 15 years. The breakeven point appears to be 17 years and if I live longer then the delay scenario begins to pull ahead.

Government Changing the Laws

Another factor to keep in mind particularly this year is the federal government’s announcement last spring that it is bringing in legislation designed to improve the system’s fairness. The legislation was passed in December and the government will be phasing in changes between 2011 and 2016.

Starting in 2012, the penalty to take the CPP early will be 0.6% instead of .5%  a month for each month before turning 65. This move bumps the penalty up to 36% if you start at age 60.

As well, starting in 2011, the government is phasing in new rules if you delay the benefit after turning 65. The so-called “late pension augmentation” will be increased to 0.7% a month, from 0.5%, for each month after age 65 until age 70. This means you can collect an additional 42%, versus 30% under the old rules, assuming you wait until 70.

In addition, starting in 2012, you will no longer have to stop working or earn significantly less, to start receiving the benefit.

If your genes suggest that you may live well into your 90’s, then you might consider taking the risk of delaying collection of your CPP, however in my case no one has lived past 80 years of age, so I am taking mine early and the math bears out this decision. If your health is not great, this may be another reason to begin collecting early.

No More Contributions to CPP

There is another major advantage in that once you start receiving the CPP, you no longer have to contribute to the plan. This means a saving of $2,100 a year, assuming you are earning up to $46,300 in employment income. Over five years this adds up to $10,500 in total savings and if you are self-employed, the saving is doubled, to $21,000, because self-employed individuals also have to pay the employer’s share of CPP contributions.

Starting in 2012, if you start collecting before 65, you must continue contributing to the CPP. Once you reach 65, you can still make voluntary contributions to the CPP. Both of which will increase your CPP retirement benefit.

These are some of the factors that need to be considered in this decision. Mine is pretty simple, but readers should take into account the following:

  • Current health
  • Life expectancy
  • How long you will work
  • Tax consequences and impacts of other income
  • Government plans to phase in changes to the CPP plan

Comments and suggestions are welcome.

Biggest Money Mistakes

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Biggest Money MistakesWe recently read an article online that discussed the standard money mistakes that the average consumer makes over their lifetime. Although this was a great article, we decided to write our own biggest money mistakes with some of our own real-life situations that we have encountered. Here is our list of the biggest money mistakes.

Biggest Money Mistakes

Selling an Investment Property too Soon:

Buying an investment property is probably the second biggest money decision most people make next to the decision to buy their own home. We purchased an investment property back in the ’80s with the idea of renting it out and watching the investment grow. Well after about 6 years and no appreciation we decided to sell. Had we waited another 5 years we would have tripled our original investment? Real estate is a long term investment!

Paying for Something Before it was Delivered:

We all have done this. We have paid for something that will be delivered in a few days or weeks in good faith. More and more often now, goods are not coming through on delivery due to delays are at worst companies going bankrupt. Now I always go for 10% down and the rest on delivery. At least this way I only lose 10% if something happens.

Not Selling High: Classic greed is all this is:

Holding a stock that has gain like crazy, expecting it to go higher and then it cracks and nosedive. Nortel is the classic case in recent memory. Sell at least half of your stock so that you capture some of the profits and lock them in. Sell them all when you have made a decent amount of money. Avoid being greedy!

Buying a Vacation Home as an Investment:

Some vacation homes will be a good investment, however, it is the old issue of supply and demand. Vacation homes can fall into oversupply and or low demand depending on the economy. If you can buy a place such as a cottage where no additional building is allowed, then you may be ok. Buying a vacation home in Las Vegas is the other extreme and really follows the oversupply and low demand phenomenon at the present time.

Keeping too Much Money in Employers Stock:

We have all heard the horror stories where someone’s total savings are locked up in company stock which is losing ground. Never do this. Diversify your savings or retirement portfolio to protect yourself from the troubles a single company may have.

Too Risk Adverse for My Age:

Common theory these days is to move from high-risk investments to safer investments that are income-driven as we get older. If you have a company pension then you can afford to take more risk, while people who depend on their savings for income should move to lower-risk investments as they get older.

Trusted and Advisers Guidance, and Ignored Fees:

Following an advisers guidance to invest in a high load mutual fund is probably the worst you can do. There are high fees that the mutual funds pay to the advisers. Also, trading stocks often is another way the advisers make their money. Always look at the investment and don’t blindly follow the investment advice.

Chased Hot Stocks:

Sometimes you win, but most times you lose. Most of us are too far removed from the investment to be able to react quickly enough to a hot stock that has suddenly gone cold. Unless you can follow a stock almost 24 hours a day, stick with blue-chip stocks that pay a good return.

Short Term Money into Hot Stocks:

Short term money should be put in something that is guaranteed to return your original investment. Never go with short term hot stocks for money that you will need soon. It may not be there when you need it.

Failed to Re-balance:

Re-balancing stocks and funds in your savings plans should be reviewed on a regular basis. Make sure that you continue to follow a diversified portfolio investment plan. This approach lowers your risk and ensures that you are not overexposed in one sector.

Panic When the Market Dropped:

I just spoke with an adviser who is a friend of ours. He mentioned that out of 400 clients, 2 sold and got out of the market when it crashed in 2008. The rest stayed pat and recovered all of their investments and then some. Once you get out of the market at a low point, that money that you lost is gone and can never be gained back.

Good luck with your investments and hopefully these ideas and money mistakes can be avoided in your future. Comments welcome.