CPP Rules

New CPP Rules

Here’s a reminder about some good news about Canada Pension Plan benefits. As of January 1, 2012, you no longer have to stop working to draw CPP. You can simultaneously receive and accrue CPP benefits between the ages of 60 and 70, which means you have increased potential to improve your retirement finances.

The old rules stipulated that you had to stop working in order to collect early CPP benefits. As of January 1 of 2012, that condition no longer applies.

Financial Security in Retirement

Term Deposit and Savings Account rates have dropped to 50 year historic lows.  The Federal government is talking about adjustments to various pension programs.  How do you ensure that you have a financially secure retirement with all of this uncertainty?

Establish your financial foundation - Many people have an idea of when they would like to retire but have little idea how much money they have already saved up.  Between work pension plans, mutual funds, term deposits, RRSPs and TFSAs, people can have money spread out among many investment options.  Before you decide when to retire you should know how much you have available to you today as a starting point.

Determine how much you need in retirement - Some people plan to do a lot of travelling in retirement and others plan to stay close to home and family.  Some will still have debt going into retirement and others will have been out of debt for years.  Your retirement can sustain any of these choices if you have planned and prepared for it.   To begin planning start by figuring out how much you will really need to live on during retirement.  Take into account that your health costs may increase over the years. Once you know how much you will need to live on each month you can work those numbers back to determine how much you will need to have saved upon retiring.  A financial planner can help your numbers be realistic and they can help determine any potential OAS and CPP cash flow into your monthly budget.

Showing Aging Parents You Care

Is it too late to consider long-term care insurance for an aging parent? If your parent is in good health, the answer is no.

Many healthy aging parents have no coverage for a simple reason: it’s just not a concern. But if the need for long-term care moves from being a remote possibility to a reality, the financial burden could be significant. Making sure your parents have long-term care insurance can be one of the smarter financial moves you can make.

The costs of an extended-care facility or in-home care can quickly deplete finances. Adult children may then be required to help pay the expenses, negatively affecting their finances, and perhaps their own family’s standard of living.

Life With Low Rates

An opinion piece by Jerry

With the Federal Reserve in the U.S. announcing that rates will be kept low until into 2013, Canada's own government bond rates have dropped and will most likely stay relatively low for the next year and half as well.

What does this mean?  With an almost guarantee of low rates for the next few years this will mean something very different to 2 groups - the savers/investors and the borrowers.

Savers & Investors - Low rates mean low returns on the safest investments.  This means bonds, GICs and term deposits.  With so many baby boomers looking at retirement over the next dozen years (or much sooner) they want a good return to build up their retirement fund.  The reality is that returns will be low, unless they go into riskier investments like mutual funds and stock markets.  However, principal and returns are not guaranteed with mutual funds and stocks, so investors need to be careful how much of their portfolio they put into the riskier investments while hoping for higher returns.

Risky Market News

Stock markets have dropped a lot in the past 2 weeks.  Term deposit and savings account interest rates are dropping as well.  What do you do when the world seems crazy?

Evaluate your risk tolerance - The markets go up and down, sometimes rather dramatically, but over the long term they tend to go up.  If the ups and downs of the current market keep you awake at night, your investment portfolio is probably too heavy in the markets.  Everyone wants a great return, but a great return also means a great risk.  Low risk means low returns, so you want a balance.  You need some risk if you want to earn better than inflation returns.  Before you invest anything a financial advisor should go over what kind of risk you are comfortable with for your investments.

Look at your time frame - If you are retiring in less than 5 years, than you should not be putting much of your portfolio at risk because you may not have enough time to recover if the markets have a bad few years.  A good financial advisor will warn you of this.  If you are planning to continue to invest or do business for at least 10 years then your portfolio can be in the riskier investments (with higher potential return) because it is more likely if the markets go down that your portfolio will have time to recover.  By looking for returns over the next 10 or 15 years you can afford to take a little more risk today.  Concentrating too much on the short term means you will be constantly anxious about what is happening.  Investing is best done over the long term, not in a short burst of a couple years before retirement.

Lotto Wins for Retirement?

Macleans has an article out this week that speaks about how lotteries are now the retirement plan of choice for 32% of Canadians between 45 and 64 years old.  This not only a surprisingly high percentage, but it almost matches the 34% who said they actually have retirement plans and investments to go with the plans.

The chances of winning Lotto Max are about 1 in 85 million, or about 0.0000012%.  Not great odds.  Yet, the closer people get to retirement, the more concerned they are that they haven't saved enough and are turning to lotteries as a hopeful "quick, cheap fix" to get the retirement savings they will need.

I'm not trying to condemn lotteries, but I want to emphasize that planning on winning the lottery to fund your retirement is not a plan at all.  It's a gamble with your retirement's financial security, and the odds are not in your favour.

What is the best way to retire financially secure?  Start early, create and periodically update a plan, invest regularly, diversify your investments to reduce risk, and live on less than you make.

When people don't feel financially secure, they start to do things that don't always make sense, reacting out of fear rather than following a logically laid out plan.  These over-reactions often fall into 2 categories:

GIS and Allowance Facts

Wow, since posting the article on Old Age Security (OAS) and Canadian Pension Plan 9CPP) Myths and Facts a few weeks ago, we have gotten a few phone calls questioning the accuracy of the article.  In each case where someone thought the government had clawed back their OAS, it turns out they had actually clawed back the Guaranteed Income Supplement (GIS) or Allowance.  The information in the article stands true, but I am writing this one about GIS and Allowance to add information about the GIS and Allowance program.

Guaranteed Income Supplement Facts

• The Guaranteed Income Supplement(GIS) is provided to OAS pensioners with little or no other income.
• You must be 65 years old or older to receive OAS & GIS.
• GIS must be applied for.
• GIS is not taxable income.
• Once income is over the maximum amount to receive the maximum benefit, GIS is clawed back at the rate of $0.50 for every $1 over the threshold until the maximum is met, as indicated below.

Life Stage for Baby Boomers

Baby Boomers in Canada make up about 8.5 million people or roughly 25% of the Canadian population.  They are usually described as the group of people born between 1946 and 1965, often to parents who got married right after World War 2. 

Some Boomers have already gone into a retired lifestyle, with either a change to something part-time or outright retirement.  For most, they will be considering how they want to retire in the next dozen years.  This group, hopefully, is already looking at their lifestyle and adjusting it so they will be ready for the day when their retirement and income change their lives substantially.

What Boomers should be doing before retirement?

Retiring debt - Boomers should be paying down debt.  In their 50's they should be at the peak of their earning potential, and as children move away, the Boomers should have more money to pay off the mortgage, vehicle loans and all credit card debt.  Also important, Boomers should not be accumulating debt during the years leading into retirement.  Any purchase that will increase debt into the retirement years should be seriously reviewed, as cashflow will be lower in retirement and debt payments will be more difficult than they were during the working years.

OAS & CPP Facts and Myths

I've heard from dozens of people planning for retirement that they don't want to earn money in retirement because the government will claw back their Old Age Security and Canada Pension Plan payments.  I have to say that this course of thinking is based on some myths that actually encourage people to make less money when they probably need it most.  Below are the numbers that hopefully help those who have questions about OAS and CPP get the maximum benefit during their retirement.

Old Age Security (OAS) Facts:
2011  Maximum Monthly Benefit                                     $524.23 ($6,506.23 annually)
2011 Average Monthly Benefit to be paid out                    $490.47 ($5,885.64 annually)  
Individual Annual Income before any clawbacks start    $67,668.00
Individual Annual Income when no OAS is received    $109,607.00

Lessons Learned from 2010

After a very enjoyable Christmas holiday, it's time to get back to work and the regular busy routines of life.

I must admit that while my family stayed very close to budget with Christmas gifts this past year, we went way over on the food budget during the holidays.  We only had some family over one evening, but we had other friends over a few times and we ended up buying a lot of snack foods.  While the snacks tasted good in the moment, I found that later on I wanted something more filling or substantial that wouldn't leave me feeling so groggy.  After seeing the bill for all the snack food, I really wished we'd just spent the money on a meal of ham, scalloped potatoes and corn rather than potato chips and fried spring rolls; in the end it would have tasted better and been far less expensive. A lesson learned for next time.

I'm starting out 2011 by looking at the things I've learned in 2010.  Here are a few of them:

Baby Boomers turn 65 in 2010

Baby Boomers were born in the years after World War 2, typically classified as those born from 1945 to 1964.  What that means is that the oldest of the Baby Boomers are turning 65 years old in 2010, and 65 seems to be the magic retirement age.

This means something different than it did back in the 1940s when retirement was really embraced.  Back then, it was quite likely that if you lived to 65, you would only live a couple of more years, therefore you usually only needed enough to live on for a few years after retirement.  That is not the case anymore.  If you retire at 65 today, there is al most a 50% chance that you will live to be 87 years old, meaning you need enough to support you for over 20 years.

15% of parents are saving for kids education over retirement

Good article by Jonathon Chevreau of the Financial Post about saving for retirement and children's education at the same time.  Some scary stats about how many are saving for neither one of those.

http://network.nationalpost.com/np/blogs/wealthyboomer/archive/2009/09/23/15-of-parents-put-kids-university-savings-ahead-of-their-own-retirement-plans.aspx