Sara Makes Sense
Sara Makes Sense
More isn't always more when it comes to CPP
Thousands of baby boomers are wrestling with this question right now as they plan for retirement.
Do I collect CPP early or wait?
The difference over years can be significant.
In this episode of SARA MAKES SENSE, Sara starts with a CPP report and sets the record straight on how to view Canada Pension Plan together with your retirement dreams.
See Sara's blog on this topic
Got a question for Sara? Send her an email at ask@saramakessense.ca and she might respond to it in an upcoming episode
Sara's website is https://www.wddevelopment.ca/
Sara:
Yeah. I know I'm completely not ready. So let's do this thing.
Sara:
Baby boomers, you know who you are, and if you're not one, you probably still know who they are. They're that big hoard of people that are retiring soon or have recently retired. So before you push pause or think that this podcast isn't for you, just hang on. Those of you in that demographic might find this really useful. Those of you who aren't in that demographic, you're still gonna need to know this. And it's really important to understand how our topic today is going to impact you, both now and in the future. The Canada Pension Plan also known as CPP, this is a retirement pension that we pay for when we're working. You contribute, your employer contributes, the pension board manages the money and then when you retire, they send it back to you in the form of a pension once a month. So there's been some headlines recently about the Canada Pension Plan.
Sara:
There was a report released in December of 2020. It started making headlines in June and July. And I talked to a client about it about 12 months before it came out, about when you should collect the CPP, and the big headline was; you should wait until after your 65. So why do you care about this? Well, your decision can make the difference anywhere between tens of thousands to hundreds of thousands of dollars on either your income or your estate. I'm Sara McCullough and in this episode of Sara Makes Sense we're talking about the Canada Pension Plan and how you can manage this.
Sara:
So when it comes to the Canada Pension Plan, all of us often get boxed into thinking we've got three choices. You either collect at 65, which we still think of as the normal retirement age, or you can collect it early. You can collect CPP as early as age 60, and you can wait to age 70 and that's what this report was talking about. And I'm absolutely all for research. It provides perspective, and it really adds a different voice to this debate about what should you do? So, as I say, the report came out, I have clients ask, clients have asked throughout my entire career. So in 18 years of advising, Canada Pension Plan does form an important piece of all of our retirement plans. And it's for me, as an advisor, it's pretty cyclical. I have periods where people specifically ask me to leave it out of their plan because they don't believe it's gonna be there. And so there's periods where about 80% of my clients will ask me specifically if it's in their projection and then they ask me to take it out and show them what it looks like, because they're worried about the pension plan running out of money.
Sara:
Then I have periods where nobody really asks about it. I tell them it's there. I show them the amount, but nobody really says, hey, take it out, I don't think it's gonna be there when I'm ready to retire. And so then recently, as I say, there was this report and it got a lot of headlines because if you delay CPP payments until age 70, you will receive approximately 150% of the monthly payment that you would've received at age 65. That's a lot of money just for waiting, not for working longer, working harder, working more efficiently, just for waiting. One hundred and fifty percent, I mean, sounds good, I'm in. Except there's a few more things you should probably know about that. And there is another, there were another few headlines connected to that report that didn't land so well for me and I just don't think that they're helpful. There were a few headlines where the lead author on the report took a few shots at financial advisors and financial planning. One of the quotes and it's hard to tell if it was written by the journalist or, you know, said by the main author of the report, but delaying CPP is best for clients in the long run, but advisors can increase their compensation by encouraging clients to take CPP early. What?
Sara:
So we're just gonna pause here and expand on that. The fact is, and I've talked about this, particularly in my first podcast, a traditional investment advisor is compensated on the amount of money that they are managing for their clients. And part of that compensation includes a component for doing a financial plan for you as a client. So when you leave more money with the advisor, ie you take your CPP early; you're gonna draw down less of your investments and the advisor gets paid more. True, I don't know that I believe that industrywide advice to clients specifically on when to draw CPP is really based on advisor compensation. I think that's a little unfair, and I think it's a little bit hard for clients to sort through that. In my business specifically, I don't manage investments anymore for clients. I'm paid directly by the client to develop a financial plan that meets the client's needs. So my compensation really doesn't depend on where my clients draw their money from, it does depend on how good of a job I do listening to my clients and presenting options for them. So you can understand why I'm a little bit baffled that some of these headlines make it sound like Bonnie Jean McDonald knows what's best for clients; for all clients.
Sara:
So let's peel back some of the layers of this CPP report, the report on the Canada Pension Plan examines the income increase and income stability increase that's possible when delaying CPP from age 65 to age 70. The report has a really narrow focus, as indicated by the word microsimulation to explain the testing that they did for this. So in my professional opinion, the report specifically ignores many factors and it, the report is clear on that. And really, I don't think that's a bad thing. And here's why. I think this report is a great starting point for conversations between advisors and also between advisors and clients. I love the really gritty technical calculations because it gives me a way to look at how I'm planning for clients. And it gives me a good springboard for evaluating any biases of my own that may have crept into my advice.
Sara:
If you're my client, you don't want my biases in your plan, you want your goals in your plan. So, as I said earlier, I really love research. All right? So at a high level, this report says you can receive 150% of the CPP that you would've received at 65 if you just wait until age 70 and the report also says, don't worry we're not asking you to have a lower income in those five years, the report modeled the assumption that you are going to use your RSP money or your other savings in that five year period. So your household income is going to be the same. They've just juggled around where it's coming from to show you that the best option, in their opinion, is to delay the CPP. And again, when you think about whether collecting CPP early or delaying is good for you, I strongly suggest that you're gonna have to consider all of these other factors, because none of us make decisions in a vacuum.
Sara:
When it comes to your life and your goals, when we change one thing, the other things are gonna shift around. So three of the main conclusions from this report were; delaying CPP is good because it eliminates or lowers the possibility of running out of money or outliving your money. And I agree, one of the most fantastic things about CPP is you can't outlive it, it's a government pension that pays you for life. The other thing that's great about the CPP, and again, the report looked at this in a very narrow way, is that you, as the recipient, don't have any investment choice, risk, or market fluctuation risk. Remember when we're talking about RSPs or TFSA investments or other non-registered investment accounts, you have to choose your investments. You have to live with the market ups and downs. In the case of CPP, the pension board deals with that. And the reality is they have a very skilled board of investment managers.
Sara:
They have a very large investment pool. They have access to investments that individuals don't have; that they're either impossible to access, they're complex, they're costly, they're risky; they don't work well for individual investors. So this is a really great way to diversify that risk away. Canada Pension Plan is also inflation adjusted, right? So it gets evaluated every year. The board looks at the rate of inflation over the past 12 months, and then they make adjustments to the numbers that ultimately land in your bank account. And so what that means to you is, if your pension starts at $1,100 a month, 10 years from now, the numbers are gonna be different, but it's still ultimately going to buy you $1,100 worth of stuff. And for most of us over our lifetime inflation is one of our biggest risks is that our, our income is just not keeping up with inflation and we can ultimately buy fewer and fewer things. So these are important considerations and that's what the report used to conclude that delaying is the best thing. And I'm saying, as a client, you need to look at your overall situation and decide how important is that 150% increase to you. And what are the other ramifications of waiting from 65 to 70?
Sara:
And so at this point, I'm just gonna give you a really relatable, tangible, practical example of how we might prioritize things. And I'm gonna talk for a few minutes about grocery shopping and sales. I get so excited when butter goes on sale. So excited. Why? I'm a baker and butter is expensive, especially when you use a lot of it. Every time butter goes on sale, I buy it. I also like flank steak, but I don't eat steak often. Last week I walked by flank steak on sale, it was 30% off. I didn't pick it up. Why? I didn't actually feel like eating steak this week. I had enough other meals in the freezer. I had done my meal plan for the week. It's a good price, but flank steak just wasn't high enough on my list to buy it. So that 150% increase in the CPP payment, how important is that to you? I don't know and I'm guessing that right now, you might not know either.
Sara:
So let's look at this from again another angle and as usual here, I'm going to use an actual client scenario without the actual names or identifying details. Mylo and Jeanette came to me a few months before their retirement to work on their plan. They had both received early retirement packages and needed to make decisions on a number of things. In my first conversation with Mylo on the phone, he was very clear. He said to me, I have our CPP numbers from CPP directly. We are not taking CPP until age 70. If you give me different advice, I'll fight you.
Sara:
Duly noted Milo. Looking forward to seeing you both. And this was pre-pandemic, so I actually was seeing them in my office. So when I worked through their plan, I did do their initial scenario with the delayed CPP payments until age 70. I also showed them what happened if they took it at 65, which again is considered normal retirement age and what happened if they took it as early as possible, at age 60. If they delayed until age 70, their overall net worth was $400,000 higher. So when you first hear those two numbers, remember Mylo before talking to me had already understood that there was 150% increase in their monthly payments by delaying. I told them that means you have an estate that is $400,000 bigger. That's a lot of money. And remember, I wasn't showing them a plan that included spending less between ages 65 and 70; their retirement income available stayed the same.
Sara:
They were just using different assets and they still ended up potentially with $400,000 more in the end, easy decision, right? Like the report says, or kind of implies, you might be a fool not to delay if you've got other assets to carry you through from age 65 to 70. So what else was important for you to know about these two? Well, they were both just on the edge of 60 when we had this conversation and the report didn't look at the impact of taking CPP early, because you retired early. It didn't look at the benefits or the drawbacks. And across the board almost everybody agrees that this conversation about taking CPP or not when you retire between age 60 and 65 is complex. So now we're talking about reductions other assets for a longer period of time. So by retiring early between age 60 and 65 and not drawing CPP, in those years those get added to your CPP account, but at zero income, because remember your CPP payments are based on your personal earnings history.
Sara:
And so years of zero earnings or low earnings actually lower your payments in retirement. So the fact that these two were on the edge of turning 60 at the time of this conversation mattered. It mattered to Mylo and Jeanette about what they decided for those five years. Another thing that mattered again was the number of years that they were going to be leaning heavier on their own assets to stand in for CPP payments. So for these two, we were looking at 12 years, if they delayed to age 70 and what their projection showed was, if they delayed and went 12 years without CPP using their own assets, the draw down on their own assets was $216,000 over that time. If they took CPP at age 60, even with the reduction in payments, the draw down on their own assets was $74,000.
Sara:
And what ended up happening was when I calculated the value of those CPP payments, they were lower; it almost matched the draw down on their own assets. The problem is when they were drawing down their own assets; it created a risk zone for them as a couple. So their own assets are now lower, which increases the impact of a turbulent investment market. And we talked earlier about CPP pushes that off, but now they've got less assets. If we have a turbulent market at the end or near the end of that 12 years and then one of them dies; the survivor doesn't get the deceased partners payment, that's not how CPP works. There's a hard maximum for a CPP payment. And while there is a survivor benefit, if the survivor is already at the maximum, they don't get anything from the deceased payments. So these two were both individually at the max, so if one of them passed away in that risk zone, the survivor now had fewer assets because they've been drawing them down, there's only one CPP payment, not two and if they were faced with turbulent investment markets, that's not the same scenario. And all of a sudden, it's not a clear decision. And so do you see that Milo's initial, I'm gonna fight you stance was softening.
Sara:
And then one of them said to me; my health isn't so good. And the other one said, I have a few concerns of my own about my health. So how did this story end? It didn't. What you also need to remember is that you can apply for the CPP at any time once you turn 60, any month you want. There's no need to make a declaration that you are or are not delaying. As I explained to Mylo and Jeanette in that meeting, they didn't have to make a decision today. They can take their time, live with these projections for a little while, see how their retirement unfolded. They had both been working full time their entire adult lives, and now they were going to be both fully retired. So they had a list of goals, they just weren't sure which ones they were gonna do first, they weren't sure which ones were gonna stay on the list, which ones were gonna come off. They could see how their investments did and when it made sense for them, they can apply for the CPP, but they couldn't make that decision without seeing the different options and the different impacts for them personally.
Sara:
Whether to collect CPP early or not hinges on many, many factors that we can't possibly cover in this single podcast. But what I want you to take away is, don't ignore this. It's a huge part of your working life. It's going to be a part of your retirement. And so it needs to support your entire strategy. It needs to support your goals. And the more we understand about it, the better off we all are. And so that's why, as narrow as this report is, as many things as it ignores, as difficult and as inflammatory as some of those headlines felt, I'm really happy it's out there. And I'm really happy that it sparked conversations and it's gotten people thinking a little bit more about what does this mean for me; even if the conversation starts with, I'm gonna fight you if you say something different than what I came into this office thinking I wanted. In life we all have pieces scattered here and there, whether or not they involve controversial reports about CPP. And from time to time, we need someone who can cut through the noise. Someone who not only gets to know you as a person, but can also really show and make sense of your financial plan, not just the numbers, but truly what the numbers mean for you. This relationship and this plan, it belongs to you, not your planner. I'm Sara McCullough, thank you for listening to Sarah Makes Sense.
Disclaimer:
The information in this podcast is intended for general information and illustrative purposes. For advice relevant to your specific situation, meet with a qualified financial planner, lawyer, or accountant before making any changes to your situation. Sara's designations and licensing include: Certified Financial Planner, Registered Financial Planner, Certified Divorce Financial Analyst, and holding an insurance license.