I’ve been asked many times about the taking your Canada Pension Plan (or CPP) early. It’s one of the issues facing seniors and income management of their retirement funds, my conclusion is that it makes sense to take CPP as early as you can in most cases. Again there are a number of factors that can determine this process and they should be considered. We can help you understand which makes the most sense for you. Contact us at Henley Financial & Wealth Management.
In seeking the answer of when to take your CPP – ask yourself these five questions…
1) When will you retire?
Under the old rules, you had to stop working in order to collect your CPP benefit. The work cessation rules were confusing, misinterpreted and difficult to enforce so it’s probably a good thing they are a thing of the past.
Now you can start collecting CPP as soon as you turn 60 and you no longer have to stop working. The catch is that as long as you’re working, you must keep paying into CPP even if you are collecting it. The good news is that paying into it will also increase your future benefit.
2) How long will you live?
This is a question that no one can really answer so assume Life Expectancy to be the age factor when considering the question. At present a Male has a life expectancy of 82 and a female has a life expectancy of 85. These vales change based on lifestyle and health factors but it gives us a staring point.
Under the old rules, the decision to collect CPP early was really based on a mathematical calculation of the break-even point. Before 2012, this break-even point was age 77. With the new rules, every Canadian needs to understand the math.
If you qualify for CPP of $502 per month at age 65, let’s say you decide to take CPP at age 60 at a reduced amount while instead of waiting till 65 knowing you will get more income by deferring the income for 5 years.
Under Canada Pension Plan benefits, you can take income at age 60 based on a reduction factor of 0.6% for each month prior to your 65th birthday. Therefore your benefit will be reduced by 36% (0.6% x 60 months) for a monthly income of $321.28 starting on your 60th birthday.
Now fast-forward 5 years. You are now 65. Over the last 5 years, you have collected $321.28 per month totalling $19,276.80. In other words, your income made until age 60 was $19,276.80 before you even started collecting a single CPP cheque if you waited until age 65. That being said, at age 65 you are now going to get $502 per month for CPP. The question is how many months do you need to collect more pension at the age of 65 to make up the $19,276.80 you are ahead by starting at age 60? With simple math it will take you a 109 months (or 9 years) to make up the $19,276.80. So at age 74, you are ahead if you start taking the money at age 60, you start to fall behind at age 75.
The math alone is still a very powerful argument for taking CPP early.
So, “How long do you expect to live?”
3) When will need the money?
When are you most likely to enjoy the money? Before the age 74 or after age 74, for most people, they live there best years of their retirement in the early years. Therefore a little extra income in the beginning helps offset the cost of an active early retirement. Some believe it’s better to have a higher income later because of the rising costs of health care and this is when you are most likely to need care. Whatever you believe, you need to plan your future financial security. It is hard to know whether you will become unhealthy in the future but what we do know is most of the travelling, golfing, fishing, hiking and the things you want to do and see are usually done in the early years of retirement.
4) What happens if you delay taking your CPP?
Let’s go back to age 60 you could collect $321.28 per month. Let’s you decide to delay taking CPP by one year to age 61. So what’s happens next? $3,855.36 from her CPP ($321.28 x 12 months), but chose not to, so you are able to get more money in the future. That’s fine as long as you live long enough to get back the money that you left behind. Again, it comes back to the math. For every year you delay taking CPP when you could have taken it, you must live one year longer at the other end to get it back. By delaying CPP for one year, you must live to age 75 to get back the $3,855.36 that you left behind. If you delay taking CPP until 62, then you have to live until 76 to get back the two years of money you left behind.
Why wouldn’t you take it early given the math? The only reason I can think of is that you think you will live longer and you will need more money, as you get older.
Any way the math adds up… you can always take the money early and if you don’t need it put it in a TFSA and let it make interest. You can use it later in life if you choose.
A tax-free compounding account… In your portfolio that may have been over looked – $52,000 for each spouse to be exact, start planning now!
The tax-free savings account (TFSA) is starting to grow up.
Introduced in the 2008 federal budget and coming into effect on Jan. 1, 2009, the TFSA has become an integral part of financial planning in Canada, with the lifetime contribution limit now set to reach $52,000 in 2017.
Start taking advantage of this savings today.
Remember when you thought $5,000 did not amount to much as an investment. If you had taken advantage of this program you could have another $60,000 to $70,000 for each husband and wife invested in savings today. That’s $120,00 -$140,000 of Tax free Value based on the average market return since 2009.
Used correctly the TFSA can supplement income lowering your tax base during retirement. The gain made in a TFSA is tax-free, and therefore so are withdrawals — Did you know? That the money coming out of the account does not count as income in terms of the clawback for Old Age Security, which starts at $74,780 in 2017.
The TFSA has also become a great vehicle for dealing with a sudden influx of wealth. For people who downsize and sell their house or receive an inheritance, this money is already tax-free. Do not make it taxable in the hands of the government again.
Contact me for more information regarding this and other investments that have been overlooked. It never hurts to get a second opinion regarding your future.
When learning about the lingo of RESP’s you will find some useful information within this article that will catch your attention, as most people who invest in their children do so, because they understand the need to help in the future. Although, they most likely will not understand the ins and outs of the program that they have been investing into for the future. We at Henley Financial & Wealth Management are always here to help you understand the process. Please contact us with any questions you may have.
The CESG contribution limit is different than the RESP limit. The maximum annual amount of Basic CESG (Canada Education Savings Grant) that can be paid in any year was increased to $500 from $400 (and to $1,000 from $800 if there is unused grant room from previous years). The lifetime CESG for each child is still $7,200.
You can create a family plan or an individual plan. If you have one child, and intend to have more children, a family plan can be an attractive option. You can name one or more children as beneficiaries (the child using the funds in the future), and add or change beneficiaries at any time. If one of your children decides not to attend a post-secondary institution, your other children can make use of the funds.
With a family plan, all beneficiaries must be related to you. They can include children, adopted children, grandchildren, and brothers and sisters. You cannot include an unrelated person in a family plan.
A portion of contributions to the plan must be allocated to each beneficiary, although not necessarily equally. For example you can allocate a greater percentage to an older child who becomes a beneficiary a few years before university to quickly build education savings for that child. Meanwhile, younger children could be allocated less because there is plenty of time until they attend college or university. Contributions for each beneficiary can be made until the beneficiary turns 31.
The CESG is paid into the family RESP in the name of each beneficiary until that beneficiary turns 18. Most RESP’s, family or individual must be collapsed on or before the last day of their 35th year of existence. This should provide enough time to meet education savings needs of most families, including those with children of substantially different ages.
An important thing to know regarding RESP and CESG…
In the RESP world, $7,200 is an important number. It’s the total amount of RESP grant money that can be paid to any one child. This means that once a child has received $7,200 of grants – any future contributions will not receive any grant money. Meaning if there is a $50,000 maximum contribution to a RESP, only $36,000 of that RESP contribution will be credited with the 20% ($7,200) CESG.
This rule also applies to the RESP withdrawal phase. When you are making payments to a student – that child cannot receive more than $7,200 worth of grants. Any excess amount of grants paid to a child will have to be returned to the government.
All withdrawals of contributions from an RESP account can be sent to either you (subscriber) or the student (beneficiary). If you request a withdrawal of accumulated income in the form of an EAP (educational assistance payment), the money has to be sent to the student.
Specify if the withdrawal is to be from contributions, non-contributions or both
There are two parts to an RESP account:
- Contribution amount. This is the total amount of all your contributions to the account.
- Accumulated Income. This is all the money in the RESP, which are not contributions. RESP grants, capital gains, interest payments, dividends are all included in the Accumulated Income portion.
Example of contribution amount and accumulated income amount
Let’s say you contributed $2,400 per year for 15 years to an RESP account. 20% grants were paid on all the contributions and the investments have gone up in value.
- Account is now worth $50,000.
- Total contributions are $36,000 (15 x $2,400).
- Accumulated income amount is $14,000 ($50,000 – $36,000)
You can make two types of withdrawals from an RESP account if your child is attending post secondary school:
- PSE (Post-Secondary Education Payment) is a withdrawal from the contribution amount.
- EAP (Educational Assistance Payment) is a withdrawal from the Accumulated income.
Some interesting facts about PSE and EAP:
- PSE payments are not taxable income and there are no limits on withdrawals.
- EAPs are taxable in the student’s hands.
- There is no withholding tax on EAPs.
- The financial institution at the end of the year will issue a T4A slip for any EAP made during the year.
- There is a $5,000 limit for EAPs in the first 13 weeks of schooling.
- When doing a withdrawal, you will have to specify how much of the money will be coming from contributions and how much from accumulated income.
So you now have some of the ins and outs of making contributions and withdrawals to and from an RESP. The rules can be confusing and complicated so when in doubt, seek the help of a financial advisor to guide you through your options.
- You have two life insurance options after securing your mortgage: insuring through the creditor or insuring through a life insurance company.
- Mortgage insurance is convenient, but the benefit is limited to the amount owing on the mortgage and is paid directly to the creditor and not your family.
- Life insurance is paid to your beneficiary and your coverage won’t decrease as your mortgage is paid down.
- If you buy a bigger home, increasing your insurance coverage may be a smart choice.
Henley Financial and Wealth Management can provide expert guidance on both of these options.
When you buy a home, you need a way to help protect yourself and your family’s financial security, no matter what happens.
Your bank/lending institution will talk to you about mortgage insurance (also called creditor insurance) when you finance your house. You wil be told about the importance of this product for your mortgage. What it means…if you die, your mortgage with the lender is paid out, which is how the lender protects the institution if something should happen to you.
But what happens to your family if they don’t payout the mortgage because the death did not pass the underwriter approval after the fact. What you receive from the lender for your premium is a credit certificate not an actual insurance policy. After death, the credit certificate is sent to the insurer for underwriting at which time the underwriter will decide if the insured qualified for insurance. One of two scenarios will happen: the lender will payout the mortgage or refund the premiums. If its the latter it is because the insured did not qualify for insurance due to circumstance before death.
Is having mortgage insurance/credit insurance from your lender the best option for you?
If you want to protect more than just your home, individual insurance will better suit your needs. Individual insurance generally provides more control, options and benefits to help you financially protect what matters most. Underwriting is done at the time of application and an insurance policy is issued if you qualify. When the insured dies the benefactor can choose to payout the mortgage, use the money for the families individual needs or do both.
By comparing Mortgage Insurance and Individual Life Insurance, you ensure you’re giving yourself and your family the type of insurance protection that meets your personal needs and just protecting the lender.
Build a financial security plan that will help protect your mortgage and what matters most in your life.
You may soon find yourself with a tax refund.
- How should you spend it?
- What is the right answer for you?
- Would you be interested in a value added idea?
Presented by Henley Financial & Wealth Management – please continue to read you may find this of some value.
The average individual tax refund is between $1,500 and $3,000. Not everyone will get a tax return essentially a return means that you paid the government too much in tax during the year and now they want you to have it back… For the chosen few people that do lend the government their own money to invest during the year on a tax free basis, that’s the biggest chunk of discretionary income they’ll see in a year. There’s a lot of temptation to spend this cash as is not readily accounted for so it’s essentially free money.
What would you do with that cash if was suddenly given to you?
Hmm, A Trip, Newest Phone, Clothes, Shoes, Dinner and Drinks (well more drinks than dinner), Raptors Tickets, Concert Tickets and a host of many other ideas come to mind.
Once you see the cheque or the deposit in you bank account a spending rush will come over you. Earning 1% in a high yield savings account does not seem very appealing. Investing in your portfolio for future returns that cannot be seen for years to come does not give you that warm and fuzzy feeling.
You could take a trip of a lifetime. How could that be a bad investment? The experience alone is worth a lifetime of memories. This will subside next month when you realize that you spent the return and then some and have to pay for those memories. Hopefully you took some beautiful pictures to share with your face book and instragram friends. Those will more than make up for the sticker shock price of the trip.
The other items or ideas mentioned are all short term memories but definitely worth the time spent if that’s what you want. Just remember there is a difference between needs and wants.
So what should you do with your tax return? Here is an idea that will work but isn’t sexy at all. Double up on a mortgage payment. Or Pay down a credit card bill as it is the highest interest debt that you are carrying. Either is a good choice…
If you think about it paying down your mortgage with your return you are one month closer to paying off the principle on your house. This is one of the biggest assets you own in your portfolio especially with today’s housing market. Since mortgage rates are historically quite low, you could potentially make more money by investing that return in the market but as we know the market can be very volatile.
In any case it’s just a thought and the value to you in the long run is a great basic investment in yourself and your family.
The greatest compliment we receive is being introduced to family, friends and co-workers. Let us know if you would like to introduce someone to Henley Financial and Wealth Management. Contact us Henley Financial & Wealth Management.
A person sacrifices his/her health to make money. Then they sacrifice money to recuperate their health. They become so anxious about the future that they do not enjoy the present; the result being that they do not live in the present or the future; they live as they are never going to die, only to die never really lived. Dalai Lama
So when I’m asked what I do?
The answer is simple! I help you take care of the future so you don’t have worry, thus allowing you to live for today and tomorrow. I help you succeed!
According to the Dalai Lama, “a person sacrifices their health to make money”. So what if I told you I can help you protect your money so you don’t have to sacrifice your health.
When creating our wealth we are often confronted with the risk of not accumulating enough for our future. During the accumulation phase of life (accumulation phase – is when we earn money) it is critical that we save for the future, so we can continue to enjoy a comfortable lifestyle into retirement. Our lifestyle ambitions requires us to earn our dreams. In some cases we tend live beyond our earning potential. Saving for retirement is often complicated, difficult and a time-consuming task for many. We often see people delay saving for the future because they want more now. This is where I can help you succeed. I work with you to help give you that future so you can live today, within your earning potential, and not worry about tomorrow. I help make your life simple through planning.
If I could…
Take the volatility out of the market would you be interested?
Help you protect your assets would you be interested?
Help you protect your earning power would you be interested?
Help you protect your earning potential would you be interested?
If you answered yes, to any of these questions above, it’s time for us to start planning together. Plan for your future so you can live in the present…let me do what I do best.
I can help you find money that you did not know you were losing willingly or unknowingly by taking the volatility out of the markets. In doing so I will help you Protect Your Assets through Wills, Health Benefits, Estate planning, and Long Term Care. I will help you Protect Your Earning Power through Living Benefits. Finally, I will help you Protect Your Earning Potential with the use of Life Insurance.
This is what I do! I help you plan for the future so you can live in the present. I help you succeed!
So is the Dalai Lama right? Do we have to sacrifice health for life style?
As long as we do what we love and love what we do! We know that life is good. We must enjoy the present as we never know what lies ahead. So live for today and plan for tomorrow. If done correctly we will not have to sacrifice our health for lifestyle.
Do you have to sacrifice your money to recoup your health?
In life we are sometimes thrown a curve ball, and our ability to deal with any health issue that comes our way is vital to our recovery. If planned correctly you will never have to sacrifice the future for the present. Depending on the health issues you will have a plan in place so that the road to recovery is all that you will have to concern yourself with.
Although the Dali Lama says that people don’t enjoy today because they worry about the past and the future. I believe that if you plan your personal and families financial security with a vision and purpose you can indeed live worry free to enjoy today.
Unfortunately, we all will die at some point, as it is the cycle life we know. Live life, enjoy your present and future.
The purpose of our life is to be happy. Dali Lama
Start planning today and be happy tomorrow.
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