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.
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.
So 50, is the new 40, why do people always want to count backwards? Women never seem to age past 29; until it’s obvious and then they age to forty something. I act like a teenager most of the time and sometimes feel like a twenty something. There are days when my aches and pains set in and that is what being fifty is sometimes like. But that’s what happens when you age.
If I rate my younger years I would realize how many mistakes I’ve made along with all the things I’ve learned in the five decades of life.
I prefer to live by this motto and enjoy life.
“Growing old is inevitable, Growing up is optional”.
Don’t wait until you have time to travel. Travel the world while you can, the world is your oyster so they say. How do you know what’s out there if you don’t explore? Don’t just travel to the obvious places. Travel to learn, travel to discover and try not to go to the same place over and over. Travel to the places that will challenge your adventure.
In life we spend entirely too much time working on other people’s visions or in other people’s meetings. Meetings are ways for us to procrastinate implementing good ideas. If you find yourself in a job that you wish you could leave then do it. Find something you love and make your dream job a reality. I realize that is sometimes unachievable. But do something you love to do and you will never regret getting up in the morning and going to work.
In all relationships personal or business you must have trust. Trust in yourself, and your ideas good or bad. Some of your ideas are good and will work out, other ideas may not but what is the harm in trusting in yourself. You may lose friends, or even get hurt. But you must trust people until they give you a reason not to. Don’t waste time on people who you don’t trust.
Find the best in people, they will be best and worst that will happen to you. Some people will help you go further in life. Others will pull you down to their level and hold you back. A few people will change your life forever. As the saying goes you have not met your best friend yet. If you think like that you will meet many amazing people in your life searching for another best friend. Just think what life would be like to have many best friends. You need amazing people who do for you as you do for them in your life. Don’t waste time with friends who don’t treat you the way you treat them.
Value other people’s time. That means that if you’re late, you think you’re worth more and can keep them waiting. Now I realize that there are times when being late cannot be avoided. Call ahead and let them know that you will be late. Don’t be that person who gets invited to the surprise party an hour early just so you will be there in time for the surprise.
In Life we fail a lot. We fail… often, at love, at socializing, at making friends, at work, at business, and with family. Our biggest problem when we fail is we blame that failure on something or someone else. We should learn something every time we fail. If you have not learned anything from failure then you have failed. If you learn something, then you’ve gained a valuable lesson. Every time you grow you learn and fail, you become better at figuring out life.
Life for me has been 50 years in the making. I don’t need to go back 10 years to find it nor do I believe I have completely succeeded at life quite yet. Without many mistakes along the way I would have never learned the patience needed in growing older.
We often forget to plan for our future financial security needs because we are to busy looking behind us to see where we have been. Before you know it, that time will be here and it may be too late. Live life and plan for the future.
Growing old is inevitable… The rest of this quote is yours to finish!
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