It might seem counterintuitive to spend down your own retirement savings while at the same time deferring government benefits such as CPP and OAS past age 65. But that’s precisely the type of strategy that can increase your income, save on taxes, and protect against outliving your money.
Here are three reasons to take CPP at age 70:
1. Enhanced CPP Benefit – Get up to 42 percent more!
The standard age to take your CPP benefits is at 65, but you can take your retirement pension as early as 60 or as late as age 70. It might sound like a good idea to take CPP as soon as you’re eligible but you should know that by doing so you’ll forfeit 7.2 percent each year you receive it before age 65.
Indeed, you’ll get up to 36 percent less CPP if you take it immediately at age 60 rather than waiting until age 65. That alone should give you pause before deciding to take CPP early. What about taking it later?
There’s a strong incentive for deferring your CPP benefits past age 65. You’ll receive 8.4 percent more each year that you delay taking CPP (up to a maximum of 42 percent more if you take CPP at age 70). Note there is no incentive to delay taking CPP after age 70.
Let’s show a quick example. The maximum monthly CPP payment one could receive at age 65 (in 2019) is $1,154.58. Most people don’t receive the maximum, however, so we’ll use the average amount for new beneficiaries, which is $664.41 per month. Now let’s convert that to an annual amount for this example = $7,973.
Suppose our retiree decides to take her CPP benefits at the earliest possible time (age 60). That annual amount will get reduced by 36 percent, from $7,973 to $5,862 – a loss of $2,111 per year.
Now suppose she waits until age 70 to take her CPP benefits. Her annual benefits will increase by 42 percent, giving her a total of $11,322. That’s an increase of $3,349 per year for her lifetime (indexed to inflation).
2. Save on taxes from mandatory RRSP withdrawals and OAS clawbacks
Mandatory minimum withdrawal schedules are a big bone of contention for retirees when they convert their RRSP to an RRIF. For larger RRIFs, the mandatory withdrawals can trigger OAS clawbacks and give the retiree more income than he or she needs in a given year.
The gradual increase in the percentage withdrawn also does not jive with our belief in the 4 percent rule that will help our money last a lifetime.
You can withdraw from an RRSP at anytime, however, and doing so may come in handy for those who retire early (say between age 55-64). That’s because you can begin modest drawdowns of your retirement savings to augment a workplace pension or other savings to tide you over until age 65 or older.
Tax problems and OAS clawbacks occur when all of your retirement income streams collide simultaneously. But with a delayed CPP approach your RRSP will be much smaller by the time you’re forced to convert it to a RRIF and make minimum mandatory withdrawals.
With careful planning (and appropriate savings) your retirement income streams by age 70 could consist of CPP and OAS benefits, small RRIF withdrawals, plus – the holy grail – TFSA withdrawals, which do not count as income and won’t affect means-tested benefits like OAS.
3. Protect against longevity risk
Here’s where the counter-intuitiveness comes into play. Most default retirement projections will have you taking CPP at age 65 (or earlier) while delaying withdrawals from your RRSP and/or LIRA until age 71.
As I suggested above, the idea is to spend down some of your RRSP before age 70 to fill the gap left by deferring your CPP benefits. Good luck getting your commission-paid advisor to buy into this approach. I doubt many advisors would like the idea of spending down your savings early in order to maximize retirement benefits from CPP.
“Spend your risky dollars first because they may not be there for you in your 80s, depending on how your investments do. A bigger CPP cheque, however, will definitely be there for you.” – Fred Vettese
Spending down your RRSP in your 60s while deferring CPP until age 70 is like converting your risky assets (personal savings in the stock market) into a guaranteed income stream for life.
Related: 5 ways to save your retirement
Think about it. Will you still have the required mental faculties at age 80 or 90 to continue managing your own retirement assets? Or would you prefer to enjoy spending those assets in your 60s and 70s, knowing you still have an enhanced (and guaranteed) income stream to last a lifetime?
If your biggest fear in retirement is outliving your money then why not design your retirement income streams to protect against that very fear? Instead, most retirees take their CPP benefits the first chance they get – leaving additional money on the table and giving up a portion of that longevity risk protection.
Let’s hear it: Retirees, when did you take CPP? Soon-to-be retirees, have I given you a compelling argument to take CPP at age 70?
Dividend investors tend to have an almost blind faith in the steadiness of companies in which they invest. They want to invest in businesses that have paid dividends for many years and, more importantly, have a track record of growing those dividends each year for decades or more. Reliable dividends mean never worrying about the stock price as long as the company continues to write quarterly cheques to its investors.
The crown jewel for dividend investors is the dividend aristocrats – a list of companies that have not only paid but also increased dividends annually for 25 years or more. It’s the perfect stock screen for large blue-chip dependable dividend payers. Investors believe that companies who belong to the dividend aristocrats must generate exceptional cash-flow and have prudent management that takes care of its shareholders.
But is it prudent for management to pay an ever-increasing dividend at the expense of growing their business through investments, research & development, or acquisitions? Or paying down debt?
Let’s face it, there must be times when it’s not smart to pay out all of your free cash flow to investors. And if management decides that paying dividends is its top priority just for the sake of staying on the dividend aristocrats list, well I’d say that’s the opposite of being prudent. Eventually poor decisions like that catch up with you.
Take the ultimate widow and orphan stock, General Electric, which recently cut its dividend to 1 penny per quarter. GE was a dividend darling, paying out shareholders every year since 1899. It had a stretch of 32 consecutive years of dividend growth, and was the largest company in the world from 1994-1998, and 2000-2005.
Another former aristocrat, Anheuser Busch cut its dividend in half amidst swelling debt of $109 billion after its acquisition of rival SABMiller.
As reliable as the likes of Johnson & Johnson, McDonald’s, Coke, and Walmart have been over the years it does not take a huge leap of faith to imagine the next 20+ years turning out much different for these companies. Indeed, the S&P 500 Dividend Aristocrats list looks much different today than it did after the financial crisis in 2008.
Hey, as a former dividend investor I can empathize with the idea that investing in strong dividend paying stocks “feels better” than investing in a broad stock market filled with good and not-so-good companies. But screening for companies based on their historical performance, including dividend history, is not the best way to build a portfolio. There’s simply no guarantee that this reliability and performance will continue in the future.
Businesses change, industries get disrupted, management becomes complacent. All the better to diversify that risk away by investing globally in thousands of stocks.
This Week’s Recap:
On Thursday I wrote about RRSP loans and explained the reasons why you should (and shouldn’t) get one.
Over on Rewards Cards Canada I shared a new enhancement to the prestigious American Express Platinum Card (including a shiny new metal card design)
Promo of the Week:
The Credit Card Genius website released its best credit card offers for 2019 and there are some good ones on the list for those who are in the market for a new card, or looking to claim some bonus points.
The top promotion on the list is for the Scotiabank Gold American Express card, which comes with a 15,000 point welcome bonus plus a $100 e-gift card to Amazon upon approval.
Another offer I’m strongly considering is TD’s Aeroplan Visa Infinite Card. You can get a 30,000 point welcome bonus and the annual fee is waived in the first year. Sign me up!
Lots of reading this weekend so grab an extra coffee and let’s go!
BMO is getting in on the one-ticket ETF revolution with their new offerings of ZCON, ZBAL, and ZGRO. Great for investors!
A crazy story about the founder of a cryptocurrency exchange and his sudden death, causing the search for more than $260 million in digital assets.
An amazing post by investor advocate Neil Gross calling on big tech firms to optimize our finances. Some excellent ideas in here:
“Sci-fi fantasy? Maybe not. Algorithms already drive cars down busy city streets and land space probes on comets, so something this intricate isn’t beyond the tech world’s existing capability. They could build it.”
Tax expert Tim Cestnick tells us to take heed of the 80-percent rule this RRSP season.
Canadian Couch Potato blogger Dan Bortolotti explains what to look for when choosing a financial advisor.
Charlie Munger says teaching young people to actively trade stocks is like starting them on heroin.
Barry Ritholtz shares some excellent examples of paying for advice:
“But then I remember that a true financial advisor doesn’t really earn their fees until the big moment. That moment where a client wants to double their exposure to technology stocks after a 500% rally they feel they didn’t get enough out of.”
Independent Financial Adviser, Darryl Brown, answers some reader questions with Rob Carrick on one of the newest retirement planning strategies called F.I.R.E., Financial Independence Retire Early:
Ellen Roseman says Millennials and Gen-Xers should reach out to robo-advisors to manage their investments.
Kevin Press from Today’s Economy blog interviews Tom Drake, founder of Maple Money – one of the longest running personal finance blogs in Canada.
The Globe & Mail’s Gail Johnson explains how finances play into Canadians’ happiness.
Here’s a very interesting take on the psychological trappings of freelancing:
“Once I started freelancing, things changed. I became hyperconscious of how much money I could (or should) charge for my time, and this made me unhappy and mean when my nonworking hours didn’t measure up to the same value.”
Why technology is poised to (finally) disrupt the mortgage lending industry, with the majority of applications completed online or with a chatbot.
What to do when banks give questionable financial advice to seniors? Jason Heath explains in his latest MoneySense column.
Michael James muses about the emotional money choices he made over the years. These won’t be what you think they are (unless you know Michael).
Mark Seed explains why he doesn’t post net worth updates on his My Own Advisor blog, choosing instead to focus on dividend income updates.
Finally, an interesting and important debate is taking place now about your future car’s moral compass.
Have a great weekend, everyone!