In previous articles I’ve looked at reasons to delay taking CPP until age 70, along with explanations why you might want to take CPP earlier at age 60. But in this article I’m going to explain why you shouldn’t take CPP at age 65.
The most compelling reason to defer CPP is the increase or enhancement of your benefit – 0.7% for every month you delay past 65. Wait until age 70 and you’ll receive 42% more CPP than if you took it at age 65. Taking CPP early can also be an attractive option for those with a reduced life expectancy or for those who simply need the money right away.
Once you’re close to age 60, Service Canada will mail you an application form, along with an estimate of your CPP benefits. Curious, since this behavioural “nudge” may influence you to take CPP early at a reduced rate, rather than waiting until the standard retirement age of 65.
Finding out the optimal age to take CPP requires a break-even analysis and depends on a number of factors, including how much you’ve contributed and for how many years, plus a guess on how long you’ll live. Also playing a role is your current and future tax bracket, your income needs now versus in the future, plus the impact that taking CPP early has on means-tested benefits such as GIS and OAS.
What’s interesting about the break-even analysis for CPP is that the standard retirement age of 65 is never the optimal age. Let me explain:
Why Not Take CPP At Age 65?
In I post I wrote years ago about taking CPP early or late, Canada Pension Plan expert Doug Runchey shared with me the interesting fact that taking CPP at 65 is never the optimal choice from a payout perspective.
Indeed, Aaron Hector, a financial planner at Doherty & Bryant Financial Strategists, expanded on that fact with an interesting analysis on optimal CPP starting ages.
Hector looked at two scenarios; one in which the retiree spends all of his or her CPP benefits, and one in which the retiree invests their CPP and earns a 3% real return after taxes.
What he found was that taking CPP at age 60 was best for those who live only until age 69 (when CPP was spent), or until age 71 (when CPP was invested). Taking CPP at age 70 was optimal for those who live until age 86 and beyond.
As you can see, age 65 is never the optimal starting age to take CPP. That said, you could argue that 65 is the sweet spot between the two extremes of taking CPP early or late.
It’s helpful to know that the normal life expectancy at 60 for a Canadian is 25 years. So, if you don’t have any reason to believe you’ll have a shorter or longer life expectancy then 85 is a good age to use as a benchmark for your own break-even analysis. In this case, the optimal age to take your CPP payments and receive the most money is age 69.
Taking CPP early and investing
There’s a mindset among some retirees that they should take CPP as soon as possible and invest. The idea being that the longer their investments can compound, the better off they’d be versus delaying CPP beyond age 65.
But Hector’s analysis should put a damper on any expectation that taking CPP early and investing will lead to a better outcome. This could be due to overconfidence in one’s investing ability, over over-optimism about the expected rate of return. In any case, as you’ll see below, taking CPP at 60 and investing the entire amount only improves the optimal outcome by two years.
It’s hard to beat a guaranteed 7.2% a year increase in CPP benefits just by delaying your application. There’s also a practical argument against this approach. Is the object of the game to amass the largest bank account before you die? Or is it to spend and enjoy what you worked so hard to earn in retirement?
In my mind, it’s not a rational argument that a retiree will invest every single dollar of CPP benefits. At some point we’re going to spend our money.
Final thoughts on taking CPP at 65
The standard retirement age of 65 is embedded in our society and triggers most Canadians to take their CPP benefits at that age – like a rite of passage for retirement. But what I’ve explained here clearly shows that it’s never optimal to take CPP at age 65, from a purely financial perspective.
If anything, this analysis and research should at least give us pause before automatically applying for CPP at age 65. Look at your family history – are they leading long and healthy lives, or is there a trend of illness or disease? Beyond that, what kind of shape are your finances in today? Where will your retirement income streams come from? Do you fear you’ll outlive your money?
All of these questions should play a role in your decision as to whether to take CPP early, late, or somewhere in-between.
Our net worth crossed the million-dollar mark at the end of 2020, but that included about $300,000 in home equity. This week I noticed the total amount we had invested across our RRSPs, corporate account, RESPs, and my LIRA had surpassed the $1M threshold for the first time. We’re managing a million dollar portfolio!
- RRSP – $331,400
- LIRA – $219,900
- RESP – $112,000
- Corporate – $372,000
- Total = $1,035,300
I started my DIY investing journey back in 2009 with about $25,000 from a group RRSP at a former employer. I bought a handful of dividend stocks and thought I was pretty, pretty, pretty good at this whole investing thing.
Little did I know that a rising tide lifts all boats and my stocks just happened to be soaring because the entire market was on fire coming out of the depths of the global financial crisis.
While it was cool to see a 30%+ return on my investments that year, the growth meant little due to the tiny size of my portfolio. In fact, my own savings contributions added more to my portfolio balance than market returns did that year.
Indeed, in the beginning your savings rate matters the most. Contributing $10,000 to a $25,000 portfolio makes a bigger impact than earning a 10% return on that same investment ($2,500).
Fast forward 15 years and more than $1M later, and market movements have a much larger effect on our portfolio balance. Now, a 10% gain on our investments means growth of $100,000 (although the reverse is true as well).
The stakes are much higher now, and there’s more room for error. That’s why I’ve largely removed my own judgement and decision making from our investment management.
No more picking individual stocks or trying to guess which sector, country, or region will outperform. Just buy the entire global market for as cheap as possible and move on with my life.
Related: How I Invest My Own Money
The beauty is that it’s a strategy you can embrace whether your portfolio is worth $25,000 or $2,500,000.
This Week’s Recap:
In the last edition of Weekend Reading I explained the federal government’s proposed changes to the capital gains inclusion rate, which will move from 50% to 66.67% inside of corporations and trusts, while remaining at 50% for the first $250,000 of personal capital gains and then moving to 66.67% of the gains in excess of $250,000.
From the archives: Here are eight overlooked ways to save taxes in retirement.
Our mortgage renewal at Pine Mortgage is almost complete and should be in place this week. So far, so good with Pine – so if anyone’s in the market for a new mortgage just let me know and I can pass along our contact.
Promo of the Week:
With all of my credit card wheelings and dealings (and with us in the market for a new mortgage lender) I tend to keep a close eye on my credit score.
I’ve seen it dip below 700 after a credit card sign-up spree (13 cards in one year), and reach as high as 820 thanks to diligent bill paying, low credit utilization, a long history, and no new inquiries.
My credit score was 804 when I last checked before switching mortgage lenders. It dropped 30 points after that hard inquiry and one new credit card sign-up (I couldn’t help myself!).
Your credit score can vary widely depending on when you check, and with whom.
I get my Equifax credit score for free from Borrowell. It won’t affect your credit score and Borrowell uses bank-level encryption to ensure your information stays safe. Get your free credit score here.
Weekend Reading:
Preet Banerjee’s latest Globe and Mail column argues that biases around house-rich cash-poor homeowners are impacting financial planning for retirement. What is your home equity release strategy?
On Kiplinger, here are five ways to make retirement a little less scary:
The most important thing about retiring “to” something is that you know who you are. Remember: “Retired” says only what you don’t do. Make sure you know what you do do.
Happy 71st birthday! You now must convert your RRSP into a RRIF. Here’s what you need to know.
Like me, Jonathan Clements is forever an optimist and not scared of bears (bear markets, that is). But the future isn’t limited to two alternatives, either continued economic growth or economic apocalypse.
Investors in ARKK have experienced dramatic ups and downs, with an emphasis on downs for most investors. The question anyone still holding these funds must be asking – or should be asking – is whether it will recover:
I like this idea from Michael Kitces about reframing retirement risk away from Monte Carlo style success/failure and towards over-or-under-spending:
The Monte Carlo success/failure framing, in essence, focuses only on minimizing the risk of overspending, hiding a bias towards underspending by calling it a “success”. Or, put another way, a 100% probability of success is exactly a 100% probability of underspending.
Tomas Pueyo shares why he doesn’t invest in real estate and explains why real estate won’t continue to go up forever.
A Wealth of Common Sense blogger Ben Carlson explains why convenience is a form of wealth.
Finally, a loyalty points lesson on why credit card reward charts rarely provide good value for economy class flights to Europe.
Enjoy the rest of your weekend, everyone!
The federal government unveiled its 2024 federal budget with a proposed $53B in new spending over five years, including an ambitious $8.5B plan to tackle the housing crisis. The feds also proposed an increase to the capital gains inclusion rate, from 50% to 66% on gains in excess of $250,000 (personally) and from 50% to 66% on capital gains realized within a corporation or trust (no $250,000 threshold).
The proposed changes to the capital gains inclusion rate will apply to dispositions after June 24th, 2024.
A quick explanation on the inclusion rate: This does not mean a tax rate of 66% on capital gains. It means that two-thirds of a capital gain will be taxable as income. And only 50% of the first $250,000 of a gain will be taxable (for individuals).
For corporations and trusts, two-thirds of every $1 of capital gain will be taxable. This brings the taxation of capital gains closer in-line with dividends and interest.
A capital gain (or loss) is the difference between the original price paid and the price for which it was sold.
For individuals, this will mostly apply to second properties. If you bought a rental property or a cottage for $300,000 and then sold it for $600,000, you will have incurred a capital gain of $300,000:
- $250,000 of that gain will have the 50% inclusion rate applied – meaning $125,000 will be added to your income and taxable at your marginal tax rate.
- $50,000 of that gain will have the 66% inclusion rate applied – meaning an additional $33,000 will be added to your income and taxable at your marginal tax rate, for a total of $158,000 in taxable capital gains.
If you sold that property on or before June 24th you would have $150,000 in taxable capital gains rather than $158,000 in the proposed new inclusion rate. The difference in actual taxes paid for someone in the highest marginal tax bracket in Ontario would be $4,282.
Note that if you held that second property jointly with a spouse, each individual gets to apply the 50% inclusion rate to the first $250,000 of capital gains. That means a $300,000 capital gain on a property jointly held could be split $150,000 per spouse.
- $150,000 of that gain will have the 50% inclusion rate applied – meaning $75,000 will be added to each spouse’s income and taxable at their marginal tax rate.
No doubt there are many individuals wondering whether it makes sense to trigger the sale of a property prior to June 24th. If you’re one of them, make sure you assess your situation and know the adjusted cost base of your property (original price paid plus certain capital expenses) and current market value.
Do you own the property individually, or jointly with a partner? Is the difference between the book value and market value under or over the $250,000 threshold? Do you have any capital losses that can be applied to offset some of the gains? Do you have RRSP contribution room that can be used to reduce your taxable income if you do trigger a gain?
Finally, how long were you planning to hold the asset (before these changes gave you pause)? Know that pre-paying tax now, even at a lower inclusion rate, might make you worse off in the long-run.
PWL Capital built a tool to test whether it makes sense to realize a gain now or defer it into the future.
It’s unlikely I will ever incur a personal capital gain (owning a second property sounds like my personal nightmare), but the proposed increase to the capital gains inclusion rate inside a corporation will impact me at some point in the future.
Up until now, my wife and I paid ourselves dividends and invested any retained earnings inside a corporate investment account. We did this because we already have considerable assets saved inside our RRSPs and a LIRA (and TFSAs, before we used them to top-up the downpayment on our new house). Building up a corporate investment portfolio gave us another tax shelter and more flexibility in how we pay ourselves in retirement.
Smarter people than me are still working out the details on optimal compensation and structure of investments after these changes take effect. It’s possible this is the impetus my wife and I needed to finally make the switch to salary (or some salary + dividends combo), but we’ll see.
I think it’s fairly clear that it makes sense to take larger personal withdrawals from the corporation to fill our TFSAs back up more quickly, rather than investing those extra dollars inside the corporation. We planned on doing that anyway, but may accelerate that plan.
This Week’s Recap:
In the last Weekend Reading I looked at the best time of year to retire and determined that the second quarter (April-May-June) might be the sweet spot. Thanks so much for the thoughtful responses on your own retirement decisions!
We’re still working on our mortgage switch with Pine Mortgage (that is to say, all of our documentation has been submitted and approved, and Pine is busy doing what they need to do to move the mortgage from TD before the end of the month.
From the archives: No, RRSPs are not a scam – a guide for the anti-RRSP crowd.
Promo of the Week:
The American Express Business Gold Rewards Card is still the top credit card on the market, giving you up to 75,000 Membership Rewards points when you spend $5,000 within three months.
Use this link to sign up for your own American Express Business Gold card and earn 75,000 Membership rewards points when you do the same. Then activate your player two for a chance to earn another 90,000 points (15k referral plus 75k welcome bonus).
If you’re looking for hotel rewards, this one is an absolute no-brainer card to have in your wallet. The Marriott Bonvoy Card gives you 55,000 bonus (Bonvoy) points when you spend $3,000 within the first three months. Not only that, you get an annual free night certificate to stay at a category five hotel (easily worth $300+), making this a card a keeper from year-to-year. The annual fee is just $120.
Weekend Reading:
PWL Capital’s Ben Felix shares a great explanation of the capital gains tax increasing and what it means for you:
Family doctors are one group unfairly swept up in the proposed changes to capital gains – here’s how the changes impact them.
Erica Alini lists the seven ways the 2024 federal budget affects your finances, from selling your cottage to RESPs (subscribers):
“The budget also proposes automatically opening an RESP for eligible children born in 2024 and later years starting in fiscal year 2029. This will ensure an additional 130,000 children will receive up to $2,000 through the Canada Learning Bond, which helps low-income families save for postsecondary education.
While the aid isn’t tied to contributions, families must have an account open to receive the funding.”
Some excellent thoughts on selling your business from advice-only planner Julia Chung.
Divorced parents are supposed to share kid costs fairly – but Anita Bruinsma explains why that’s often not the case.
Mark Walhout explains how to avoid tax surprises with CPP and OAS.
Don’t wait until the last minute to fill your cash bucket. Why you should take this simple step as you approach retirement. I like the idea of filling up your cash bucket with new contributions in your final working year (or two).
Finally, with Japanese stocks awake from their decades-long slumber, Of Dollars and Data blogger Nick Maggiulli explains why we invest for the decades, not the years.
Enjoy the rest of your weekend, everyone!