Weekend Reading: Talking Cents Edition

By Robb Engen | August 29, 2021 |
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Weekend Reading: Talking Cents Edition

Money is still a taboo topic in many cultures. Well, that’s not exactly true. We love to complain about money – about the price of gas, the cost of groceries, the rise and fall of lumber prices, our empty bank account, our credit card debt.

But we rarely talk about the value of money and the role it plays in our lives. What it means to us. Why we make certain decisions about money. How we see money supporting our future goals.

Author Ramit Sethi says the way we feel about money today often stems from our childhood experiences. He calls these our invisible money scripts:

“Invisible scripts are truths so ubiquitous and deeply embedded in society that we don’t even realize they’re guiding our attitudes and behaviour.”

The University of Chicago’s Financial Education Initiative came up with Talking Cents cards to spark conversations about money with your kids and help them develop a positive relationship with money.

I ordered a deck of cards last year to try them out. Each night after dinner we drew a handful of cards and went around the table discussing the questions and our answers. 

The deck contains 108 cards, plus a link to a discussion guide for each card. The discussion guide is a great addition to encourage a richer discussion with prompts and follow up questions. For example, one of the cards included this quote from Albert Einstein:

“If you want to have a happy life, tie it to a goal, not to people or things.” Do you agree or disagree?

The discussion guide for this card said that it may be interesting to share a little bit about Albert Einstein. He was born in Germany in 1879 and later immigrated to the United States. He won the Nobel Prize in Physics in 1921. Extend this discussion by having others explain why they agree or disagree with the quote.

I bought the deck of cards directly from the University of Chicago website. It cost $20 USD plus $13 shipping – so just over $40 CAD. Not cheap.

Thankfully, the Rational Reminder team of Ben Felix and Cameron Passmore, who have made Talking Cents a regular feature in their podcast, have brought the cards to Canada and now sell them for $30 CAD plus tax (free shipping).

If you want to do your part to encourage more rich conversations about money you can pick up your deck of Talking Cents cards at the Rational Reminder online store.

Finally, I’ll leave you with another question from the Talking Cents deck. I’m curious about your answers so please leave a comment below:

“What is something you could buy for yourself but haven’t because you think it would be too extravagant?”

For me, I’ve always wanted to fly business class on a long flight. Even though I have plenty of points to support our (eventual) travel, I’ve always thought it was best to conserve them for more economy redemptions.

But, that changed recently when I re-booked our trip to Italy for 2022 and found business class seats available for 70,000 Aeroplan points (Calgary to Rome). I’ve never been more excited for an 11-hour flight in my life!

This Week’s Recap:

On Friday I updated my post on whether you should defer OAS to age 70 or take it at 65.

Over on Young & Thrifty I took a look at BMO InvestorLine’s self-directed trading platform.

Many thanks to Erica Alini at Global News for including my OAS analysis in her latest Money123 newsletter <–you should subscribe to this.

Promo of the Week:

I’m still baffled why so many Canadians still keep high cash balances in their chequing account or in a big bank savings account that pays next to nothing in interest.

Yes, interest rates are still pitifully low. But that doesn’t mean accepting zero or next to zero percent interest on your cash savings. 

That’s why I promote EQ Bank’s high interest savings account which pays 1.25% interest and offers some chequing account functionality like free e-Transfers and bill payments.

I also like that EQ doesn’t play the promotional interest game – giving you a high rate for just a short period of time. Instead, EQ Bank typically sits in the top 5 of all high interest savings account rates across the country.

Sure, you’re not going to get rich stashing your money in high interest savings. But you can literally get 125x the interest by moving your cash from a big bank to a high interest online bank like EQ.

Weekend Reading:

A look at some excellent free Amazon Gift Card offers on select new credit card applications, from our friends at Credit Card Genius.

National Bank’s discount brokerage arm just eliminated commissions for ETF and stock trades. Rob Carrick writes, should you move your brokerage account to benefit from zero commissions? (<–subscribers)

My take:

Millionaire Teacher Andrew Hallam asks young investors, would you pass the wizard’s test?

At the Toronto Star, improving your investment portfolio requires facing some sneaky biases.

A must read for investors who feel compelled to tilt their portfolio towards or away from specific countries or regions. Stock returns are random. Stop trying to predict winners and just hold a globally diversified portfolio.

Ramit Sethi explains how to automate your finances using technology and psychology:

“Using automation to reduce choices sets you up for success with money, without even having to think about it on a daily basis.”

Turning to the election, here’s why experts say inflation won’t be solved on the campaign trail.

And, here’s a detailed look at the three major political parties’ proposals on childcare and what they could mean for your finances.

Morningstar’s Christine Benz says to forget income replacement, focus on supplying cash flow needs in retirement.

PWL Capital’s Ben Felix argues that our money decisions should be anchored in the objective of living a happy life:

Morningstar takes a closer look at popular retirement savings estimates and asks if you really need to save that much for retirement.

Here’s Kiplinger with six retirement killers to avoid at all costs.

Michael James on Money has mixed feelings about Daryl Diamond’s new book, Retirement for the Record.

Mortgage broker David Larock looks at the current case for variable rate mortgages.

Jason Heath answers a reader question about whether to maximize the down payment on a house or to keep some money to invest.

Of Dollars and Data blogger Nick Magguilli looks at whether we’re in a “melt-up” for investment returns.

Finally, Warren Buffett and Charlie Munger famously have three boxes for investment ideas: In, Out, and Too Hard. Here’s why you don’t have to invest in everything.

Enjoy the rest of your weekend, everyone!

Why You Should (or Shouldn’t) Defer OAS To Age 70

By Robb Engen | August 27, 2021 |
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Why You Should (or Shouldn’t) Defer OAS To Age 70

I’ve long advocated that anyone who expects to live a long life should consider deferring their Canada Pension Plan to age 70. Doing so can increase your CPP payments by nearly 50% – an income stream that is both inflation-protected and payable for life. If taking CPP at 70 is such a good idea, why not also defer OAS to age 70?

Many people are unaware of the option to defer taking OAS benefits up to age 70. This measure was introduced for those who retired on or after July 1, 2013 – so it is still relatively new. Similar to deferring CPP, the start date for your OAS pension can be deferred up to five years with the pension payable increased by 0.6% for each month that the pension is deferred.

OAS Eligibility

By the way, unlike CPP there is no complicated formula to determine your eligibility and payment amount. That’s because OAS benefits are paid for out of general tax revenues of the Government of Canada. You do not pay into it directly. In fact, you can receive OAS even if you’ve never worked or if you are still working.

Simply put, you may qualify for a full OAS pension if you resided in Canada for at least 40 years after turning 18 (when you turn 65).

To be eligible for any OAS benefits you must:

  • be 65 years old or older
  • be a Canadian citizen or a legal resident at the time your OAS pension application is approved, and
  • have resided in Canada for at least 10 years since the age of 18

You can apply for Old Age Security up to 11 months before you want your OAS pension to start.

Your deferred OAS pension will start on the date you indicate in writing on your Application for the Old Age Security Pension and the Guaranteed Income Supplement.

There is no financial advantage to defer your OAS pension after age 70. In fact, you risk losing benefits. If you’re over the age of 70 and not collecting OAS benefits make sure to apply for OAS right away.

Here are three reasons why you should defer OAS to age 70:

1). Enhanced Benefit – Defer OAS to 70 and get up to 36% more!

The standard age to take your OAS pension is 65. Unlike CPP, there is no option to take OAS early, such as at age 60. But you can defer it up to 60 months (five years) in exchange for an enhanced benefit.

Deferring OAS to age 70 can be a wise decision. You’ll receive 7.2% more each year that you delay taking OAS (up to a maximum of 36% more if you take OAS at age 70). Note that there is no incentive to delay taking OAS after age 70.

Here’s an example. The maximum monthly payment one can receive at age 65 (as of July 2021) is $626.49. Expressed in annual terms, that equals $7,553.88.

Let’s look at the impact of deferring OAS to age 70. Benefits will increase by 0.6% for each month of deferral, so by age 70 we’ll see a total increase of 36%. That brings our annual OAS pension to $10,273 – an increase of $2,719 per year for your lifetime (indexed to inflation).

2). Avoid / Reduce OAS Clawback

In my experience working with clients in my fee-only practice, retirees are loath to give up any of their OAS benefits due to OAS clawbacks. That means designing retirement income and withdrawal strategies specifically to avoid or reduce the OAS clawback.

The Canada Revenue Agency (CRA) calls this OAS clawback an OAS pension recovery tax. If your income exceeds $79,845 (2021) then you are required to pay back some or all of the OAS pension you receive from July 2022 to June 2023. For every dollar of income above the threshold, your OAS pension is reduced by 15 cents. OAS is fully clawed back when income exceeds $129,581 (2021).

So, does deferring OAS help avoid or reduce the OAS clawback? In many cases, yes.

One example I’ve come across many times is when a client works beyond their 65th birthday. In this case, they may want to postpone OAS simply because they’re still working and don’t need the income. In some cases, the additional income received from OAS would be partially or completely clawed back due to a high income. Deferring OAS to at least the next calendar year when you’re in a lower tax bracket makes a lot of sense.

Aaron Hector, financial consultant at Doherty & Bryant, says there is a clear advantage to postponing OAS if someone expects their retirement income to push them into the OAS clawback zone.

“Not only will postponement provide them with an enhanced OAS income, it will also in turn provide them with a higher clawback ceiling,” said Mr. Hector.

It might also allow the opportunity to draw down RRSP/RRIF assets between 65 and 70 which would reduce future expected retirement income (lower RRSP/RRIF assets = lower mandatory withdrawals between age 72 and death).

One could also stash any unspent RRSP/RRIF withdrawals into their TFSA. Growing their TFSA in retirement gives retirees the valuable ability to withdraw money tax-free any time and not have that income affect their means-tested benefits (such as OAS).

3). Take OAS at 70 to Protect Against Longevity Risk

It’s counterintuitive to defer taking pensions such as CPP and OAS (even with an enhanced benefit for waiting) because it forces retirees to tap into their personal savings – depleting their nest egg earlier and faster than they’d prefer. Indeed, people are reluctant to spend their capital.

But this is a good thing, according to Retirement Income For Life author Fred Vettese. Deferring CPP and OAS increases the amount of guaranteed income you will have for the rest of your life, while also reducing your long-term investment risk because you are spending your savings first.

“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 (or OAS) cheque, however, will definitely be there for you.”

In one example I looked at a single 59-year-old woman – Jill Smith – who plans to retire on July 1st when she turns 60. Jill requires $48,000 in after-tax spending each year to meet her retirement goals.

She has $775,000 saved in her RRSP, plus $75,000 in her TFSA and $30,000 in cash. She’ll qualify for 80% of the CPP maximum and is fully eligible for OAS.

If Jill takes CPP right away (July 2) at age 60 and takes OAS at the standard age 65 she’ll have enough personal savings to last until she’s 89. Her CPP and OAS pensions make up 30.39% of her total annual income in retirement.

CPP at 60, OAS at 65

Now let’s compare this scenario with deferring CPP and OAS to age 70.

Not only does Jill increase the viability of her retirement plan – her personal savings now last until age 92 – but she has increased the portion of index-protected, paid-for-life government pensions to 54.25% of her total annual income.

CPP and OAS at 70

Mr. Hector says that someone who fears running out of money in old age would be wise to postpone OAS to guarantee a higher base level of income when they are very old.

So those are three great reasons to take OAS at 70 – to enhance your annual OAS benefit, to reduce or avoid OAS clawbacks, and to protect against longevity risk.

Now let’s look at four reasons why you might not want to defer your OAS pension past 65.

1). The OAS Enhancement Is Less Enticing Than CPP

The actuarial adjustment you receive for deferring OAS to age 70 is much less than it is for deferred CPP to 70. It is just 36% compared to 42% for CPP. That makes a big difference, considering you’re foregoing your pension for five years. You want to make sure it’s worthwhile.

“When I compare the two side by side it really jumps out at you how there is a much greater incentive to deferring CPP than there is to defer OAS. This of course is due to the fact that there is a greater enhancement effect for CPP,” says Mr. Hector.

Ignoring income and clawback concerns, it is best to take OAS at age 65 for someone who is going to die between 65 and 79 for OAS, but for CPP the range shrinks to 65 to 77.

Taking OAS at age 70 gives the best outcome for those who live to age 88 and beyond.

2). Emotional Factor

Fred Vettese is a big proponent of deferring CPP until age 70 but not as enthusiastic about deferring OAS. He says that starting CPP late is already forcing the average retiree to draw down their RRIF balance much faster than they planned on doing. It is still a good move, but one that makes people uncomfortable.

He says asking people to start OAS late as well will accelerate the RRIF drawdown and make people that much more uncomfortable.

3). You Need The Money

Deferring CPP and/or OAS is a luxury for those who have the means to fund their lifestyle while they wait. Repeat: This is not a strategy for those who need to access their government benefits right away to get by.

Mr. Vettese says you need at least $200,000 saved before even considering the deferral strategy.

4). Leaving an Inheritance

Deferring OAS and CPP until age 70 means spending down a good portion of your personal savings in your 60s. This could also mean it’s possible to spend down most if not all of your personal savings before you die.

While this ‘die broke’ strategy may be ideal for some, others may wish to leave an inheritance to their loved ones or to charity.

As there is no survivor-OAS pension, someone who is concerned about leaving a large estate to their heirs may decide that they would rather take OAS earlier so that they can leave their investments intact.

“The investments will always have a value for their beneficiaries but that is not true for someone who opted to defer OAS,” says Mr. Hector.

Final Thoughts

There’s no clear-cut answer for deciding if and when to defer OAS.

When I’m working with clients, I always make sure they understand to at least postpone taking OAS until retirement, or the next calendar year after retirement to avoid OAS clawbacks and additional taxes in the final working year.

Then we look at OAS clawback amounts (if any) and see what can be done to avoid them. Sometimes that means taking more from their RRSP/RRIF in their 60s while deferring OAS until somewhere between ages 67 to 70.

But the bottom line is that deferring OAS to 70 is a bet that you’ll live a long life. And, like with an annuity, rather than worrying about what happens if we die early, we should give more thought to whether we’ll live longer than expected.

With that in mind, deferring OAS by 1-5 years can help transfer the risk from your personal savings to the inflation-protected, paid-for-life government pension program.

The more we can ‘pensionize’ our retirement income, the better off we’ll be if we happen to live an extraordinary long life.

Weekend Reading: Tapping Into Home Equity Edition

By Robb Engen | August 21, 2021 |
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Weekend Reading: Tapping Into Home Equity Edition

Many retirees want to know how much they can spend in retirement without running out of money. The caveat is that most also want to remain in their home as long as possible. With the pandemic shining a light on poor conditions and service at long-term care facilities, it’s likely we’ll see even more seniors wanting to ‘age in place’. 

What that means for some retired homeowners is coming up with a way to tap into their home equity. The most common thought is to downsize – sell the family home and move into a condo or smaller house while pocketing the difference in price. Another option is to sell the home and rent in retirement

Those who want to remain in their home for comfort, sentiment, or other reasons may choose to utilize a home equity line of credit. One challenge with this approach is getting a large enough loan in place while you still qualify (i.e. before you retire). Another challenge is that tapping into the loan triggers monthly interest payments.

Finally, there’s one option that was once considered taboo but is now becoming increasingly popular: a reverse mortgage. Canadian homeowners aged 55+ can set up a reverse mortgage through one of two lenders, Equitable Bank and HomeEquity Bank.

The reverse mortgage allows you to access up to 55% of the value of your home. The cash can be paid over a longer period of time (literally like a reverse mortgage), or in a lump sum up front. 

The money is tax-free. You maintain ownership and control of your home, and only pay back the loan when you move or sell. Any appreciation in value over time still belongs to you. You’re simply required to keep the property maintained, pay your property taxes, and keep the house insured.

In areas of the country like Vancouver and Toronto, many seniors will find that their home is by far their largest asset. If the idea is to age in place and leave the home in your estate, you may be sacrificing your own retirement lifestyle along the way.

Imagine you live to age 95. How old will your beneficiaries be and how useful will an inheritance of several million dollars be to them at that time?

Then there’s the reality that you may not be able to age in place for your entire lifetime. Poor health outcomes might dictate a move to a retirement home at some point. 

A paid off home is indeed a cornerstone to a solid retirement plan, but retirees should also consider tapping into their home equity by some measure to enhance their lifestyle and/or plan for extra healthcare costs in their later years.

One question for my homeowner readers – would you consider a reverse mortgage? Let me know in the comments.

This Week’s Recap:

Earlier this week I wrote about two types of overconfident investors.

Last week I was excited to share a conversation with Alexandra Macqueen and David Field, the authors of The Boomers Retire.

Alexandra was gracious enough to offer a free copy of the book to give away to a lucky reader who commented on the post. The winner of the book is “Kat” who commented on August 16th at 12:18pm. Congrats, Kat!

Promo of the Week:

Most bank managed portfolios come with mutual fund fees in the 2%+ range. Meanwhile, many investors aren’t interested or cut out for do-it-yourself investing.

A robo advisor is the perfect sweet spot between a fully managed investment portfolio and a self-directed option. With a robo, you can ditch the expensive mutual funds (which can add up to $10,000 or more each year on large portfolios) and still get a managed portfolio of low cost, globally diversified, and risk appropriate ETFs, plus access to a portfolio manager if you have questions or concerns. 

The robo automatically monitors and rebalances your investments as you add new money and when markets move up and down. 

Retirees in particular can benefit from the cost savings and automation that robo advisors provide. Think about it. Cost savings matter the most when your portfolio is at its largest. And, while there’s nothing complicated about the accumulation phase, the withdrawal phase in retirement is another matter altogether. When to convert your RRSP to a RRIF? How much to withdraw from each account every year? When to schedule those withdrawals (monthly, quarterly, annually)?

A robo advisor can help with all of this and more. 

My go-to robo advisor is Wealthsimple, the largest robo-advisor in Canada. Clients with more than $100,000 to invest qualify for Wealthsimple Black, which comes with a reduced management fee of 0.40% plus some other perks.

Right now you can get a $50 bonus when you open and fund your first Wealthsimple account (min. $500 initial deposit). Sign up now to take advantage of this special offer.

Weekend Reading:

Our friends at Credit Card Genius look at the positive and negative changes made recently to Canada’s best credit card.

You might recognize Tomas Pueyo from his excellent COVID-19 coverage but he also worked for years in the financial advice industry and laid out a few things you need to know about how to invest.

Here’s Morningstar’s Christine Benz and Susan Dziubinski on why you should trial run your retirement

Steadyhand’s Tom Bradley explains how investors can narrow the gap between their risk capacity and risk appetite.

Jason Heath answers a reader question on how much should you withdraw from your RRIF.

Peter Lazaroff discusses investing regret, including where regret comes from, why we experience it with our portfolio, and what to do about it.

Ramit Sethi talks about why we are so emotional about money in this Harvard Business Review interview:

“Our feelings are almost always unrelated to the financial decisions we make and indicative of something much deeper.”

Can you change your mind about money? Here’s why the biggest improvement you could make to your financial well being might be to reframe the way you think about money.

Jonathan Chevreau is rethinking the speculative component of his core and explore investing approach. I think more stock pickers should do this kind of honest self-reflection.

Here’s a fascinating conversation with one of my favourite writers, Morgan Housel from the Collaborative Fund:

Here’s Morgan Housel again looking back at three times history hung by a thread due to chance encounters.

Nine questions that A Wealth of Common Sense blogger Ben Carlson is pondering about the greatest bull market in his lifetime.

Investment advisor Markus Muhs with a scathing critique of market linked GICs – not now, not ever. Agree 100%.

A great resource here by Mark Walhout on investing inside a corporation

Finally, here’s a nice piece by the Humble Dollar’s Don Southworth on the dreaded “b” word. He writes, “for too many people, a budget connotes pennypinching, financial claustrophobia and sacrifice.” But he’s convinced that budgets can change lives because a budget changed his.

Have a great weekend, everyone!

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