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.
Why Take CPP at age 70?
Here are three reasons to take CPP at age 70:
1. Enhanced Benefit – Take CPP at 70 and 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 2021) is $1,203.75. Most people don’t receive the CPP maximum, however, so we’ll use the average amount for new beneficiaries, which is $689.17 per month. Now let’s convert that to an annual amount for this example = $8,270.
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 $8,270 to $5,293 – a loss of $2,977 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 $11,743. That’s an increase of $3,473 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The gradual increase in the percentage withdrawn also does not jive with our belief in the 4 percent rule that will help our money last a lifetime.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. Take CPP at age 70 to 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?
Bonds are meant to be the ballast that helps smooth out volatility in your portfolio. They act as a cushion – the steady yet unspectacular asset class that balances the unpredictable movement of stocks. But a sudden decrease in bond prices has investors looking for answers.
In short, bond yields are on the rise because investors are optimistic about future economic growth. The U.S. 10-year Treasury yield climbed to its highest level in more than a year. Here in Canada, 10-year government bond yields have more than doubled since the beginning of January.
Rising rates spell trouble for bond prices, though. Long-term bonds are particularly sensitive to changes in interest rates. A good way to measure that sensitivity is by looking at a bond’s duration. A bond with a duration of 5 years will see its price fall by 5% if interest rates rise by 1% (and vice versa).
BMO’s ZFL, which tracks Canada’s long-term federal bond index, has an average duration of 17.94. The price of ZFL fell by 11.08% as of Thursday before a slight uptick in prices on Friday. BMO’s popular ZAG ETF, which tracks the Canadian aggregate bond index, has an average duration of 8.1 years and its price was down 4.81% as of Thursday.
Short-term bond ETFs have a lower yield but they are less sensitive to interest rate movements and more preferable to hold in a rising rate environment.
The iShares Core Canadian Short Term Bond Index ETF (XSB) has an average duration of 2.71 years. Its price is down just 1.10% on the year, compared to the iShares Core Canadian Universe Bond Index ETF (XBB), which has an average duration of 7.91 years and is down 3.87% year-to-date.
The silver lining for bond holders is that you’re still getting interest payments from your bonds, and those payments should eventually rise as new bonds are purchased at higher interest rates. That’s why investors with a long time horizon should stick to their plan and rebalance – buying bonds at low prices and higher yields.
Retirees, on the other hand, should consider the average duration of their bonds and determine if it’s appropriate for their age and stage of life. Clearly, holding long-term bonds when you have short-term spending needs is not a wise strategy.
Fears over rising interest rates have plagued investors for the past decade. As this 2011 article from Canadian Couch Potato Dan Bortolotti explains:
“The key message for investors: as long as your time horizon is at least as long as the duration of your bond fund, you won’t lose any capital. Any price decline from rising interest rates will be offset by higher coupons within that time frame. In fact, history suggests the recovery is likely to be more swift than that: even a three-year period of negative bond returns is extremely rare.”
This Week’s Recap:
Earlier this week I wrote my annual letter to Engen Householders.
Read the Oracle of Omaha Warren Buffett’s annual letter to Berkshire shareholders here.
From the archives: Why I Don’t Hold Bonds in My Portfolio.
Promo of the Week:
The American Express Cobalt Card is arguably the best ‘hybrid’ card in Canada. Cardholders earn 5x points on groceries, dining, and food delivery, plus 2x points on transit and gas purchases.
New Cobalt cardholders can earn 30,000 points in their first year (2,500 points for each month in which you spend $500) plus, you can earn a welcome bonus of 15,000 points when you spend a total of $3,000 in your first 3 months.
Our friends at Credit Card Genius share how you can take advantage of record low interest rates in Canada.
Jim Wang at Wallet Hacks brilliantly explains what you should do with all the financial advice on the internet.
A fantastic piece by Morgan Housel on investing and speculation – when everyone’s a genius.
For Globe and Mail subscribers, Rob Carrick explains that what’s happening with housing and stocks is not normal:
“Gen Xers, boomers and older generations have one benefit young adults lack in making sense of what’s happening now – perspective. If you opened your eyes to personal finance and investing in the pandemic, you’re seeing things that may never happen again. Take advantage, and take care.”
What would Warren Buffett make of this stock market silly season? He’s already told us.
A perfectly timed new video by PWL Capital’s Ben Felix on the pitfalls of chasing star fund managers:
With the 2020 RRSP deadline fast approaching, My Own Advisor Mark Seed shares RRSP facts you must remember this year and beyond.
Michael James on Money explains that the great thing about managing other people’s money (from a fund manager’s perspective) is you can dip into it to pay yourself.
On the Evidence Based Investor, Larry Swedroe looks at the odds of outperformance through active management.
A Wealth of Common Sense blogger Ben Carlson debunks everyone’s favourite hyperinflation scenario.
Of Dollars and Data blogger Nick Maggiulli sold his Bitcoin. Have fun staying poor.
Global’s Erica Alini reports that fixed mortgage rates are on the rise.
Finally, this New York Times article takes an interesting look at how boredom is impacting the economy today.
Have a great weekend, everyone!
Inspired by the folksy wisdom in Warren Buffett’s annual letter to Berkshire shareholders (scheduled for Feb 27, 2021), I decided to write my own letter. I don’t have any shareholders so this letter is written to my family, or my householders.
Alas, I don’t expect anyone to make the pilgrimage to Lethbridge, Alberta for our annual household meeting, so instead you’ll get to read Engen’s annual letter to householders.
Engen’s annual performance versus the market
|Year||My personal rate of return||TSX Composite annual rate of return||S&P 500 annual rate of return|
To the Householders of Engen Inc.
The Engen family’s gain in net worth during 2020 was $184,645 which represented an increase of 22.3% over 2019. Over the last 11 years (since I started this blog) our household net worth has grown from $102,200 at the end of 2009 to $1,013,141 by the end of 2020 – a rate of 23.2% compounded annually.
There are five building blocks that add value to the Engen family’s finances: (1) high savings rate; (2) no new debt; (3) minimizing cost of living increases; (4) investment earnings from our portfolio of stocks; and (5) increasing income.
High savings rate
We’ve always tried to maintain a high savings rate and 2020 was no exception. Between our RRSP, TFSA, and RESP accounts, we managed to save one-third of our income. That’s in addition to the $100,000 we were able to invest inside our new Corporate Investment Account.
Looking ahead, these savings categories will have to be reassessed beyond 2021 as we have maxed-out both my wife’s and my RRSP contribution room along with my unused TFSA room.
Thankfully, TFSA contribution room is plentiful in my wife’s account and that will be our focus this year with a planned $50,000 in TFSA contributions for her account plus the $6,000 annual TFSA limit going into my account.
RESP contributions are currently maxed-out each year ($2,500 per child) and will be until our children are ready to attend post-secondary.
Our savings rate will actually tick-up to 37% in 2021.
No new debt
Both of our vehicles have been paid off for years and that has allowed us to direct more of our income towards our savings goals and for travel (ha!). We’ve also paid off our home equity line of credit that we used to complete our basement renovation.
We haven’t had any non-mortgage debt for two-and-a-half years. Even though rates are ultra low, we don’t plan to take on any new debt in the near term.
Speaking of our mortgage, we’re halfway through a five-year term with a 1.45% variable interest rate. We’re in no hurry to pay this down, although with the balance now well below $200,000 we believe the next mortgage renewal (in 2023) will be our last one.
Minimize cost of living increases
Raising a family is expensive. Our annual grocery spending now far exceeds what we pay onto our mortgage. What we saved on dining expenses in 2020 was offset by an increase in our wine budget (sorry, not sorry).
Our spending on kids’ activities was down slightly in 2020, thanks to most sports being shutdown over the spring and fall. We expect these costs to continue to rise though as our kids remain in weekly piano and ballet lessons, plus an expected return of some sporting activities later this year.
As I mentioned, we haven’t had a vehicle payment for several years and don’t plan to upgrade our 2007 and 2013 model vehicles any time soon.
I’m a firm believer that Canadians spend way too much money on vehicles, as evidenced by the auto industry’s record sales every year. How many families have two brand-new leased or financed vehicles sitting in their driveway?
The Engen strategy for saving big money is to drive our paid-off vehicles for at least another five years before we even think about purchasing a new one. That will save us $10,000 per year, an amount that will be saved towards our early retirement fund.
The key to managing all of this is budgeting and planned spending – something we’ve been mastering for the past decade and still find tremendous value in each year.
Investment earnings from our portfolio of stocks
Our RRSP portfolio has grown large enough (at ~$250,000) that market changes rather than personal contributions is now the biggest driver of performance.
You see, while our high savings rate is important, that mattered much more in the early years of investing. A 10% return on $10,000 is only $1,000, but a 10% return on $250,000 is $25,000. That kind of compounding starts to make a big difference once your portfolio reaches six-figures or more.
And, while many investors like to focus on the amount of dividends a portfolio can generate, the way I look at it I’m still in the accumulation phase of my investing journey and so I’m most interested in the total returns from my portfolio. After all, if I were a dividend investor I’d be re-investing those dividends anyway, not spending them.
With my one-ticket investing solution (Vanguard’s VEQT), my portfolio is automatically rebalanced and requires no maintenance from me besides adding new money from time to time.
It was a good decision to leave my day job in the public sector at the end of 2019. Wages had stagnated for years and the situation in post-secondary is far worse now thanks to the pandemic.
It was fortuitous that I started this blog back in 2010. Since then, through a combination of hard work and luck, I managed to earn more than $500,000 (before expenses) through advertising, freelance writing, and fee-only financial planning.
Not all of that went back into our household finances, mind you, but we did withdraw an extra $3,000 or so every month to help accelerate our savings goals.
That side hustle has now turned into a full-time career for me and my wife, and we managed to double the business revenue in 2020.
We also found other ways to increase our income each year; earning credit card rewards on our spending, and selling unused items on Facebook and Kijiji.
Increasing income has been the number one difference maker in our household finances over the last 10 years. This hasn’t come from big bonuses or big jumps in salary. In fact, we were a single-salary household and I had never earned six-figures in a year.
Instead, I’ve hustled and found the right opportunities to turn my passion into a full-time business venture. I hope to instil the same entrepreneurial mindset into our kids as they get older.
As we look to the year ahead we’ll continue to focus on these five pillars that have laid the foundation for financial success.
It’s these building blocks, stacked slow and steady, year after year, that help us reach such lofty ambitions as having a million-dollar net worth by age 41, and becoming financially free by age 45. They allow us to spend freely on things we care about, and save big on things we don’t.
More than anything, they’re the financial values we share as a household, a compass to guide us through life’s milestones and to our destination.
Next year we’ll be that much closer to it. Until then.