Attempts to enhance the Canada Pension Plan (CPP) failed this week as Ottawa decided to kick the can down the road and wait for the economy to improve before making any changes to contributions and benefits. Provinces are now looking into their own solutions, including a voluntary pension option.
The current average CPP payment to retirees is $7,234.32 a year and the maximum payment is $12,150. Meanwhile, just one-quarter of Canadians made RRSP contributions last year, even though two-thirds don’t have a workplace pension plan.
Related – Let’s play necessity Tetris: Retirement income edition
Confronting our pension failures. That’s the premise of a new book titled, The Third Rail, written by Jim Leech, CEO of Ontario Teachers’ Pension Plan, and Jacquie McNish, a senior writer at the Globe and Mail. The book showcases examples from Holland, New Brunswick, and Rhode Island, as places which have adopted pension reform to fix their broken pension programs.
The authors argue that, unless immediate action is taken to reform our inadequate pension system, retirees will find themselves in financial limbo and taxpayers on the hook for soaring elderly support payments.
I’m reading the book now, and it’s fascinating – as far as arguments about pension reform go. A definite must-read for Canadians who care about workplace pensions and the long-term health of our pension system.
The book publisher sent me an extra copy to give away, so if you’d like a chance to win a copy of this book, just leave a comment at the end of the post. I’ll close off the entries on Thursday December 26th at 5:00pm EST and announce the winner on December 27th.
Weekend Reading
Now let’s take a look at some interesting personal finance articles, videos, and podcasts from around the web this week:
1. We recorded episode six of the Because Money video podcast this week, where we discussed small business finances and why it’s so hard to separate your business from your personal finances. We also touched briefly on charitable giving and some reasons why Canadians are Scrooges when it comes to donating money.
2. Mark Seed from My Own Advisor was on the More Money for Beer and Textbooks podcast last week talking about some of the mistakes he made when he first started investing, which included high MER mutual funds and investing in penny stocks.
3. Speaking of My Own Advisor, Mark featured me in his investing series titled, What’s in your portfolio? Check out what I had to say about my investing goals and strategy, as well as some advice for other investors using a similar approach to me.
4. CBC’s Amanda Lang looked at ways the financial system is rigged against you in this video that aired on The National.
5. Dollar cost averaging has long been touted as the best way to invest your money, but what if you have a large lump sum – like from a year-end bonus? This article on Canadian Business says that the odds favour investing it all right away.
6. The Globe and Mail’s Rob Carrick lists his nine favourite investing websites. All solid resources that should be bookmarked on your computer.
7. Canadian Couch Potato Dan Bortolotti says it’s the possibility of achieving market-beating returns that keeps investors away from a more sensible, passive approach.
8. Why do academics always talk about risk-adjusted returns? Mike Piper explains why risk-adjusted returns matter over on his Oblivious Investor blog.
9. Another investing question answered – this time about whether stocks become more or less risky over time. Michael James has your answer.
10. Big Cajun Man argues against a claim that the government is losing money by allowing the TFSA program to continue. What’s your take?
Christmas break
We’ll be taking a break from our regular Monday and Wednesday posts next week to enjoy the Christmas holidays. We’d like to wish you all the best over the holiday season, and we’ll see you back here next Friday with some final thoughts on the year 2013.
Don’t forget to leave a comment for your chance to win a copy of The Third Rail.
Thanks for reading, and have a Merry Christmas!
One way you may be able to increase your CPP benefits is by taking advantage of the “Child Rearing Dropout Provision.”
If you stopped working – or worked fewer hours – to care for your young children under the age of seven, that period could be excluded from your contributory period. It can also affect disability pension benefits and death and survivor benefits.
Here’s an example:
Julie was employed full-time until her daughter, Elizabeth, was born in 1983. She then stayed home until Elizabeth started school in 1989. When Julie applies for her pension at age 65, she requests the Child Rearing Dropout Provision. CPP will then exclude the period from the month following the child’s birth to 1990 in its calculation of her benefit amount.
Related: Do We Need To Expand CPP?
She will receive $735 per month. Without the provision, her pension would have been $650 per month.
Are you eligible for the child rearing dropout provision?
You may apply for the child rearing dropout provision if:
- You have children born after December 31, 1958
- Your earnings were lower because you either stopped working or took a lesser paying job to be the primary caregiver of a dependent child under seven years of age
- You received Family Allowance payments, or were eligible for the Canada Child Tax Benefit (even if you didn’t receive it because your family income was too high)
I contacted Service Canada for further clarification. The “dropout” period is the actual time that your children were 1 month to 7 years old.
Related: The High Cost Of Childcare
I was hoping that – in my case – 11 years could be added to the general dropout provision (17% in 2014). I worked full time – and had some of my highest earnings as compared to the Maximum Pensionable Earnings – during the major part of that period, so I don’t want to exclude them. Unfortunately for me, I will not be able to take advantage of this provision.
When can you apply?
When you apply for your CPP benefits, the application form (ISP1000) includes a section on child rearing that you can fill out.
If you are already receiving CPP payments you can still request this provision by completing for ISP1640 and mailing it to Service Canada.
What documents do you need?
For each child listed on the application form, you must provide one of:
- The child’s name, date of birth and Social Insurance Number, or
- The original or certified true copy of the child’s birth certificate
For children born outside of Canada you may also be required to provide proof of entry into Canada.
Waiving your rights
The person (usually the mother) who received the Family Allowance or Child Tax Benefit payments can waive the rights to the Child Rearing Provision in favor of the spouse who remained home and was the primary caregiver. Note – this only applies to spouses, not grandparents or other relatives that may have cared for the child.
Related: Why You Should Protect Your Earnings With Disability Insurance
Either parent can request the Child Rearing Dropout Provision, but it can’t be used by both parents, neither can the period be split between parents.
Conclusion
According to a 2011 report by Canada’s task force on financial literacy:
- 55,000 people are missing out on CPP payments
- 160,000 eligible people don’t apply for OAS
- 135,000 – 150,000 of those eligible are not receiving GIS benefits
That means you must apply. Apply for CPP survivor benefits. Apply for death benefits. Apply for the dropout provision. It is not automatic.
Related: How Do You Choose Your Retirement Date?
Make sure that you take the steps necessary to receive the highest payment possible
All applications are available at Service Canada. For further information about your own situation call them at 1-800-277-9914.
I’ll admit I’ve never liked the idea of taking out an RRSP loan to boost contributions and generate a higher tax refund. If you can afford to pay back the RRSP loan over 12 months then you probably should have budgeted and saved for higher contributions in the first place instead of borrowing.
However, after re-reading The Wealthy Barber Returns last month, I got an idea that would increase next year’s RRSP contributions by 67 percent with minimal cost and effort. I took out an RRSP loan and here’s how it works:
Related: RRSP contribution vs. Mortgage pay down
RRSP Contributions
I’ve already contributed $11,100 toward my RRSP this calendar year, but because $5,100 of that was claimed in the first 60 days for last year’s taxes, I’ll have a total RRSP contribution of $6,000 for this tax year (2013).
My marginal tax rate is 32 percent, so that $6,000 RRSP contribution would generate a tax refund of $1,920.
I’ve budgeted $1,000 per month for RRSP contributions in 2014, or $12,000 for the year.
A Simple Idea
According to Chilton’s, “A Simple Idea” chapter, most of us save from our after-tax income but by doing so we shortchange our RRSPs and then we often add financial insult to injury by spending our tax refunds.
Related: Why do we save?
In his fictional example, “Todd” had $3,000 saved for an RRSP contribution and Chilton advised him to contribute $5,000 because that amount would generate a $2,000 tax refund which will cover the amount borrowed.
Where does Todd get the extra $2,000 to make that contribution?
“I don’t care where you get it, just get it,” Chilton advised. “Transfer it from your emergency fund account, borrow it from your sister, take it from your line of credit. Remember, you’ll get it back in May or so. At five percent, the interest over four months will be less than $35. But you’ll have contributed 67 percent more to your RRSP!”
My $20,000 RRSP Loan
With that in mind, I borrowed $20,000 from the bank in the form of an RRSP loan at four percent. Monthly payments will total $1,703 starting in January and ending in December.
Related: Is an RRSP loan necessary?
That increases my 2013 RRSP contributions to $26,000, which will generate a tax refund of $8,320. Remember I had budgeted $12,000 for RRSP contributions next year. After applying the tax refund to the RRSP loan sometime this spring, I’ll still only be out of pocket $12,000 for the year, but my RRSP will have an extra $8,000 using this approach.
Two caveats with this strategy: I’ll need to come up with an extra $703 per month to pay the loan until my tax refund comes in, and the full cost of borrowing $20,000 for 12 months will come to $435. But if I apply the entire refund at once and then continue with the same repayment schedule I’ll pay off the loan in August and save a few hundred bucks interest.
Final thoughts
Using an RRSP loan (or borrowing from your sister) can be a powerful strategy to boost your RRSP contributions and build your retirement portfolio. However, use caution whenever borrowing to invest and remember that this solution only works when you have the discipline to save your tax refund or use it to help pay off the loan.
Related: Smart tax planning strategies
Now if you’ll excuse me, I have some Christmas shopping to do and I’m looking for a sale on dividend growth stocks.