Owen Winkelmolen, an advice-only financial planner and founder of financial planning firm PlanEasy.ca.Handout
This is the latest article in our series, Planning for the CPP, in which Globe Advisor explores the decisions behind when to take CPP benefits and reviews different aspects of the beloved and often-debated government-sponsored pension plan.
As part of the series, we invited readers to ask questions about their Canada Pension Plan (CPP) retirement benefits and find experts to answer them. This week, Owen Winkelmolen, an advice-only financial planner and founder of financial planning firm PlanEasy.ca in London, Ont., answers questions about the pros and cons of taking CPP benefits early and investing them:
Should I take my CPP at 60 and invest it? I know the returns will depend on stock market returns over time, but can you do some calculations on average returns of, say, 5 per cent? What are the pros and cons of this strategy versus waiting until 65 or 70?
There are many pros and cons to delaying CPP benefits. Your question alludes to the famous CPP break-even age question, so let’s explore that first.
Let’s assume your CPP at 65 would be $1,000 a month and your CPP at 60 would be $640 a month, which is 36 per cent lower for starting five years early. If you take the CPP starting at 60, there would be $38,400 in CPP payments made between 60 and 65. However, if you take the CPP starting at 65, these monthly payments are $360 more.
The simplistic break-even analysis for delaying CPP would suggest that your break-even happens after 107 months, $38,400 divided by $360, or around the age of 73 and 11 months. But as your question astutely points out, that doesn’t include investment returns, so how does the break-even age change when we add investment returns?
If we add real investment returns of 3 per cent (5 per cent nominal returns and inflation of 2 per cent), the break-even happens later, at 76 and four months. Investing those early CPP payments between 60 and 65 (or drawing less from your investment portfolio during that time) means the break-even point gets pushed further out. If you delay the CPP from 60 to 70, the break-even point happens even later, at 81 and three months.
This analysis includes several assumptions:
That your marginal tax rate is the same now and in the future. If your marginal tax rate is lower or higher in the future, this will impact the analysis.
That the zero-earning years being added between 60 and 65 will not be a drag on your CPP benefit; this only applies to someone who has made a maximum contribution over 39 years.
It doesn’t include the impact of variable investment returns and inflation rates.
It doesn’t consider Guaranteed Income Supplement (GIS) clawbacks after the age of 65 for lower- and moderate-income retirees. GIS clawbacks are triggered by CPP benefits and other taxable income, so a higher CPP benefit after 65 may not be as attractive.
That you have a long and healthy retirement and can reach the break-even age.
If you invest all your CPP income (taken at 60), what sort of return do you need to do better than waiting until 65? That’s assuming you can still work until 65, or have other investments you can live off.
To answer this question, we’ll build on the previous answer.
Intuitively, you may think a higher investment return will help you reach your CPP break-even point faster, but this isn’t the case. The opposite is true.
Notice how, in the previous answer, the break-even age moved later when we added investment returns? That’s because delaying CPP benefits requires you to draw down on other investment assets to close the income gap. Drawing down on investment assets has an opportunity cost in the form of lost investment returns. The higher your expected investment returns, the larger the opportunity cost.
In the above example, the break-even point for delaying taking the CPP from 60 to 65 with real investment returns of 3 per cent happens at the age of 76 and four months.
Assuming higher real investment returns of 4 per cent (6 per cent nominal returns and inflation of 2 per cent), the break-even point happens later, at 77 and five months.
If we go in the opposite direction and assume lower real investment returns of 2 per cent (4 per cent nominal returns and inflation of 2 per cent) then the break-even point happens earlier, at 75 and four months.
When you have a more conservative portfolio – or a portfolio with higher investment fees – and the expected rate of return is lower, then delaying the CPP and drawing down on your investment portfolio has a lower opportunity cost.
Everything else being equal, delaying the CPP and drawing down on your investment portfolio is slightly more attractive for conservative investors or investors with higher investment fees. Delaying the CPP is slightly less attractive for aggressive investors or investors with lower investment fees.
TORONTO – Canada’s main stock index was higher in late-morning trading, helped by strength in energy stocks, while U.S. stock markets also moved up.
The S&P/TSX composite index was up 34.91 points at 23,736.98.
In New York, the Dow Jones industrial average was up 178.05 points at 41,800.13. The S&P 500 index was up 28.38 points at 5,661.47, while the Nasdaq composite was up 133.17 points at 17,725.30.
The Canadian dollar traded for 73.56 cents US compared with 73.57 cents US on Monday.
The November crude oil contract was up 68 cents at US$69.70 per barrel and the October natural gas contract was up three cents at US$2.40 per mmBTU.
The December gold contract was down US$7.80 at US$2,601.10 an ounce and the December copper contract was up a penny at US$4.28 a pound.
This report by The Canadian Press was first published Sept. 17, 2024.
TORONTO – Strength in the base metal and technology sectors helped Canada’s main stock index gain almost 100 points on Friday, while U.S. stock markets climbed to their best week of the year.
“It’s been almost a complete opposite or retracement of what we saw last week,” said Philip Petursson, chief investment strategist at IG Wealth Management.
In New York, the Dow Jones industrial average was up 297.01 points at 41,393.78. The S&P 500 index was up 30.26 points at 5,626.02, while the Nasdaq composite was up 114.30 points at 17,683.98.
The S&P/TSX composite index closed up 93.51 points at 23,568.65.
While last week saw a “healthy” pullback on weaker economic data, this week investors appeared to be buying the dip and hoping the central bank “comes to the rescue,” said Petursson.
Next week, the U.S. Federal Reserve is widely expected to cut its key interest rate for the first time in several years after it significantly hiked it to fight inflation.
But the magnitude of that first cut has been the subject of debate, and the market appears split on whether the cut will be a quarter of a percentage point or a larger half-point reduction.
Petursson thinks it’s clear the smaller cut is coming. Economic data recently hasn’t been great, but it hasn’t been that bad either, he said — and inflation may have come down significantly, but it’s not defeated just yet.
“I think they’re going to be very steady,” he said, with one small cut at each of their three decisions scheduled for the rest of 2024, and more into 2025.
“I don’t think there’s a sense of urgency on the part of the Fed that they have to do something immediately.
A larger cut could also send the wrong message to the markets, added Petursson: that the Fed made a mistake in waiting this long to cut, or that it’s seeing concerning signs in the economy.
It would also be “counter to what they’ve signaled,” he said.
More important than the cut — other than the new tone it sets — will be what Fed chair Jerome Powell has to say, according to Petursson.
“That’s going to be more important than the size of the cut itself,” he said.
In Canada, where the central bank has already cut three times, Petursson expects two more before the year is through.
“Here, the labour situation is worse than what we see in the United States,” he said.
The Canadian dollar traded for 73.61 cents US compared with 73.58 cents US on Thursday.
The October crude oil contract was down 32 cents at US$68.65 per barrel and the October natural gas contract was down five cents at US$2.31 per mmBTU.
The December gold contract was up US$30.10 at US$2,610.70 an ounce and the December copper contract was up four cents US$4.24 a pound.
— With files from The Associated Press
This report by The Canadian Press was first published Sept. 13, 2024.
TORONTO – Canada’s main stock index was down more than 200 points in late-morning trading, weighed down by losses in the technology, base metal and energy sectors, while U.S. stock markets also fell.
The S&P/TSX composite index was down 239.24 points at 22,749.04.
In New York, the Dow Jones industrial average was down 312.36 points at 40,443.39. The S&P 500 index was down 80.94 points at 5,422.47, while the Nasdaq composite was down 380.17 points at 16,747.49.
The Canadian dollar traded for 73.80 cents US compared with 74.00 cents US on Thursday.
The October crude oil contract was down US$1.07 at US$68.08 per barrel and the October natural gas contract was up less than a penny at US$2.26 per mmBTU.
The December gold contract was down US$2.10 at US$2,541.00 an ounce and the December copper contract was down four cents at US$4.10 a pound.
This report by The Canadian Press was first published Sept. 6, 2024.
