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 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.
TORONTO – Canada’s main stock index was up more than 150 points in late-morning trading, helped by strength in technology, financial and energy stocks, while U.S. stock markets also pushed higher.
The S&P/TSX composite index was up 171.41 points at 23,298.39.
In New York, the Dow Jones industrial average was up 278.37 points at 41,369.79. The S&P 500 index was up 38.17 points at 5,630.35, while the Nasdaq composite was up 177.15 points at 17,733.18.
The Canadian dollar traded for 74.19 cents US compared with 74.23 cents US on Wednesday.
The October crude oil contract was up US$1.75 at US$76.27 per barrel and the October natural gas contract was up less than a penny at US$2.10 per mmBTU.
The December gold contract was up US$18.70 at US$2,556.50 an ounce and the December copper contract was down less than a penny at US$4.22 a pound.
This report by The Canadian Press was first published Aug. 29, 2024.
The crypto market has recently experienced a significant downturn, mirroring broader risk asset sell-offs. Over the past week, Bitcoin’s price dropped by 24%, reaching $53,000, while Ethereum plummeted nearly a third to $2,340. Major altcoins also suffered, with Cardano down 27.7%, Solana 36.2%, Dogecoin 34.6%, XRP 23.1%, Shiba Inu 30.1%, and BNB 25.7%.
The severe downturn in the crypto market appears to be part of a broader flight to safety, triggered by disappointing economic data. A worse-than-expected unemployment report on Friday marked the beginning of a technical recession, as defined by the Sahm Rule. This rule identifies a recession when the three-month average unemployment rate rises by at least half a percentage point from its lowest point in the past year.
Friday’s figures met this threshold, signaling an abrupt economic downshift. Consequently, investors sought safer assets, leading to declines in major stock indices: the S&P 500 dropped 2%, the Nasdaq 2.5%, and the Dow 1.5%. This trend continued into Monday with further sell-offs overseas.
The crypto market’s rapid decline raises questions about its role as either a speculative asset or a hedge against inflation and recession. Despite hopes that crypto could act as a risk hedge, the recent crash suggests it remains a speculative investment.
Since the downturn, the crypto market has seen its largest three-day sell-off in nearly a year, losing over $500 billion in market value. According to CoinGlass data, this bloodbath wiped out more than $1 billion in leveraged positions within the last 24 hours, including $365 million in Bitcoin and $348 million in Ether.
Khushboo Khullar of Lightning Ventures, speaking to Bloomberg, argued that the crypto sell-off is part of a broader liquidity panic as traders rush to cover margin calls. Khullar views this as a temporary sell-off, presenting a potential buying opportunity.
Josh Gilbert, an eToro market analyst, supports Khullar’s perspective, suggesting that the expected Federal Reserve rate cuts could benefit crypto assets. “Crypto assets have sold off, but many investors will see an opportunity. We see Federal Reserve rate cuts, which are now likely to come sharper than expected, as hugely positive for crypto assets,” Gilbert told Coindesk.
Despite the recent volatility, crypto continues to make strides toward mainstream acceptance. Notably, Morgan Stanley will allow its advisors to offer Bitcoin ETFs starting Wednesday. This follows more than half a year after the introduction of the first Bitcoin ETF. The investment bank will enable over 15,000 of its financial advisors to sell BlackRock’s IBIT and Fidelity’s FBTC. This move is seen as a significant step toward the “mainstreamization” of crypto, given the lengthy regulatory and company processes in major investment banks.
The recent crypto market downturn highlights its volatility and the broader economic concerns affecting all risk assets. While some analysts see the current situation as a temporary sell-off and a buying opportunity, others caution against the speculative nature of crypto. As the market evolves, its role as a mainstream alternative asset continues to grow, marked by increasing institutional acceptance and new investment opportunities.
