CPP Deferral debate - Fred Vettese article discussion

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by gaspr » 31 Mar 2017 18:28

simplesimon wrote:
31 Mar 2017 17:53
So many posts here, not sure if this was posted before.

I've used this spreadsheet already, and lots of other really good stuff here.

http://pabroon.blogspot.ca/2014/03/cpp-calculator.html
I just had a quick look...does not do child rearing dropout or age 65 dropout calculations...

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park » 07 Apr 2017 00:45

Park wrote:
30 Mar 2017 16:02
Park wrote:
30 Mar 2017 12:42
Park wrote:
29 Mar 2017 21:40
When I retire, I've lost the ability to generate income from labor. I now rely solely on income from capital. I'm less diversified than I formerly was. There are certain financial risks that I'm now more exposed to: inflation risk, market risk and longevity risk.

CPP mitigates those risks: fixed income that is inflation indexed and has the credit risk of the government of Canada, which I"ll receive it as long as I live.

For a taxable investor in retirement, fixed income is needed and taxation of such income may be an issue. But the government has stacked the tax deck in favor of CPP. CPPIB doesn't pay taxes. I get a modest tax credit on my employee contribution. I get a tax deduction on the employer contribution. There are those who would say that I don't do as well, because I have to pay the employer portion. I would counter that the employer portion is already embedded in the compensation of those who only pay the employee portion. And one can share a pension with one's partner, which might decrease tax; such income splitting isn't possible for many income sources.

I'm unable myself to judge whether CPPIB manages money well. But I've never heard anyone argue that it does it poorly and its costs are too high.

Institutions can diversify their investments more readily than an individual can. I'm thinking primarily of alternative investments. CPPIB can and does invest in such alternatives. By deferring CPP, I"m getting alternative investment exposure and increasing my diversification. There are those who would make good arguments that alternative investment exposure isn't a good idea, and I don't dismiss those arguments. I think it very unlikely that I should personally be investing in alternatives. But Yale has done well with its alternative investments under Swensen. CPPIB is a big enough player to likely be able to profit from alternative investments. Of all my sources of possible retirement income, CPP has the greatest probability of benefiting from alternative investments. So I would consider the alternative investment exposure that I get with CPP to be an overall plus, although with some reservations.

In 2010 in the link below, Jamie Golombek estimated an average real return of 3%, for present CPP contributors. I assume that refers to the return of those who are self-employed. Undoubtedly, there are those who could invest and get a higher rate of return than 3%. But it would be difficult to get a better risk adjusted fixed income return. For purposes of comparison, the present return of RRBs is 0.68%. And I'm not sure whether the 3% takes into account survivor's pension.

http://www.jamiegolombek.com/media/jg-r ... sps-en.pdf

By having CPP, I diversify my risk. In retirement, I'll take income from my RRSP, TFSA and taxable accounts. If there are problems with those other sources of income, CPP will likely help.

Every year that I delay CPP, I get the equivalent of an inflation indexed annuity that pays 7-8%. When it comes to fixed income, I think it is very unlikely that I could find a better alternative. And I get that when I'm older, which is important. Assume a scenario, where my only source of income ends up being CPP. In such a situation, I'll have to think about going back to work. That's reasonable if I was 65, but less so if I'm 85. For those who think understandably that such a scenario is very unlikely, a reduction of 50% in your retirement income due to marital breakdown is more probable.

From the link below, max CPP at age 60 is $681.60 in 2016. At age 70, it is $1,512.30. I might be able to support myself on the latter, but I don't see that as a possibility with the former.

http://boomerandecho.com/when-to-take-c ... n-between/

What if the government changes the rules, and takes advantage of me? That is possible. But it could also do that to my RRSP, TFSA, and taxable accounts. When it comes to such shenanigans, I've diversified my risk.

Why don't I take CPP early, when my health permits me to enjoy the money more? I'd rather decrease the risk of me being poor at age 85.

What if I die at a comparatively young age? That is a very legitimate issue. There are people, who should take CPP as early as possible. Indeed there are some who should try to avoid making any CPP contributions. Those who die early increase the return of those who die late. But if you're reading this post, the probability is good that you'll live longer than the average CPP contributer, and will likely benefit from those who die early.

I've heard a variety of lifespans, as to when a delay until 70, pays off. The numbers I've seen range from 81 to 86. I'm not sure if those numbers take into account survivor's pension or tax reduction via pension sharing.

When I'm 59, I'll reexamine this issue every year until I"m 70, taking into account my health and any rule changes.
http://forums.redflagdeals.com/what-act ... a-1089150/

"For every year that you contribute after age 65, you can drop out a previous year of low or no contributions. This over-65 dropout is in addition to the general dropout"

http://www.moneysense.ca/save/retiremen ... ore-later/

"it’s easy to use up all your drop-out years if you spent a long time getting an education or just “finding yourself.” If you then stop working in your early 60s and don’t take CPP right away, you’ll immediately start adding more years of zero earnings to the calculation. This will lower your average pensionable earnings, which in turn will make your benefit go down...By my estimates, this factor in isolation can reduce your pension by as much as 2% to 3% for each year you delay taking CPP after age 60. So for people in this situation, the overall net cost of starting CPP early is liable to be 3% or 4% per year (that’s the current 6% overall reduction, minus 2% to 3%)."

That's from 2011. The current overall reduction is now 7.2%, not 6%. At that time, one could remove 15% of your lowest earning years in calculating your CPP. It's now 17%. It looks like what is written in the last link doesn't apply to those 65-70. See the link below.

http://www.michaeljamesonmoney.com/2013 ... g-cpp.html

"if you’re working beyond age 65 at a high income level, you’re allowed to replace an equal number of lower earning months with these after-age-65 earnings. And if you’re not working or working only minimally, you can simply drop out those over-65 months so that it doesn’t reduce your calculated retirement pension"
For me, this is an essay that makes me clarify my thoughts about CPP. I hope others will find it of use.

I hadn't read this thread entirely, prior to posting. So some of what I've written is redundant.

Brian5000 has previously pointed out that the increase of zero accumulation years between 60-65 decreases the benefit of deferral to 4.7%.

Longinvest quoted Fred Vettese, who stated that a CPP pension will likely increase more than usually quoted 8.4% per for each year of deferral between ages 65-70. If the CPP earnings ceiling increases by more than inflation between ages 65-70, that will also be reflected in an increased pension. And that earnings ceiling usually does increase slightly more than inflation.

Others have pointed out that when you think you're going to die may not be as relevant as I thought it was. If I'm certain that I'm going to die young, then taking CPP early makes sense. But there wouldn't be many individuals who are certain about that. Even if the probability is low that you'll have a long life, you have to consider that possibility. Based on one's risk aversion, there would be many individuals who would plan for a long life, even if the probability was low. Such individuals should still consider deferring CPP.

As others have pointed out though, if you think that there is a good chance you'll die at a comparatively young age and maximizing your estate is more important to you, CPP deferral makes less sense.
I'm far from a CPP expert, so please correct me if I'm wrong in the following.

https://retirehappy.ca/how-to-calculate ... t-pension/

"multiply that result by the average YMPE for the five-year period ending in the year that your CPP will start"

So the average YMPE for the five years ending in the year you start your pension is critical in determining your pension. As mentioned previously, YMPE commonly goes up slightly more than inflation. So every year after 60 that you delay taking CPP will most likely result in the average YMPE for the previous 5 years going up slightly. That will be reflect in a slightly higher pension for every year of delay past 60.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by adrian2 » 07 Apr 2017 07:48

Park wrote:
07 Apr 2017 00:45
So the average YMPE for the five years ending in the year you start your pension is critical in determining your pension. As mentioned previously, YMPE commonly goes up slightly more than inflation. So every year after 60 that you delay taking CPP will most likely result in the average YMPE for the previous 5 years going up slightly. That will be reflect in a slightly higher pension for every year of delay past 60.
Correct, but 90%+ of people can't be bothered with the arithmetic.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by leoc2 » 07 Apr 2017 08:13

adrian2 wrote:
07 Apr 2017 07:48
Park wrote:
07 Apr 2017 00:45
So the average YMPE for the five years ending in the year you start your pension is critical in determining your pension. As mentioned previously, YMPE commonly goes up slightly more than inflation. So every year after 60 that you delay taking CPP will most likely result in the average YMPE for the previous 5 years going up slightly. That will be reflect in a slightly higher pension for every year of delay past 60.
Correct, but 90%+ of people can't be bothered with the arithmetic.
The reduced penalty from 60 to 65 and the increase from the bonus from 65 to 70 will likely outweigh the slightly higher pension for every year of delay past 60.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by adrian2 » 07 Apr 2017 08:41

leoc2 wrote:
07 Apr 2017 08:13
The reduced penalty from 60 to 65 and the increase from the bonus from 65 to 70 will likely outweigh the slightly higher pension for every year of delay past 60.
The math is all in Fred Vettese's article.
For most people, the logical decision is to defer.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park » 07 Apr 2017 08:47

Park wrote:
07 Apr 2017 00:45
Park wrote:
30 Mar 2017 16:02
Park wrote:
30 Mar 2017 12:42


http://forums.redflagdeals.com/what-act ... a-1089150/

"For every year that you contribute after age 65, you can drop out a previous year of low or no contributions. This over-65 dropout is in addition to the general dropout"

http://www.moneysense.ca/save/retiremen ... ore-later/

"it’s easy to use up all your drop-out years if you spent a long time getting an education or just “finding yourself.” If you then stop working in your early 60s and don’t take CPP right away, you’ll immediately start adding more years of zero earnings to the calculation. This will lower your average pensionable earnings, which in turn will make your benefit go down...By my estimates, this factor in isolation can reduce your pension by as much as 2% to 3% for each year you delay taking CPP after age 60. So for people in this situation, the overall net cost of starting CPP early is liable to be 3% or 4% per year (that’s the current 6% overall reduction, minus 2% to 3%)."

That's from 2011. The current overall reduction is now 7.2%, not 6%. At that time, one could remove 15% of your lowest earning years in calculating your CPP. It's now 17%. It looks like what is written in the last link doesn't apply to those 65-70. See the link below.

http://www.michaeljamesonmoney.com/2013 ... g-cpp.html

"if you’re working beyond age 65 at a high income level, you’re allowed to replace an equal number of lower earning months with these after-age-65 earnings. And if you’re not working or working only minimally, you can simply drop out those over-65 months so that it doesn’t reduce your calculated retirement pension"
For me, this is an essay that makes me clarify my thoughts about CPP. I hope others will find it of use.

I hadn't read this thread entirely, prior to posting. So some of what I've written is redundant.

Brian5000 has previously pointed out that the increase of zero accumulation years between 60-65 decreases the benefit of deferral to 4.7%.

Longinvest quoted Fred Vettese, who stated that a CPP pension will likely increase more than usually quoted 8.4% per for each year of deferral between ages 65-70. If the CPP earnings ceiling increases by more than inflation between ages 65-70, that will also be reflected in an increased pension. And that earnings ceiling usually does increase slightly more than inflation.

Others have pointed out that when you think you're going to die may not be as relevant as I thought it was. If I'm certain that I'm going to die young, then taking CPP early makes sense. But there wouldn't be many individuals who are certain about that. Even if the probability is low that you'll have a long life, you have to consider that possibility. Based on one's risk aversion, there would be many individuals who would plan for a long life, even if the probability was low. Such individuals should still consider deferring CPP.

As others have pointed out though, if you think that there is a good chance you'll die at a comparatively young age and maximizing your estate is more important to you, CPP deferral makes less sense.
I'm far from a CPP expert, so please correct me if I'm wrong in the following.

https://retirehappy.ca/how-to-calculate ... t-pension/

"multiply that result by the average YMPE for the five-year period ending in the year that your CPP will start"

So the average YMPE for the five years ending in the year you start your pension is critical in determining your pension. As mentioned previously, YMPE commonly goes up slightly more than inflation. So every year after 60 that you delay taking CPP will most likely result in the average YMPE for the previous 5 years going up slightly. That will be reflect in a slightly higher pension for every year of delay past 60.
Thanks for the responses. When it comes to calculating CPP retirement benefits, each year of contribution is given the same weight, all else being equal. But in inflation adjusted terms, YMPE at age 18 will most likely be noticeably less than YMPE at age 69. If once again all else is equal, you get more retirement benefit for earlier years of contribution than later years of contribution.

Edited to include the following: I don't know how much YMPE goes up each year relative to price inflation. It does have a history of going up slightly more than price inflation, as real incomes increase.

How much do real incomes increase, taking into account fringe benefits etc.?

http://www.nber.org/digest/oct08/w13953.html

In the USA between 1970-2006, real hourly compensation grew by 1.7% per year, which is similar to the annual increase in productivity of 1.9%.
Last edited by Park on 07 Apr 2017 14:14, edited 1 time in total.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by simplesimon » 07 Apr 2017 14:01

I've taken a self taught crash course on Net Present Value and Discount Rates, and came up with what I consider to be an "OK" spreadsheet for "what-iffing" CPP start ages, discount rates, rates of inflation, wage growth over inflation and year of death, using my anticipated "today's dollar" CPP payments, obtained from various CPP calculator spreadsheets.

I'm in the group where I will be adding drop out years between 60 and 65 if I defer.

I am an actuarial neophyte, but having said that, I have certainly noticed while playing with numbers that the XNPV is pretty sensitive to discount rate.

I understand why Mr. Vettese used a 1% discount rate over inflation for the exercise, because when comparing XNPV's you are supposed to use equivalent risk type investments, and I suppose that CPP is considered very close to risk free.

If you use an admittedly more risky discount rate, even something as low as 5 or 6 percent, which would be about 3 to 4% real return, the math starts to favour taking CPP early, at least in my situation. I've been getting that kind of rate in my TFSA's, with fairly moderate risk investments, but of course, the bottom could drop out at any time.

Does my analysis of the effect of discount rate on Net Present Value generally make sense, or am I way off?

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by longinvest » 07 Apr 2017 15:24

When one does a break-even calculation, there are two important variables which can affect results: discount rate and age of death.

The CPP pension provides fixed payments, when stated in CPI-inflation-adjusted terms, until the death of the retiree. There is no volatility in payments and payments do not stop before death. Payments have no inflation, market, or longevity risk.

A portfolio could achieve a higher return (but, because of risk, a possibly lower return, too) than the discount rate used by Fred Vettese. But, even if the portfolio was to achieve a higher average return, taking regular fixed inflation-adjusted withdrawals from a portfolio is risky; it exposes the retiree to a significant possibility of portfolio depletion before death.

In other words, when choosing to draw regular fixed inflation-adjusted withdrawals from a volatile portfolio, instead of getting an inflation-indexed pension, one better hope to get both high returns and luck, so that volatility doesn't deplete the portfolio prematurely. One should also aim for a short-enough life, so as not to outlive the portfolio.

A pension is a form of insurance. It's usually not a good idea to buy more insurance than strictly necessary. Yet, robust inflation-indexed pensions (other than CPP/QPP and OAS) are not widely available. So, for many of us, delaying these pensions (while filling the gap with cash investments) is a way to significantly increase these pensions and get a higher robust income floor that we won't be able to survive.

Someone with a gigantic portfolio, like Warren Buffett, does not need a pension. He could draw his CPP pension early hoping to beat the internal return of the pension (which won't be known before his death). He doesn't care. If he wins (at death), his heirs get more money. If he loses, it won't have affected him at all, as he did not need the money in the first place.

Two last notes:
  1. One should be very careful when projecting monthly fixed inflation-adjusted withdrawals from a volatile portfolio; even if this portfolio achieves an average compound real 4% to 5% real return, the monthly sequence of return could lead to early portfolio depletion, before the death of the retiree. There's a ton of literature about this. Here's the keyword for a Google search: SWR (safe withdrawal rate).
  2. Life expectancy is an average, not a ceiling. This average is very useful for insurers and pension plans. On the other hand, it is not an interesting number for an individual retiree; a rational retiree wouldn't aim for a 50% chance of outliving his portfolio. :!:
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park » 07 Apr 2017 16:09

longinvest wrote:
07 Apr 2017 15:24
A pension is a form of insurance...Someone with a gigantic portfolio, like Warren Buffett, does not need a pension. He could draw his CPP pension early hoping to beat the internal return of the pension (which won't be known before his death). He doesn't care. If he wins (at death), his heirs get more money. If he loses, it won't have affected him at all, as he did not need the money in the first place.[/list]
I agree that a pension is a form of insurance. I consider fixed income in general a form of insurance, and a pension is fixed income.

Someone who is very well off may not need fixed income, but that would be uncommon. Even well off retirees need fixed income IMO.

When it comes to fixed income, the government has stacked the deck in favor of CPP. By receiving CPP retirement benefits, there is less need for fixed income elsewhere. From what I can see, it makes sense to maximize those benefits, as it allows one to decrease less advantageous fixed income elsewhere.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by kcowan » 09 Apr 2017 11:03

longinvest wrote:
07 Apr 2017 15:24
  1. Life expectancy is an average, not a ceiling. This average is very useful for insurers and pension plans. On the other hand, it is not an interesting number for an individual retiree; a rational retiree wouldn't aim for a 50% chance of outliving his portfolio. :!:
Yes I find it amusing that so much effort is spent on SWR projections when the age at death is equally important.

In my case, life expectancy of 91 meant that my realistic range was from 83 (10%) to 99 (90%). The numbers have changed now after 14 years but the principle remains the same. One thing that 14 years has convinced me of is that, by the time I count CPP/OAS/DB Pensions, most of my portfolio belongs in equity. In fact at 68% I am underweight equities. (OAS is mostly DW now that we are moving into RRIF.)
For the fun of it...Keith

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by gaspr » 10 May 2017 11:39

Fred Vettese has written an excellent follow up article. But it is fascinating to read the comments that follow...virtually no one is buying what he says.

You can lead a horse to water....

http://business.financialpost.com/perso ... n-your-80s

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by ghariton » 10 May 2017 12:14

gaspr wrote:
10 May 2017 11:39
Fred Vettese has written an excellent follow up article. But it is fascinating to read the comments that follow...virtually no one is buying what he says.

You can lead a horse to water....

http://business.financialpost.com/perso ... n-your-80s
Thank you for the link.

The commenters give all the wrong reasons for taking CPP and OAS early. Fear of dying young, lack of trust in the government's promises, and so on. I find all this very disturbing.

Interestingly, nobody mentioned the one reason for taking early CPP which I find valid, at least in my situation. It turns on this assumption by Vettese:
The actuarial math clearly shows that CPP at 70 is worth a lot more, at least if one is using a [real] discount rate of 1 per cent.
I think that I can do better than a real one per cent. Yes, that means taking on some risk, and CPP and OAS have no risk, or at least none worth worrying about. Using CPP as a rock-solid foundation for a retirement plan makes a lot of sense for many middle-income people. For them, the trade-off is clearly worthwhile (unless they are in ill health, and even then, people are surviving conditions which used to be fatal). But if you are less risk-averse, or if you have enough money so that you can self-insure against market drawdowns, at least in part, then CPP becomes a much less attractive option.

In my case, my "rock-solid foundation" is RRBs. In theory, if my CPP were larger, I could hold less RRBs and invest the rest in equities. But I prefer RRBs because they give me more flexibility. I can gradually reduce the amount as I grow older and need less assured income (because my remaining life is shorter). And I can still access the capital if I have to, something that is not possible with an annuity.

My plan originally was to annuitize my RRSP/RRIF at 75. But on reflection my risk aversion has decreased enough that I no longer feel the need. The same goes for the annuities provided by CPP and OAS. I'll keep cashing what I have, of course. But if I could get a fair value for them, I would probably sell them now*, and invest the proceeds into equities and perhaps some more RRBs.

George

*In 1994 or 1995, on a CompuServe forum, I told Warren Baldwin that I would exercise the option of dropping out of the CPP program altogether if the option were open to me. He didn't seem to think it all that absurd.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by longinvest » 10 May 2017 18:17

ghariton wrote:
10 May 2017 12:14
Interestingly, nobody mentioned the one reason for taking early CPP which I find valid, at least in my situation. It turns on this assumption by Vettese:
The actuarial math clearly shows that CPP at 70 is worth a lot more, at least if one is using a [real] discount rate of 1 per cent.
I think that I can do better than a real one per cent.
Vettese's discount rate is an average rate. Using the scenario described in an earlier post (spotty work record, retirement at 60) with a CPP of $439.08 at 60 or $961.65 at 70 (in inflation-adjusted 2017 dollars), it implies the death of the retiree at age 79 and 3 months.

How did I get this? As follows. Let's assume that the retiree elects to take his $439.08 CPP pension at age 60 and invests it in a bank account paying interest at a constant inflation-adjusted rate. Calculate how much he accumulates at age 70. Then, calculate how long it would take him to deplete this account by taking monthly ($961.65-$439.08)= $522.57 withdrawals. This way, he effectively gets to spend $961.65 per month from age 70 until depletion of his account, giving us the break-even age of death for a specific real discount rate.

For example, if the rate was 0%, the retiree would accumulate $52,689.60 by age 70. It would take him 8 years and 5 months to deplete this amount. In other words, he gets an effective 0% real discount rate if he dies at age 78 and 5 months.

Here's the resulting chart:
rate.png
See how the rate increases quickly until age 90. Dying at age 82 implies a real discount rate of 3.4%. Not too shabby. Age 83 gets 4.0%. And so on. Surviving until age 90 implies an impressive real 6.3% discount rate.

For real (inflation-adjusted) fixed income with no volatility whatsoever, these rates of return are outstanding. Not only that, but the income stream doesn't stop as long as one lives (and the implied rate just keeps increasing). Survivors win it all.

As I am still in my 40s and, as a consequence, have not started to draw on CPP, I get to choose what I will do. I am very tempted to bet on my own longevity. :wink:

Note that I am not a fan of these break-even analyses. I much prefer to look at delaying CPP to age 70 and filling the gap with cash investments (such as GICs) as a way to safely increase income by 42%* starting at age 60, as explained in my earlier post. This way, I get to win regardless of when I die, as I safely get more money to spend from the start of retirement.

* of age 60 CPP.
Last edited by longinvest on 11 May 2017 08:48, edited 2 times in total.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by longinvest » 10 May 2017 19:53

In case anybody is interested, here's a table of the implied real discount rates based on age of death, for delaying CPP from age 60 to 70, increasing the monthly pension from $439.08 to $961.65:

Code: Select all

Effective Real Discount Rate at Death

Age  Rate
<70 -100.0%
 71  -45.6%
 72  -25.3%
 73  -16.1%
 74  -10.6%
 75   -6.8%
 76   -4.1%
 77   -2.1%
 78   -0.5%
 79    0.8%
 80    1.8%
 81    2.7%
 82    3.4%
 83    4.0%
 84    4.5%
 85    4.9%
 86    5.3%
 87    5.6%
 88    5.9%
 89    6.1%
 90    6.3%
 91    6.5%
 92    6.7%
 93    6.8%
 94    7.0%
 95    7.1%
 96    7.2%
 97    7.3%
 98    7.3%
 99    7.4%
100    7.5%
110    7.9%
120    8.0%
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by ghariton » 10 May 2017 22:05

Thank you for the calculations.

I have no quarrel with your numbers. But I would suggest that their interpretation depends upon the larger context. Two observations:

First, current life expectancy in Canada is 79 for men and 83 for women, for an average of 81. From your table, if I can earn a real return of 2.7 per cent, I am better off taking early payout, on average. The 2.7 per cent is nice, but not particularly high, over long historical periods. I've certainly been doing better over the last couple of decades (roughly 5 per cent real per year, and 4 per cent so far this year). Since my returns have been mostly capital gains, I have also had some control over timing of recognition, allowing for reduction in income tax paid (an option not available with an annuity.)

Second, the real benefit of delaying payout, it seems to me, is not in a higher rate of return, but rather in "purchasing" longevity insurance. Now longevity insurance is valuable and, as discussed on other threads, planning for those later years is a preoccupation of many. But the value of longevity insurance will vary from individual to individual, depending on (a) current health and future prospects, influenced by heredity, etc. (b) risk aversion, or lack thereof (c) possibility of self-insurance, by whatever means.

Of these three, only the first one seems to get much discussion, and that tends to be very emotional, so not very enlightening. In particular, the analyses assume, without any discussion, that risk should be reduced to the absolute minimum possible. For most people, that is probably a good assumption. But some are willing to tolerate more risk, including longevity risk, if the extra expected return is high enough.

In the end it may be that delaying payout to 70 is the best decision for the vast majority of people. I have no quarrel with that. I'm just pointing out that my case is different, and why that is so. There may well be others in my position.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Chuck » 10 May 2017 23:57

ghariton wrote:
10 May 2017 22:05
First, current life expectancy in Canada is 79 for men and 83 for women, for an average of 81. From your table, if I can earn a real return of 2.7 per cent, I am better off taking early payout, on average.
Generally true, but I think life expectancy at age 60 (the earliest you can take CPP) is a bit longer as I understand it, probably 83 years on average. So better to aim for 4% real.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park » 13 May 2017 21:08

http://www.etf.com/sections/index-inves ... nopaging=1

"Wealthy people are living significantly longer than their less wealthy counterparts, creating the need for retirement assets to last for an extended period. Life expectancy for the 10th percentile of household income is 76 years for men and 82 years for women. In comparison, for the 90th percentile of income (which is similar to the clientele of fee-only advisors) life expectancy is 85 years for men and 87 years for women.”

The above may underestimate the relevant life expectancies. My guess is that it doesn't reflect life expectancies of those who are 60 yo, which is relevant to this discussion.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by longinvest » 13 May 2017 22:10

Park wrote:
13 May 2017 21:08
http://www.etf.com/sections/index-inves ... nopaging=1

"Wealthy people are living significantly longer than their less wealthy counterparts, creating the need for retirement assets to last for an extended period. Life expectancy for the 10th percentile of household income is 76 years for men and 82 years for women. In comparison, for the 90th percentile of income (which is similar to the clientele of fee-only advisors) life expectancy is 85 years for men and 87 years for women.”

The above may underestimate the relevant life expectancies. My guess is that it doesn't reflect life expectancies of those who are 60 yo, which is relevant to this discussion.
There's Statistics Canada's data:
CANSIM - 102-0122 - Health-adjusted life expectancy, at birth and at age 65, by sex and income, Canada and provinces

I had to play with the "Add/Remove Data" tab to get the information. Here's what I got as life expectancy at 65:
Males -- Income group, quintile 1 (lowest) -- 2005-2007: 17.1
Males -- Income group, quintile 5 (highest) -- 2005-2007: 19.1
Females -- Income group, quintile 1 (lowest) -- 2005-2007: 21.0
Females -- Income group, quintile 5 (highest) -- 2005-2007: 21.5

In other words, if I read that correctly:
  • Lowest quintile: Males 82.1, Females 86.0
  • Highest quintile: Males 84.1, Females 86.5
More disturbing is the health-adjusted life expectancy* at 65. The average for all income groups is 78.8 for Males and 80.0 for Females. :(

* Health-adjusted life expectancy is a more comprehensive indicator than that of life expectancy because it introduces the concept of quality of life. Health-adjusted life expectancy is the number of years in full health that an individual can expect to live given the current morbidity and mortality conditions. Health-adjusted life expectancy uses the Health Utility Index (HUI) to weigh years lived in good health higher than years lived in poor health. Thus, health-adjusted life expectancy is not only a measure of quantity of life but also a measure of quality of life. (Source: CANSIM - 102-0122)
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Re: Clippings 2017

Post by TomB19 » 15 May 2017 02:45

leoc2 wrote:
07 Mar 2017 15:57
I'm 60. My father passed when he was 50 and my mother passed when she was 62. So life for me is like a Fast and Furious movie.
I get your drift.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park » 20 May 2017 17:10

CPP is an annuity. Those who die before the average life expectancy of those drawing a pension will subsidize the pension of those who beat the average. If you're reading this post, there's probably a good chance you will be in the latter group.

If you're unsure that you'll be in the latter group, consider the following. My guess (please correct me if I'm wrong on this) is that life expectancy shows a bell curve distribution, when you reach 60. Even if you live less than the average, it's unlikely to be considerably lower than the average. In other words, you probably won't lose too much money.

About the argument that you can do better than CPP and/or don't want the illiquidity of CPP, each person has to make their own decision. The decision would depend in part on the size of one's portfolio and one's level of financial competence.

As for financial competence, every study that I've seen relating it to increasing age is disturbing to say the least. By age 70, financial competence is starting to steadily decline. I read Fred Vettese's last book, and he quotes research that financial confidence steadily increases with age. The two are a dangerous combination.

https://www.alz.org/documents_custom/20 ... igures.pdf

32% of those 85+ have Alzheimer's disease.

I've mentioned that CPP decreases the following risks: market, inflation and longevity. It also decreases the financial risk of dementia. How financially competent will you be at age 90?

Whether one could do better than CPP and consequently minimize exposure to it depends on portfolio size. The smaller the portfolio, the more important CPP is as a risk management tool Even with a larger portfolio, diversification of risk with CPP makes sense. But if CPP is a small enough % of your income, then that diversification is less important. When does CPP become so small that it is no longer relevant? 10% of one's income?

Max CPP at age 60 is $8179 per year in 2016. If you have an income of greater than $73,611 (excluding CPP), then CPP isn't relevant. Max CPP at age 70 is $18147. If you have an income greater than $163,323 (excluding CPP), then CPP isn't relevant.

If you have a high income, but less than $163,323, then whether you take CPP at 60 or 70 won't make much difference to your income. Even under those circumstances, I would argue that deferral to age 70 still makes sense. CPP has some comparatively unique risk management properties that aren't easily found in other financial instruments.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by adrian2 » 20 May 2017 17:32

Park wrote:
20 May 2017 17:10
When does CPP become so small that it is no longer relevant? 10% of one's income?

Max CPP at age 60 is $8179 per year in 2016. If you have an income of greater than $73,611 (excluding CPP), then CPP isn't relevant. Max CPP at age 70 is $18147. If you have an income greater than $163,323 (excluding CPP), then CPP isn't relevant.
Completely disagree. An extra 10% on top of my income is very much relevant.
One can use the extra 10% for a luxury family vacation every year, or whatever you fancy.
A 10% bump in salary would also be very much appreciated, by almost anyone, anytime.

If you wrote 1% is irrelevant, maybe (although for the more cost conscious, it may or may not).
0.1%, yeah, that's much more into irrelevant territory.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park » 20 May 2017 17:49

adrian2 wrote:
20 May 2017 17:32
Park wrote:
20 May 2017 17:10
When does CPP become so small that it is no longer relevant? 10% of one's income?

Max CPP at age 60 is $8179 per year in 2016. If you have an income of greater than $73,611 (excluding CPP), then CPP isn't relevant. Max CPP at age 70 is $18147. If you have an income greater than $163,323 (excluding CPP), then CPP isn't relevant.
Completely disagree. An extra 10% on top of my income is very much relevant.
One can use the extra 10% for a luxury family vacation every year, or whatever you fancy.
A 10% bump in salary would also be very much appreciated, by almost anyone, anytime.

If you wrote 1% is irrelevant, maybe (although for the more cost conscious, it may or may not).
0.1%, yeah, that's much more into irrelevant territory.
My comments have been misinterpreted. I agree that an extra 10% income is very much relevant.

But there are those who believe that they can do better than CPP. I'm assuming that instead of getting 10% of income from CPP, they're getting a similar amount from money that was invested instead of making CPP contributions and/or deferring CPP benefits.

I consider CPP as a separate asset class to some extent. As such, it can diversify a portfolio and help to manage risk.

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Re: CPP Deferral debate - Fred Vettese article discussion

Post by kcowan » 20 May 2017 18:05

I took CPP at 62 and I forecast that it would outstrip my non-COLA pension of $28k by the time I was 78.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by steves » 20 May 2017 19:38

In order to clarify this arguement, you need to take all other financials into consideration.... the nature of your savings (reg, nonreg, tfsa, capgains...) the taxation/T1 spectrum (tax credits, clawbacks, bracket indexation....), additional income (salary, pension ....). Looking at just CPP in a vaccuum is a big approximation.
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Re: CPP Deferral debate - Fred Vettese article discussion

Post by Park » 20 May 2017 20:47

steves wrote:
20 May 2017 19:38
In order to clarify this arguement, you need to take all other financials into consideration.... the nature of your savings (reg, nonreg, tfsa, capgains...) the taxation/T1 spectrum (tax credits, clawbacks, bracket indexation....), additional income (salary, pension ....). Looking at just CPP in a vaccuum is a big approximation.
I agree with the above. CPP should be considered in the context of one's portfolio. Since risk and return in a portfolio are to a great extent determined by asset allocation, CPP should be considered, when it comes to asset allocation.

About the illiquid nature of CPP, that's a price you pay for CPP's ability to manage longevity and dementia risk. If liquidity is important, then CPP doesn't make sense. However, there would be few people for whom such liquidity would critical. And if liquidity is critical, a portfolio could be modified to take into account the need for liquidity.

If one has the ability to deliver above average risk adjusted posttax returns (an uncommon talent), then delay may not be as good. That must be weighed against dementia risk, as that ability may decline with time. IIRC, Ken Fisher once said that he's never known an exceptional investor older than 70. He has written that late in his father's life (the famous investor Philip Fisher), his father would have been better off in index funds.

If you have a large enough portfolio, then CPP isn't that relevant. But even under those circumstances, can you be confident that it will be irrelevant in the future? And with a large enough portfolio, the present impact of delaying CPP will be minimal. Why not buy some comparatively cheap insurance, in case your financial position changes in the future, such that CPP becomes relevant?

The one category, where delaying CPP doesn't make sense, is if you are confident that you will have a comparatively short life. Even then, survivor's pension and possibly children's benefits might alter that equation.

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