CPP Deferral debate - Fred Vettese article discussion

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CPP Deferral debate - Fred Vettese article discussion

Post by longinvest » 07 Mar 2017 12:14

Want your money to go further in retirement? Defer CPP until age 70 (Fred Vettese)

http://www.theglobeandmail.com/globe-in ... e34209897/
In past articles, I have argued that retirees are better off waiting until age 70 to start their Canada Pension Plan pension, assuming they have enough savings to tide them over until then. Doing so increases the amount of guaranteed income they will have for the rest of their lives. It also reduces your long-term investment risk because you are spending your savings first.
...
In spite of the many advantages of this option, almost no one takes the government up on it. Only 1 per cent or so of all CPP recipients postpone the start of their CPP payments until age 70. What we have is a rare situation – the government is quietly doing the public a big favour and hardly anyone is taking advantage of it.
...
Starting CPP early preserved more of the RRIF assets but the widowed Hanna still runs out of money sooner. This counterintuitive result happens because the early CPP start also means that her CPP benefits (including the survivor benefit from Carl) are lower for life. While she starts widowhood with a bigger CPP balance, she also runs it down more quickly.

What happened to Carl and Hanna is true in general. If you are concerned about your spouse’s welfare if you die young and think that starting CPP early will improve the financial situation, you should think again.
Obviously, it's not a popular proposition (only 1% of CPP recipients chose it).

Topic split from Clippings 2017 as there is clearly enough discussion for a separate topic -- Administrator
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Re: Clippings 2017

Post by ghariton » 07 Mar 2017 12:57

I started CPP at age 60, back in 2006. Back then I was going through a series of low net income years** and figured that it was better to get CPP at the lower marginal tax rate. I knew that my net income, and MTR, would be increasing substantially at age 71. I didn't want to shift more income to later years.

In addition to that I wanted to avoid years with zero CPP contributions. I had stayed in school too long and had run out of years I could drop for CPP purposes.

So I think it was a bit more complicated than Vettese makes out.

** I had just sold a co-op apartment in Montreal and was living in part off the capital gains, which were substantial. As a further complication all new net income was flowing to my corporation and being held there as retained earnings. Eventually given away to the children.
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Re: Clippings 2017

Post by leoc2 » 07 Mar 2017 13:00

I prefer to have extra money in my 60's (while I'm healthy) than in my 70's (I may be dead or sick).

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Re: Clippings 2017

Post by adrian2 » 07 Mar 2017 14:09

leoc2 wrote:I prefer to have extra money in my 60's (while I'm healthy) than in my 70's (I may be dead or sick).
You are interpreting the message incorrectly: by delaying the CPP to age 70, while cashing out some of your portfolio before age 70, you will get the same income as you'll get with an early CPP, before you're 70, and more income after you're 70.

So delaying CPP is a draw+win, not a lose+win. The exact numbers depend on the specifics (YMMV).
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Re: Clippings 2017

Post by leoc2 » 07 Mar 2017 15:57

My point of view is this. I have a DB pension and a plan to reduce my nest egg to 0 in 30 years. This nest egg reduction plan takes place regardless of when I take my CPP. So if I take my CPP early and execute my plan I will have extra money when I am in my 60's and less in my 70's. My family suffers from a short lifespan. 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.

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Re: Clippings 2017

Post by longinvest » 07 Mar 2017 16:05

adrian2 wrote:
leoc2 wrote:I prefer to have extra money in my 60's (while I'm healthy) than in my 70's (I may be dead or sick).
You are interpreting the message incorrectly: by delaying the CPP to age 70, while cashing out some of your portfolio before age 70, you will get the same income as you'll get with an early CPP, before you're 70, and more income after you're 70.

So delaying CPP is a draw+win, not a lose+win. The exact numbers depend on the specifics (YMMV).
Actually, by taking a similar approach to Delay OAS to 70, spend 8.8% more at 65!, one would end up with more money before 70 and more money after 70, or in Adrian's terms: win+win.
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Re: Clippings 2017

Post by Koogie » 07 Mar 2017 18:13

I think a lot of the reasoning behind taking CPP at a younger age has to do with politics and a lack of trust in government more than pure mathematics.
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Re: Clippings 2017

Post by longinvest » 07 Mar 2017 19:40

Koogie wrote:I think a lot of the reasoning behind taking CPP at a younger age has to do with politics and a lack of trust in government more than pure mathematics.
It may be cynicism but a bird in the hand is worth ...
But, CPP (and QPP) are much more difficult to change than OAS/GIS, and are funded through employee and employer contributions. I don't find the fear of politics very rational, here.

As for the bird in the hand, I'd rather spend 8% more before and after 70 (actually more than that, given that CPP's delay bonus is higher than OAS's). More money to spend is what I call having more of the bird in my hand.

The nice thing is that even if I die early, I won't live to regret my choice. ;)
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Re: Clippings 2017

Post by longinvest » 09 Mar 2017 19:57

Fred Vettese wrote a follow up to his article discussed recently in viewtopic.php?f=31&t=119841&p=592717#p592660.

http://www.theglobeandmail.com/globe-in ... e34244279/
Why people hate the thought of deferring their CPP pension, Fred Vettese

I get it. Canadians really do not like the idea of waiting until 70 to start collecting on their Canada Pension Plan.
...
In fact, the CPP pension increases by 8.4 per cent a year between 65 and 70 which adds up to 42 per cent, but that is not all. It also increases to reflect changes in the CPP earnings ceiling between 65 and 70 and that ceiling rises faster than inflation in most years. As a result, the pension at 70 is going to be very close to 50 per cent more than at 65.
...
It’s just that there is no reason that the income in your 60s has to come from CPP. It can come from your savings instead and your reward is that you’ll receive much more CPP pension later in life. Obviously you need enough savings to last until CPP starts at 70.
...
At the bottom of it, I believe deferring CPP is so unpopular because it forces people to withdraw more money from their savings early on to make up for the shortfall in income. The balance in their RRIF drops a lot faster as a result.

I recognize that this phenomenon is hard for us to accept since so much of our self-worth and our sense of financial security are tied to the amount of wealth that we have accumulated.
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Re: Clippings 2017

Post by Shakespeare » 09 Mar 2017 20:04

I believe deferring CPP is so unpopular because it forces people to withdraw more money from their savings early on to make up for the shortfall in income.
I don't agree. Most of us at my age (68) are quite conscious of our mortality. We take the money as soon as we can get it so that we do get it, mortality tables be damned.

I'm not a mortality table. :wink:

Added: it's the same reason we buy insurance for some things, despite the negative expected return.
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Re: Clippings 2017

Post by longinvest » 09 Mar 2017 20:14

Shakespeare wrote:
I believe deferring CPP is so unpopular because it forces people to withdraw more money from their savings early on to make up for the shortfall in income.
I don't agree. Most of us at my age (68) are quite conscious of our mortality. We take the money as soon as we can get it so that we do get it, mortality tables be damned.

I'm not a mortality table. :wink:
Shakespeare,

Here's a thread I started a while ago Delay OAS to 70, spend 8.8% more at 65!. It shows how one can actually spend more at 65 by delaying OAS. The CPP delay bonus is even more generous than OAS's.

In other words, there's simply no reason that one cannot use the higher amount of the delayed pension to spend more before 70.

Life expectancy does not affect the above result, as I would never plan to have a $0 portfolio at age 85 just because someone else told me I would never reach that age.

What could change the picture, though, is bequest motives. But, that's in the preamble of the first post of the linked thread.
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Re: Clippings 2017

Post by Shakespeare » 09 Mar 2017 20:21

I'm quite aware of your post.

The calculation is actuarial and the result depends entirely on *your* life expectancy: if you die before taking delayed CPP, you lose (and for a few years afterwards) because you never get the money.

In other words, it depends on if you feel lucky.
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Re: Clippings 2017

Post by longinvest » 09 Mar 2017 20:34

Shakespeare wrote:I'm quite aware of your post.

The calculation is actuarial and the result depends entirely on *your* life expectancy: if you die before taking delayed CPP, you lose (and for a few years afterwards) because you never get the money.

In other words, it depends on if you feel lucky.
Shakespeare,

I'm not sure I understand. What matters to me, while alive, is how much I get to spend each year when retired; not how much is left in my account the day I die. I don't see how you can get higher yearly spending during retirement by taking CPP early, instead of delaying it. What am I missing?
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Re: Clippings 2017

Post by Shakespeare » 09 Mar 2017 20:39

All allocations based on actuarial tables are lotteries. In general, those with short lifespans subsidize those with long lifespans. Whether you win depends on your individual life expectancy.

Your calculations depend on spending more with the expectation of getting more. But what if you don't live to get more?

Added later: if you start doing modeling with Steve's RRIFmetic you would see the point.
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Re: Clippings 2017

Post by longinvest » 09 Mar 2017 21:08

Shakespeare wrote: Your calculations depend on spending more with the expectation of getting more. But what if you don't live to get more?
My calculations depend on spending more early than if I took CPP/QPP early. If I don't live long, I'll just leave a smaller bequest while having safely spent more while alive.
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Re: Clippings 2017

Post by Shakespeare » 09 Mar 2017 21:28

If you die early, you spent more but made less. Some people will take one side of that bet, others the other.
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Re: Clippings 2017

Post by kcowan » 11 Mar 2017 12:32

Also for those early retirees, the 8 year drop-out rule applies. When I took my golden handshake at age 49, I was able to manage down my independent income into alternate years. This gave me years to drop out. Then after 60, I had every year to drop out. So I was forced to take it early by their rules. If they had given my 12 or 15 years of dropouts, I would have deferred.

I just talked one of my buddies into taking early it because he retired at 55. I think the rules have not been thought through.
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Re: Clippings 2017

Post by longinvest » 11 Mar 2017 13:04

Here's a quick calculation, using the rules of QPP (similar to CPP, except that the dropout provision is 15%).

Retire at 60 (or before).

Option 1: Take early QPP at age 60 and get $P60 per year.

Option 2: Wait until 65 to draw on QPP. How much does one get?

$P60 is 25% of the average for 85% of the highest insurable wages between ages 18 and 60, minus 36% (early withdrawal penalty). This means that the total of retained insurable wages over (0.85 X (60-18)) = 35.7 years was TI = $P60 X 4 X 35.7 / (1 - .36) = $P60 X 223.125

At age 65, one gets 25% of the average for 85% of the highest insurable wages between ages 18 and 65. As the retiree gets $0 in wages between ages 60 and 65, and assuming he had already dropped all low-wage years at 60 (that's the worst-case scenario), also assuming that wage inflation is equal to CPI inflation (it is usually 1% higher, so I'm drawing a worst than normal scenario) we get:

$P65 = .25 X ($P60 X 223.125) / (0.85 X (65 - 18)) = $P60 X 1.396276596

Option 3: Wait until 70 to draw on QPP. How much does one get?

Note that, unlike CPP, QPP has no provision to drop the $0 wage between ages 65 and 70. But, it shares the same 42% bonus.

$P70 = .25 X ($P60 X 223.125) / (0.85 X (70 - 18)) X (1 + .42) = $P60 X 1.792067308


In summary, for retirement at age 60 or earlier, one can increase the QPP pension 40% by waiting to age 65, or 80% by waiting to age 70, an average of 8% per year in the worst case.

For CPP, assuming a 17% drop out provision between 18 and 65, and a 100% drop out provision between 65 and 70, I get:

For retirement at age 60 or earlier, one can increase the CPP pension 40% by waiting to age 65, or 100% by waiting to age 70 (more exactly, 98.2712766% higher than at age 60).

That's the worst-case scenario. If one has additional wages that were dropped by the age 60 calculation, or if wage inflation continues to outpace CPI inflation by 1%, the increases would be higher.
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Re: Clippings 2017

Post by longinvest » 11 Mar 2017 13:16

Of course, I am assuming the new rules, with a 36% penalty at age 60 and a 42% bonus at age 70. Previously, the age 60 penalty was lower and there was no provision to wait until age 70.
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Re: Clippings 2017

Post by longinvest » 11 Mar 2017 13:57

Let's factor in a 1% wage increase above inflation and a 2% inflation. This means that someone retiring at 60 (or earlier) can get a CPP pension that is 62%* higher (in nominal terms) by waiting 5 years from 60 to 65, a 12.5% per year bonus! One can increase the pension by another 66%**, a 13% per year bonus, by waiting an additional 5 years until age 70.

That looks pretty good to me.

* (1.01^5 X 1.02^5 X (1 + 40%)) - 1
** (1.01^5 X 1.02^5 X ((1 + 100%) / (1 + 40%))) - 1
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Re: Clippings 2017

Post by StuBee » 11 Mar 2017 15:30

longinvest wrote:For retirement at age 60 or earlier, one can increase the CPP pension 40% by waiting to age 65, or 100% by waiting to age 70 (more exactly, 98.2712766% higher than at age 60).
I think that you are saying that taking QPP at age 70 will give double what you would have if you take it at age 60.

I think that this means that the "I take my pension at age 70" will catch up (in total dollars received) to the "I take may pension at age 60" when the pensioner is 80 years old.

There is an obvious risk in this scenario: Death
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Re: Clippings 2017

Post by longinvest » 11 Mar 2017 15:39

StuBee wrote:
longinvest wrote:For retirement at age 60 or earlier, one can increase the CPP pension 40% by waiting to age 65, or 100% by waiting to age 70 (more exactly, 98.2712766% higher than at age 60).
I think that you are saying that taking QPP at age 70 will give double what you would have if you take it at age 60.
Right. And if you add the 1% wage inflation above CPI inflation, the (CPI inflation-adjusted) bonus becomes 120%.
StuBee wrote:I think that this means that the "I take my pension at age 70" will catch up (in total dollars received) to the "I take may pension at age 60" when the pensioner is 80 years old.
Taking the wage inflation factor into account, we can make this age 79. Adding a rate of return on invested assets would possibly inflate that back to a higher age, but then there would be market risk involved. So, it's not simple.
StuBee wrote:There is an obvious risk in this scenario: Death
I've always claimed that there is a pretty big risk for the heirs, not for the pensioner himself. The delayed pension allows him to safely spend more, while alive, than by taking the pension early. But, this comes with a relatively good probability that the heirs will get less after the pensioner's death, except when the pensioner wins the longevity lottery.
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Re: Clippings 2017

Post by longinvest » 11 Mar 2017 15:52

Let me put it this way:

If my goal in life was to get back as much money as possible from CPP/QPP and OAS, with the best probability of achieving so, then I should take the pensions as early as possible.

If my goal in life was to enjoy as much as possible my invested money and the money of my CPP/QPP and OAS pensions, by safely spending more every year of my retirement than if I had taken the pensions early, then I should take the pensions as late as possible.

Bigger bequest (early CPP/QPP and OAS): What my heirs would want after my early death. (One could worry about the incentives, here, for one's early demise. Novels were written about this. :!: )

More spending during retirement (delayed CPP/QPP and OAS): What I want, and possibly what my heirs would prefer if I was to safely give them part of my excess money available for spending while still alive (at a time that would probably be more convenient to them than after my death).

As they say: pick your poison. We're not getting out of it alive. :wink:
Last edited by longinvest on 11 Mar 2017 16:44, edited 1 time in total.
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Re: Clippings 2017

Post by ghariton » 11 Mar 2017 16:43

An additional complication is taxation. If one has a large RRSP, and will have to make large withdrawals starting at 71, then taking CPP early will result in a lower effective tax rate applying to the payments before 71, and possibly to the payments after 71.

Of course, an alternative is to start melting down the RRSP before 71, even as early as 60, thus smoothing income that way instead of through CPP payments. I did the exercise back in 2005, and found that, at that time, it was probably better to melt down by drawing early CPP (rates of return on alternative investments were higher then, and it seemed clear that marginal tax rates would be falling). But as you note, the disadvantage of early CPP was less than today, and there was no option to postpone to 70. Furthermore, alternative rates of return are now ridiculous, and I think that marginal tax rates are on their way up.

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Re: Clippings 2017

Post by longinvest » 11 Mar 2017 17:12

ghariton wrote: But as you note, the disadvantage of early CPP was less than today, and there was no option to postpone to 70. Furthermore, alternative rates of return are now ridiculous, and I think that marginal tax rates are on their way up.
About future returns... Currently, everybody seems to agree that they will be low. If I'm to believe history, it's when everybody thinks something that something else happens. I just don't know.

But, I agree on the good probability of higher marginal tax rates; the federal government is running a budget deficit which will have to be paid back somehow. Higher marginal tax rates are a probable approach for that. (Another approach is inflating away the debt through "financial repression", as you mentioned elsewhere, but that won't work with RRBs other than through taxflation). It's not looking good, ahead, for non-registered investing.
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