Old Age Security

Some common RRSP mistakes we all need to avoid

August 4, 2022

Those of us who don’t have a workplace pension – or want to augment it – are pretty familiar with what a registered retirement savings plan (RRSP) is. However, there can be tricky things to watch out for when investing your RRSP savings. Save with SPP had a look around the Interweb to highlight some RRSP pitfalls.

The folks at Sun Life identify five RRSP no-nos. First, they tell us, is the mistake of putting cash in your RRSP to meet the deadline, and then not putting it into an investment of some kind. Be sure you invest the money in something – “stocks, guaranteed investment certificates, mutual funds, bonds and more” so that your RRSP contributions grow. Your money grows tax-free until you take it out, so you need to have growth assets, the article says.

Another problem identified by Sun Life is raiding your RRSP cookie jar.

“Making RRSP withdrawals before retirement to, say, cover bills or make big purchases can have lasting consequences. For one, you’re giving up the years of tax-deferred growth your money would have generated inside your plan.” As well, the article continues, you’ll face a double tax hit – a withholding tax is charged when you take money out of an RRSP, and then the income from the withdrawal is added to your overall income at tax time. Double ouch.

Other things to watch out for, Sun Life advises, are overcontributing (be sure you know exactly what your limit is), spending your tax refund instead of re-investing it, and not being aware of RRSP/RRIF tax rules on death.

The Modern Advisor blog cautions folks against making their RRSP contributions “at the last minute.” If you spread your contributions out throughout the year, you will get more growth and income from them, the article advises.

Other tips include making sure your beneficiary selection is up to date, and knowing that contributions don’t have to be made in cash, but can be made “in kind,” such as by transferring stocks from a cash account to an RRSP account.

The RatesDotCa blog adds a few more.

On fees, RatesDotCa points out that many RRSP products, typically retail mutual funds, charge fairly hefty fees. “Canadians pay some of the highest fees in the world,” the article notes. “Over many years, these fees can add up, further reducing your retirement plan. Be sure to ask for a thorough explanation of the fees you can expect, and how they will affect your retirement plan,” the article advises.

Other ideas from RatesDotCa include not repaying your RRSP if you do borrow from it, not taking “full advantage” of any company pension plan (meaning, contribute as much as you can to it), and retiring too early (the article notes that both the Canada Pension Plan and Old Age Security pay out significantly more if you wait until age 70 to collect them.

Save with SPP can add a few more, gleaned from our own “welts of experience” over 45 years of RRSP investing.

Don’t frequently move your RRSP from one provider to another. This is called “churn,” and can result in hefty transfer fees and generally reduces the long-term growth needed for retirement-related investing.

If you borrow to make an RRSP contribution, do the math, and make sure the loan amount is affordable. Sometimes the bank or financial institution will want the money repaid within a year.

Be sure your investments are diversified, and include both equities and fixed income, plus maybe alternative investments like real estate or mortgage lending. Typically, if one sector is down, others may be up.

If you don’t want to think this hard as this about RRSP investments, consider the Saskatchewan Pension Plan. Contributions to SPP are treated exactly like RRSP contributions for tax purposes. You can’t run into tax trouble by raiding your SPP account because contributions are locked in until you reach retirement age. SPP offers a very diversified portfolio in its Balanced Fund, and fees charged by SPP are low, typically less than one per cent. Since its inception in 1986, SPP has averaged eight per cent returns annually – and although past results don’t guarantee future performance, it is a noteworthy track record. Check out SPP today!

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Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


Looking back on what the experts say – Save with SPP

July 21, 2022

Summertime, and while the living is easy, it’s not always easy to get people on the phone for an interview. We get it – there’s only a few short months of great weather in this country, after all.

So, Save with SPP had a look back on what we’ve learned about retirement and saving over the past while through past interviews, and via book reviews, from industry experts and leaders.

Derek Dobson, CEO and Plan Manager of the Colleges of Applied Arts & Technology Pension Plan, pointed to new research from the Canadian Public Pension Leadership Council that showed the economic value of pension dollars.  The study found that $16.72 of economic activity arises from every $10 paid out from a pension plan, notes Dobson. And that type of benefit comes from efficient plans, he explains. “Any plan that uses experienced investment professionals, and pooling – I include the Saskatchewan Pension Plan as an example of that – is delivering pensions efficiently,” he tells Save with SPP.

In an interview about the ins and outs of registered retirement income funds (RRIFs), BMO’s James McCreath noted that converting some or all of your registered retirement savings plan (RRSP) to an annuity instead of moving it to a RRIF is also an option.

“As interest rates rise, the functionality and usefulness of annuities go up,” he told Save with SPP. You can read the full interview here.

Prof. Luc Godbout, remarking on the trend of people working longer, had an idea on how to tweak the retirement system to accommodate the needs of older workers.  Allowing Canadians to postpone Old Age Security until age 75, and moving the conversion dates for RRSPs/RRIFs to 75, would “optimize the mechanics of pension plans, and also encourage Canadians to remain in the workforce, which improves health and also helps with Canada’s looming labour shortage.” Here’s where you can find the full article.

The author of Getting Out of Debt, Michael Steven, had some interesting thoughts on the importance of saving (once debt is under control).

“Saving requires discipline, a habit you build over time. It can be hard to save instead of spend, but if you have to attain financial freedom, then saving is one of those things you will have to embrace.” You can read the rest of our book review here.

There’s a lot to the broad topic of retirement and saving. For sure, belonging to a workplace pension plan is a key step towards retirement security. If you are saving on your own, you do need to understand the “decumulation stage” when savings are converted to income, either via an annuity or through drawing down a RRIF or similar vehicle. If you don’t have a lot of savings and have boomed your way into your 60s, then the proposed federal changes to benefits discussed by Prof. Godbout may make sense for you. But at the end of the day, as the old saying goes, it’s not what you make, but what you save, that helps your future self paddle through the waters of retirement.

If you don’t have a pension plan at work, and/or haven’t started saving for retirement yet, help is at hand. The Saskatchewan Pension Plan is open to any Canadian with RRSP room, and offers pooled investing, low-fee investment management, and many retirement income options including annuities. Check out SPP today!

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


What to do when the cost of everything is going up

June 16, 2022

By now, any of us who drive a gas-powered vehicle are experts in what inflation means. It’s when something that cost $60 in the winter costs $100 five months later.

Are there any tactics we can employ to help spending our hard-earned/hard-saved dollars more effectively during this crazy period of runaway prices? Save with SPP took a look around to see.

An article from Global News discusses the plight of mostly retired Mike and Marylou Cyr of Campbell River, B.C.

They are, the article notes, living on a fixed income consisting of workplace pensions and government benefits (the Canada Pension Plan and Old Age Security), Mike is still working a little. The couple looked first at reducing the costs of their insurance premiums, and switching to a cheaper telecom plan, the network reports.

With gas prices jumping $50 a tankful, the couple is now planning to sell off one of their vehicles and sharing the other, Global tells us. The other big jump for their spending is food, which has gone up more than $100 a month already, the article reports.  “I am very concerned with the inflation, the rising food costs, as well as the rising gas costs. I think those are two main things,” states Marylou Cyr in the article.

So to fight that, the Cyrs are growing their own veggies and have four laying hens to supply their own eggs, the article says.  “Maybe I’ll start canning again like our parents and grandparents did and store everything for the winter,” she tells Global. “If I could get a cow in the yard, I might do that, but I can’t.”

OK – trim insurance, telecom, go to one car, and grow your own food. Run some cattle if you can. What else can a person do?

According to CTV News, there are other ways to save on food. The network says folks are trying to buy grocery items that are on sale, buying items you use regularly in bulk, and targeting the groceries you use up rather than those you often throw out are good approaches.

Another way to save is through pooling costs, states University of Saskatchewan associate professor Stuart Smyth in the CTV report. “For example, (if) you’re buying 20 pounds of meat, but you’re splitting that up between three to four households, you’re saving some money that way,” he tells CTV. He underlines the importance of being a little more selective in shopping – target items that you tend to fully consume, rather than those you wind up throwing out. (An example in the Save with SPP home is yogurt; we always buy some because it is supposed to be good for us, and then almost never eat any before it expires.)

In addition to gas and food, other categories of consumer goods have been affected mightily by inflation, reports the Globe and Mail.

Meat is up 10.5 per cent versus 2021, and surprisingly, meat alternatives “like faux burger patties or plant-based ‘chicken’ nuggets” are 38 per cent more expensive than meat, the Globe notes.

Household appliances are up 23 per cent over the last two years, the article continues, and buying a typical soup and sandwich lunch “costs nearly $18 on average, up 24 per cent.” Other items that are particularly impacted by inflation include the cost of new homes and of housing in general.

We can’t fully protect ourselves from inflation. Following some of the steps outlined in these reports will at least help trim your spending.

Tips from Save with SPP’s own experience include shopping for clothes at consignment stores – you always pay less than at retail stores – and trying to brown bag lunch rather than having that $18 soup and sandwich. Friends like making fun of our $4 sand wedge from Value Village, but it gets us out of the bunkers right enough. All of these steps can help you save a few dollars, perhaps even enough to put away for retirement.

It’s interesting to read associate professor Smyth’s description of pooling purchases of meat. The same concept of “pooling” is a key way that the Saskatchewan Pension Plan reduces investment costs for its members. If you buy a stock on your own, there’s a fee for buying it and later, a fee for selling it. There might also have been annual fees to maintain your account. With SPP, you pool your savings with those of others in one big fund. That lowers the management costs to less than one per cent. It’s a great way to save on the cost of investment management, and SPP has an outstanding track record of steady investment returns. Check out SPP – available to all Canadians with RRSP room – today!

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Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


May 16: BEST FROM THE BLOGOSPHERE

May 16, 2022

End RRIF mandatory withdrawals, RRSP end dates, and create national RRSP: Pape

Well-known financial author Gordon Pape has been observing the Canadian investment and retirement savings system for many decades, and has come up with a four-point plan to make retirement more effective for Canada’s greying population.

Writing in the Globe and Mail, Pape observes that there are now seven million Canadians aged 65 and over.

“This has the makings of a massive demographic crisis,” he writes. “Where are the future workers going to come from? Who is going to support our rapidly aging population? What will happen to the tax base as people leave the work force and reduce their spending?”

He then suggests that one way to address the problem would be to encourage more Canadians to work past age 65, a plan that would “require a massive overhaul of our retirement system,” but that is “doable.”

As a starting point, he notes that the trend towards more working at home, born from our experiences with the pandemic, may be a good “carrot” for encouraging older Canadians to keep working. Working from home is preferable for most, he says.

But other carrots are needed as well, he writes.

Eliminate mandatory RRIF withdrawals: Currently, he writes, registered retirement savings plans (RRSPs) must be “wound up by Dec. 31 of the year in which you turn 71,” and are then mostly converted into registered retirement income funds (RRIFs). With RRIFs, he explains, you are required to withdraw a minimum amount annually, an amount that grows until you are 94 and must withdraw 20 per cent of the RRIF.

“RRIF withdrawals are a huge disincentive to work after age 71. Added to regular income, the extra RRIF money can quickly push you into a high tax bracket,” Pape writes.

“The solution is legislation to end mandatory withdrawals entirely. Let the individual decide when it’s time to tap into retirement savings and how much is needed. The government will still get its tax revenue. It will just be delayed a few years,” he posits.

End RRSP wind up at 71: A second “carrot,” he writes, would be to change the age that RRSPs must be closed, currently age 71. Why, asks Pape?

“RRSP contributions are tax deductible. Making RRSPs open-ended would therefore create an incentive to continue saving in later years, when people may have more disposable income (no mortgage, kids moved out). That would result in more personal savings, which should result in fewer people requiring government support in later years,” he writes.

Create a national RRSP: Pape proposes that a national RRSP – to be run by the Canada Pension Plan Investment Board – be created. “It would provide Canadians with first-rate management expertise, at minimal cost,” Pape writes.

This idea is needed, Pape says, because many people don’t know how to invest in their RRSPs and lack the advice they need to do so.

Allow CPP and OAS to be deferred longer: His final idea would be to allow people to start their Canada Pension Plan and Old Age Security later than the current latest age, 70. Again, this is to accommodate folks who want to work longer and don’t need the money as “early” as 70.

These ideas all make a lot of sense if the goal is to help people working longer. The idea of being able to withdraw RRIF funds as needed rather than based on a government mandatory withdrawal table is sensible. After all, who wants to withdraw money – effectively selling low – when markets are down? And if one is working into one’s 70s, why take away the effective tax reduction lever of RRSP contributions?

Let’s hope policy makers listen to some of Pape’s ideas. Gordon Pape spoke to Save with SPP a while ago, and he knows his stuff. He also spoke with our friend Sheryl Smolkin in an earlier Save with SPP column.

If you don’t have a workplace pension plan, investing on your own for retirement can be quite daunting, especially in times like these where interest rates are rising and markets are falling. Fortunately, there is a way to have your money professionally invested at a low cost by money managers who know their way around topsy-turvy conditions – the Saskatchewan Pension Plan. You’ll get professional investing at a low cost, and over time, your precious retirement nest egg will grow and be converted to an income stream when the bonds of work are cut off for good. Check them out today!

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


Quebec academic calls for changes to RRSP and RRIF age limits

April 14, 2022

A university professor from Sherbrooke, Quebec is calling for a couple of changes to Canada’s system of registered retirement savings plans (RRSPs) and registered retirement income funds (RRIFs), in light of the fact that people are living longer.

Professor Luc Godbout, Professor, School of Administration at the Université de Sherbrooke, is also Chair in Taxation and Public Finance. He kindly agreed to answer some questions Save with SPP had about his ideas, which were published by the C.D. Howe Institute as an open letter to federal Finance Minister Chrystia Freeland.

His open letter was originally published in French.

The professor’s open letter calls for “simple changes” to the existing rules.

“The first would be adjusting the threshold age at which registered capital accumulation plans – such as the RRSP – must be terminated. The rule now is age 71,” he notes in the letter.

Under the current rules, his letter explains, RRSP holders must “transfer their RRSP or defined-contribution pension plan balances into a RRIF or a life annuity” before the end of the year in which they reach age 71. If they don’t, he explains, “the entire value is added to their taxable income in that year.”

The age limit of 71 was established in 1957, his open letter notes.   “This means that since the creation of the RRSP in 1957, the age limit of 71 has never been raised,” the open letter explains. “Yet, since 1957, the life expectancy of seniors in Canada has improved significantly. 

“Life expectancy at age 65 was 14.5 years during the period 1955-1957. It improved to 20.9 years in 2018-2020. But the RRIF rules have not moved,” he writes.

He remarks that recent changes to Old Age Security (OAS) benefits for those aged 75 and older “provides an opportunity to harmonize other elements around our living 75-year-olds.”

Why not, he asks, consider allowing Canadians to postpone their OAS payments to age 75, rather than the current age 70? And, he asks, why not move the limit for converting an RRSP to a RRIF to 75?

“This type of change would optimize the mechanics of pension plans, and also encourage Canadians to remain in the workforce, which improves health and also helps with Canada’s looming labour shortage,” his open letter concludes.

Save with SPP asked the professor a couple of questions about his open letter.

Q. You mention that moving the “end date” for RRSP contributions (and for DC plans) and RRIF conversion to 75 from the current 71 would encourage more people to stay in the workforce. Do you see the current age 71 rule as something that encourages the opposite – a deadline that encourages retirement?

A. It may not be an important factor, but it cannot play favorably in the heads of those who want to continue in the labour market, for example, a liberal profession.

Q. If your idea on changing the date is adopted, do you think government retirement benefits like the Canada Pension Plan/Quebec Pension Plan and Old Age Security should also be changed?

A. Yes, but it is not an obligation to retire later, only to offer a possibility to delay the time when the pension begins, currently CPP between 60 and 70 years and OAS between 65 and 70 years.

Q. You note that while the RRIF age of 71 has been lowered (to 69) in the past, it has never been raised. Why do you think 71 is still the age, especially considering how things have changed since the rules came in in 1957, and retirement was mandatory at 65!

A. Because the scheme does not provide for the adjustment of this threshold to take account of the increase in life expectancy.

We thank Prof. Godbout for taking the time to answer our questions.

One way that a pension plan can deal with longer life expectancies of its membership is by providing the option of an annuity. The Saskatchewan Pension Plan provides a number of different annuity options for its retiring members – but all of them provide a lifetime monthly pension. Check out SPP today.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


Apr 4: BEST FROM THE BLOGOSPHERE

April 4, 2022

Is working the new “not working” for older Canadians?

Writing for the Financial Post, Christine Ibbotson notes that her own research on retirement in Canada has found that more people than you would think are working later into life.

“According to Stats Canada, 36 per cent of Canadians aged 65 to 74 are still working full-time, and 13 per cent of those aged over 75 are also still working. I was surprised by this finding, and I am certainly not advocating working into your elder years or continuing to work until you die; however, obviously these stats show that a lot of Canadian retirees are not just sitting around,” she writes.

Ibbotson writes that this tendency to keep working past the traditional retirement age of 65 may be because older Canadians want to “feel purposeful.”

“Contrary to popular belief, there is no “right time” to retire and if you are in good health there is no real need for rest and relaxation every day until you die. Retirement was not intended for everyone, even though we now believe we all should have access to it. The 65-year age of retirement was chosen by economists and actuaries when social security was created, when life expectancies were much less than they are now, and only provides a generalized guideline,” she writes.

Continuing to work, she continues, has many added benefits, including “being socially connected, physically active, mentally sharp, and enjoying the benefits of additional revenue.” You may, she writes, have fewer health problems if you continue to work into your later years.

While it’s true that many of us still work part time into our 60s and beyond (raising a hand here) not because we need the money, but because we like it, that’s not always the case for everyone.

Some of us work longer than 65 because we don’t have a workplace pension, and/or have not saved very much in registered retirement savings plans (RRSPs) or tax free savings accounts (TFSAs).

Recently, we looked up the average RRSP balance in Canada and found that it was just over $101,000. The average Canada Pension Plan payment (CPP) comes in around $672 per month, and the average Old Age Security (OAS) at $613 per month (source, the Motley Fool blog).

Ibbotson is correct about working beyond age 65 – we do it because we love the work and the income, but for those without sufficient savings, we may be working because we need the income. If you have a retirement savings program at work, be sure to sign up and take maximum advantage of it. If you don’t a great option for saving on your own is the Saskatchewan Pension Plan.

A personal note here – this writer’s wife is planning her SPP pension for next year. By contributing close to the maximum each year, and regularly transferring $10,000 annually from her other RRSPs, her nest egg has grown to the point where she plans to select one of SPP’s lifetime annuity options. Her first step was to get an estimate of how much per month she will receive from SPP; she has applied for her Canada Pension Plan, and apparently Old Age Security starts automatically when she hits 65 next year.

We’ll keep you posted on how this goes, but it’s exciting for her to plan life after work, with the help of SPP.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


Your Retirement Income Blueprint – a “do it properly, do it better” resource

March 31, 2022

From the get-go, where author Daryl Diamond describes his book as being a “do it properly” or “do it better” book on retirement income planning, rather than a “do it yourself” volume, a wonderfully written tome filled with valuable insights begins.

Your Retirement Income Blueprint makes great strides in explaining that retirement is not really “the back nine” of life. Retirement, he explains, is “not simply a continuation of the same thing (pre-retirement)… the playing field changes because there are such substantial differences between the planning approaches, investment strategies, risk-management issues and sheer dynamics of these two phases in someone’s life.”

There’s a lot to cover in a short review, so let’s look at some of Diamond’s retirement income gems.

Early on, Diamond explains the importance of having “a formal income plan, or blueprint, to show what your assets can realistically be expected to provide in terms of sustainable cash flow.” In other words, do you have enough income, from all sources, for an adequate retirement? Retiring without sufficient income, he warns, “can be a very unfortunate decision.”

On debt in retirement, he notes “ideally, you want to be debt free at the time you actually retire,” because otherwise, “you will have to dedicate income toward servicing the debt. And that is cash flow that could be used to enhance your lifestyle in other ways.”

Another great point, and this was one that Save with SPP personally used when planning retirement, is the idea of making a “net to net” comparison of your pre-retirement income versus post-retirement.

“That difference between your gross employment income and gross retirement income may appear quite significant, however, some analysis of your earnings statement may narrow this disparity. Compare what you are bringing home on a net basis with what your net income will be in retirement. You may find the difference in net pay is not as significant as you thought.”

The book provides a chart showing gross employment income being 33 per cent greater than retirement income – but only about 12 per cent different on a net basis, because the retiree isn’t paying into Canada Pension Plan (CPP), Old Age Security (OAS), a company pension or company benefits.

Diamond points out that the investment principles for retirement saving differ from the retirement income, or “using your nest egg” years.

“When people begin to draw income from their portfolios, their focus changes from ‘rate of return’ to ‘risk management,’” he writes. “Capital preservation becomes the number one issue, because with capital preservation, you also have sustainable income,” he adds. The goal is longevity of your income – meaning, not running out of money.  

Diamond sees annuities as a way to ensure you don’t run out of retirement income. The book shows how your CPP, OAS and company pension – along with an annuity purchased with some of your retirement savings – can create a guaranteed lifetime monthly amount for your core, basic expenses. The rest of your income can be used for discretionary, fun expenses, he explains.

Diamond isn’t opposed to the idea of taking one’s Canada Pension Plan benefits early. He advises us all to “assess whether or not there is merit to do so in your own situation.” He makes the point that while many of us live long lives, some of us don’t, so deferring a pension carries a risk.

He sees the Tax Free Savings Account (TFSA) as becoming “one of the great tools at our disposal. I look for ways to help retirees fund their TFSA accounts to the maximum, whether that be through taking CPP early, withdrawing additional amounts out of registered accounts or even moving other non-registered holdings systematically into them.”

He suggests that using one’s registered retirement savings early in retirement may be preferable to deferring them until the bitter end at 71. “Deferring all of your registered assets can create real tax problems in the future and could eliminate main credits and entitlements that you would otherwise have been receiving,” he explains.

Near the end of this excellent book, Diamond alerts retirees to what he calls the “three headwinds” that can “be a drag on” any retirement income solution – taxation, inflation, and fees. Attention should be paid to all three factors when designing a retirement income solution, he writes.

When you retire, Diamond concludes, it’s when “your ticket gets punched… and baby, you had better enjoy the ride.” The three commodities that will support a great retirement are your state of health, your longevity and “your income-producing assets and benefits.” Only the last commodity is one that you can fully control, he says.

This is a great book and highly recommended for those thinking about retirement.

Do you have a handful of different registered savings vehicles? Consolidating them in one place can be more efficient than drawing income from several sources. The Saskatchewan Pension Plan allows you to transfer in up to $10,000 per year from other registered vehicles. Those funds will be invested, and when you retire, your income choices include SPP’s family of annuities. Check out SPP today!

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


Mar 28: BEST FROM THE BLOGOSPHERE

March 28, 2022

What the return of inflation will look like for wages, debt and savings

Writing in the Financial Post, noted financial writer Jason Heath takes a look at what the return of inflation will mean for us.

He reports that in February, the consumer price index (CPI) jumped by 5.7 per cent, which “is the biggest increase since August 1991, when inflation was six per cent.”

Since that long-ago peak, he writes, inflation has fallen to much lower levels. Over the last 30 years, it has averaged 1.9 per cent, Heath explains. And, he adds, the Bank of Canada over the intervening years has put policies in place, as required, to keep the brakes on inflation.

Managing inflation through central bank policy is a lot like turning around an ocean liner – you have to make small adjustments over a long time frame. For interest rates, corrective action takes place “typically within a horizon of six to eight quarters,” or a year and a half to two years, he writes.

Despite that effort, our old friend is back, and not just here in Canada. Inflation rates are at 7.9 per cent in the U.S., 6.1 per cent in India, and at 5.9 per cent in the “Eurozone,” he writes.

He then takes a look at its likely impacts.

Higher wages: First, he writes, employers need to look at wage increases. Hourly wages have increased by just 1.8 per cent since 2020. “If inflation remains persistently high, workers whose earnings cannot keep up with the rate of inflation are effectively getting a pay cut,” he notes. They’ll need more wages to pay for the higher price of goods and services, he explains.

Higher interest on debt: If you are carrying a lot of debt, higher interest rates will cut into your cash flow, he writes.

“That cash flow decrease may not be immediate but many mortgage borrowers will see their amortization period increase as more of their monthly payments go to interest and their debt-free date is delayed. This is an important consideration for young homebuyers if they are going to balance their home ownership goals with other priorities like retirement,” he writes.

Even an increase of two per cent in borrowing rates, Heath explains, could add 13 years to your mortgage if you don’t change your monthly payment amount.

Inflation protection for retirees: Heath points out that government pensions – the Canada Pension Plan and Old Age Security – are indexed, and are increased annually based on the rate of inflation. This, he says, is a “powerful” hedge against inflation.

Interest rates are a consideration for those living on savings. If interest rates on your investments don’t keep up with inflation, it will take less time for your portfolio to decline to zero. But if interest rates are higher than inflation, you may still have tens of thousands of dollars in savings 25 or 30 years after you start drawing down your savings.

“In the short run, higher inflation is concerning and can lead to uncertainty. The Bank of Canada is likely to continue to increase interest rates to counter the higher cost of living. There is a risk the rate increases have taken too long to start or may now happen more quickly than expected, and that may have implications for savers, retirees, the economy, and the stock market,” he concludes.

Save with SPP was a youngish reporter in 1991, and remembers that the guaranteed investment certificate (GIC) was still a big tool in one’s investment portfolio in those days, as was the Canada Savings Bond. While interest on such products had been double digit a decade earlier, it was still nice to get five or six per cent interest each year without having to invest in riskier stocks or equity mutual funds.

And while it is exciting to imagine our wages going up by five per cent or more, it is rendered less exciting when the cost of everything is also going up. It was strange, on our recent trip to Whitby to see our new grandbaby, to be “excited” to find gas at the pump for under $1.70 per litre.

What’s a retirement saver to do? If you are following a balanced approach, with exposure to multiple asset classes, you should fare pretty well in a challenging investment environment. An example of that is the Saskatchewan Pension Plan’s Balanced Fund. It has eight distinct and different investment categories in which to place your savings “eggs,” including Canadian, U.S. and Non-North American Equity, Bonds, Mortgages, Real Estate, Short-Term Investments and Infrastructure. If one category is having challenges, it is quite likely that others are performing well – that’s the advantage of a balanced approach. Check out SPP today!

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Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


Mar 21: BEST FROM THE BLOGOSPHERE

March 21, 2022

How much is “enough” when setting an early retirement savings target?

Writing for the GoBankingRates blog, John Csiszar takes a crack at a challenging topic – how much is “enough” when setting your retirement savings goals, particularly if you want to retire early?

“While the fantasy of early retirement sounds great, the reality can be difficult to achieve. If you retire early, you’ll need much more than a standard retirement nest egg to fund the extra years that you will be retired and not working,” he writes.

Drum roll, here – Csiszar next tells us that since a “standard” retirement nest egg should contain one million eggs (all eggs are U.S. denominated in his article), then an early retirement nest egg should cost “$2 million or more, to fund a long, early retirement.”

He then does the math. For those wanting to retire at age 40, they need to first understand that their retirement (according to Internal Revenue Service stats for the U.S.) could last around 45.7 years.

In order to have a “modest” $40,000 income for life starting at 40, you would need to save $1.84 million once you hang up the name tag for the last time.

To get that $1.84 million, he adds, you would need to start saving $92,000 a year beginning at age 20. And even if you could manage that feat, Csiszar adds, you would need to have average investment returns of seven to 10 per cent annually.

Well, OK. What about early retirement at 50?

Csiszar does the math on that idea, with the same goal of having $40,000 in income annually. Americans aged 50 at retirement can expect 36.2 more years of life, so you’ll “only” need $1.448 million in savings. And you’ll need to save $88,266 annually from age 30 to 50 to get the job done.

These are scary numbers, but let’s not overlook the fact that most Canadians will get a Canada Pension Plan (CPP) benefit at retirement, and may also qualify for Old Age Security (OAS) and the Guaranteed Income Supplement (the latter is for lower-income retirees). These don’t start at age 40 or 50, of course, but you can get CPP at 60 and OAS at 65.

The average CPP payout in Canada, according to our friend Jim Yih at the Retire Happy blog, is $645 per month. That’s $7,740 per year. If you were to retire at age 65, and live for 20 years, the CPP (assuming you got the average rate cited here) would provide you $154,800, and that’s not including the inflation increases you would receive each year.

The Motley Fool blog tells us that the average OAS payment in Canada is $613.53, or $7,362.36 per year. If you were to start collecting OAS at 65, and received this average amount for 20 years, you would have received $147,247.20. Again, that figure doesn’t include inflation increases.

These are estimates based on average payouts; what you will actually get depends on your own earnings and employment history. But the point is, these two federal programs can provide a significant chunk of your nest egg – you are not completely on your own in your savings program.

We can save on our own in registered retirement savings plans (RRSPs), and another The Motley Fool blog post shows that the average RRSP balance in the country is $101,555.

Saving a million bucks sounds impossible, but maybe, it’s not as big a mountain as it appears.

Those with company pensions as well as RRSPs, tax free savings accounts, and other savings, can get closer to the target. The value of your home can be a savings factor if you decide to sell and downsize for your golden years.

If you do have a company pension plan, be sure to contribute to the max.

With a committed approach to saving, and assuming you can get decent investment returns with low fees, we can all get a little closer to that “standard” savings level. For those without a company pension plan, consider the Saskatchewan Pension Plan, which currently allows you to save $7,000 annually toward retirement (you can also transfer in up to $10,000 a year from other RRSPs). The SPP has a stellar investing track record – the average rate of return has been eight per cent since the plan’s inception in 1986. And while past rates of return don’t guarantee future rates, the SPP has been helping people build their retirement security for 36 years. Check out SPP today!

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.


Mar 14: BEST FROM THE BLOGOSPHERE

March 14, 2022

Few Canadians “defer” their Canada Pension Plan or Old Age Security to a later start date

Writing in the Globe and Mail, Patrick Brethour reports that “only a tiny fraction” of Canadians are deferring public retirement benefits like the Canada Pension Plan (CPP), “a decision that could cost each of them tens of thousands of dollars in foregone payments.”

You can collect CPP as early as age 60, but can defer receiving it until age 70, he explains. While CPP benefits are reduced if you start collecting them while you are age 60 to 64, “CPP benefits increase by 0.7 per cent for each month of deferral past age 65, hitting a maximum increase of 42 per cent at age 70.”

You can also defer your Old Age Security (OAS) payments, he notes.

“Deferring the OAS is slightly less lucrative, with those payments rising by 0.6 per cent for each month of deferral, to a maximum of 36 per cent at age 70. A person who was eligible for the maximum regular payments under CPP and OAS and who opted for a full five years of deferral would receive an additional $10,168 a year excluding clawbacks, based on current rates,” he writes.

Citing data from Employment and Social Development Canada, the Globe report notes that 62 per cent of us start our CPP while age 60 to 64. Twenty-seven per cent start it at age 65. Seven per cent start it while age 66 to 69, and just four per cent start it at 70.

For OAS, “the picture is even more lopsided,” as almost no Canadians defer their payments – 93.6 per cent of us start it at 65.

So why aren’t more people deferring until age 70 (and getting up to $10K more per year), as experts like Dr. Bonnie-Jeanne MacDonald have urged?

The article cites several reasons for not waiting – many “can’t afford the delay,” and start receiving benefits as soon as they can. For poorer Canadians who lack other retirement savings, the federal payments are “a lifeline,” the article notes, adding that senior poverty rates for Canadians “fall as they enter their 60s” due to receiving CPP and OAS.

Next, if you don’t expect a long life, deferring the benefits is a poor idea. Save with SPP has had relatives and friends who passed away before even reaching age 70.

Finally, those of us still working as we hit age 65 tend to opt to receive CPP, because if we don’t, we still have to pay into it without getting any additional benefit from it.

Save with SPP’s circle of friends and family is split on this issue. Those without workplace pensions took CPP as soon as it started. Some who did have a pension started it at 60, asking “why leave money on the table?” Others with workplace pensions that have a “bridge” benefit (which ends at 65) have long planned to start CPP and OAS when the bridge benefit ends. We have one friend who started CPP at 60 and is now about to turn 67 and is still working (and still paying into CPP). We have one relative who plans to take her CPP at 70 to max out the benefit, even though she is not working steadily at the moment.

It would seem it’s a personal choice for most people, based on their unique financial circumstances. The one important takeaway here is simply to know that you do have the option to get a bigger payment if you choose to start it later.

The Saskatchewan Pension Plan allows you to collect your benefits at any time you choose between age 55 and 71. The SPP’s Retirement Guide provides full details on your options for your SPP account when it comes time to retire, including SPP’s range of lifetime annuities. And you don’t have to stop working (as is the case with most company pension plans) to start collecting SPP! Be sure to check out SPP today.

Join the Wealthcare Revolution – follow SPP on Facebook!

Written by Martin Biefer

Martin Biefer is Senior Pension Writer at Avery & Kerr Communications in Nepean, Ontario. A veteran reporter, editor and pension communicator, he’s now a freelancer. Interests include golf, line dancing and classic rock, and playing guitar. Got a story idea? Let Martin know via LinkedIn.