As part of financial education in the workplace, there tends to be a greater emphasis on the accumulation phase of saving and less so on how to approach decumulation. With the Baby Boomer wave shoring up thousands of new retirees on a daily basis, strategies to convert savings into income that lasts a lifetime are more important now than ever before.
There are financial education opportunities that are far less understood and warrant some time in the communication spotlight. A topic that rarely get promoted is when to start Canada Pension Plan (CPP payments).
Bringing our Canadian retirement system into context means considering three distinct pillars:
1) Federal government programs (CPP, Old Age Security and Guaranteed Income Supplement)
2) Personal savings - Registered Retirement Savings Plans (RRSPs), Tax Free Savings Account (TFSAs) and other non-registered account, personal equity, home and vacation properties and equity in business, inheritances, etc.
3) Workplace pension programs.
CPP quick facts.
CPP is part of the federal government program. It proves a basic retirement income up to a maximum of 25 per cent of the Year's Maximum Pensionable Earnings (YMPE).
In order to receive the full retirement benefits, the normal retirement age for CPP is considered age 65. Canadians who've contributed to CPP and are entitled to receive a payment can start collecting as early as age 60, but they must start receiving CPP no later than age 70.
Anyone who starts receiving CPP before age 65 is penalized with a reduction in monthly payout. For each year a person defers receipt of CPP payments, they receive 8.4 per cent more annually to a maximum of a 42 percent increase in their CPP payment at age 70.
Is a bird in the hand better?
While there appears to be financial advantages to deferring CPP payments, many Canadians are reluctant to do so. This is due to what is called the bird in the hand attitude. People believe it is better to have the money now. They also worry that if they defer CPP payments, there won't be any federal money left for them if they wait too long.
Questions worth asking.
When to start CPP payments really depends on individual preference, comfort level, health status and wealth accumulation. For those not sure when to start, here are some questions to narrow down the right time:
1) Are you planning to work past age 60 and if so, for how long?
2) a. Is there a phase of your retirement when you believe you'll most enjoy having more money available? Chances are that people are their healthiest soon after retirement and as they continue to age, the chance of health deterioration increases.
There are three phases to retirement called:
1) The go-go years - when you're most active. Will you need extra cash that early CPP payments will provide?
2) The slow-go years
3) The no-go years - are you worried your funds will run out and deferring your CPP payments will help bridge you during this period of your life?
2) b. Consider your life expectancy while factoring in your personal health situation and family history.
3) What will taking CPP early cost you? There are some easy and free online early CPP calculators available including: the Government of Canada, and Tridelta. Doing some easy math to analyze the financial impact of taking CPP early helps with monthly income projections in retirement.
A lot to consider.
When to start CPP payments really depends on the person asking the question. Helping them walk through the process by providing important questions that facilitate insightful responses may make it easier for them to decide where to go from here. We're fortunate to have the freedom to choose when to start CPP, but for those worried about ensuring their savings last a lifetime, selecting the right time is key.
Questions about when to start CPP payments will continue to increase and we want to ensure you're well equipped to address those questions as part of your workplace pension program communication strategy. We invite you to contact us. We're here to help so that you can focus on what you do best.
With the RRSP deadline looming, many Canadians turn their attention to saving for retirement with an emphasis on accessing goals they may have set for their future.
While there are numerous studies indicating that Canadians aren't saving enough for retirement coupled with tendencies for many to shy away from pursuing greater financial literacy, Statistics Canada reports that in 2011, registered pension plans (RPPs) rose slightly while pension coverage dipped. Pension coverage rates decreased 0.4% to 38.4% in 2011 compared to 38.8% in 2010.
Looking closer at this report, RPP membership is up 0.8% (49,000 members) from the same period a year earlier. Specifically, public sector pension plans rose 0.6% while private sector plans rose 1% comparably. Public sector pension plans still hold the leading spot with 52% (3.1 million members) of total RPP membership. In the private sector, RPP coverage remains around three million active members although coverage has declined from 28% to 24%.
What about the type of plan? Not surprisingly, membership in Defined Benefit (DB) plans is down 0.1% from 2010. As for Defined Contribution (DC) plans, membership saw an increase of 3.5% compared to the same period a year earlier. A fact sheet from the Office of the Chief Actuary reports that the shift away from DB plans continues with a decline to 73% in 2011 from 83% from 2001. The main outliner remains in the public sector where Defined Benefit coverage remains stable at 94% membership.
Increasingly, women continue to join RPPs with an rise in 2011 of 0.8% over 2010. Women represent 49% of total membership versus men at 50.1%. As participation in RPPs slowly increases for women, men no longer account for membership percentages in the 75% range like they did in early 1970s.
The focus on the importance of saving for retirement continues as plan sponsors seek ways to engage their plan members through education sessions, print and online awareness mechanisms.
For additional tips and resources to help drive up pension plan participation, please contact us. We're here to help so that you can focus on what you do best.
If you've been reading the news in the last few months, you've likely noticed that a debate has been heating up about whether to increase the size of the Canada Pension Plan (CPP) benefits through higher contributions or not.
These days, retirement security seems to be a topic that is on the minds of many politicians. A problem exists for Canadians; many spend more than they save and the problem only seems to be worsening. Some Canadians feel that expanding CPP will provide retirement security to all and help address the continuing decline of workplace pensions while others argue that it will subsidize people who don't really need financial assistance.
What do you know about CPP? Presently, the average CPP benefits hover around $500 to $600 monthly with a maximum at $1000. For Canadians with an annual earnings of $50,000, CPP benefits replace a quarter of these earnings. Contributions are 9.9% of earnings and are split between employee and employer to a maximum annual contribution ceiling.
What is the CPP debate all about? Well, if CPP increases the replacement rate to include incomes up to $104,000 per eligible individual, then a married couple could receive over $200,000 in CPP income. This is the recommendation put forward by the government of Prince Edward Island and it reflects changes to be made within 3 years. Their proposal would have CPP benefits increase from 25 percent to 40 percent for incomes between $26,000 and $52,000 and a new replacement rate of 15 percent for incomes between $52,000 and 104,000.
What about self employed Canadians? They must pay both the employer and the employee share of contributions or the full 9.9 percent of pensionable earnings at $4,712.40. An increase in the contributions rates will not favourably incent small business entrepreneurs.
Some thought leaders on the subject are weighing in with the notion that increasing CPP's maximum pensionable earnings to $75,000 would help a significant number of Canadians save more and would be a more palatable compromise when considering P.E.I.'s recommendation.
Also in the news, there has been a great deal of discussion about Pooled Registered Pension Plans (PRPPs) and if they are would help motivate Canadians to save more for retirement. The idea of making PRPPs mandatory doesn't seem to be sitting well as a solution, yet if they remain voluntary, will PRPPs be taken seriously and will the uptake be what is needed to help Canadians achieve a realistic level of financial security at retirement?
As the debate continues, so does the problem for our country. Unsecured debt continues to skyrocket and a recent study by BMO indicated that Canadian baby boomers (born between 1945-1964) have saved about $228,000 for retirement when what they need to save is likely closer to $1 million. These boomers are realizing that although they'd like to retire at age 59, they anticipate working until at least age 63.
Whether changes to CPP will help, the reality is that urgent messages to younger Canadians are needed - it is never too soon to think beyond your immediate financial situation. Keeping an eye on the future and putting away 10 percent of savings annually now will make a huge difference in helping lock in financial security in a way that the cohorts ahead of Generation Y (born between 1980-2000) are now struggling to achieve.
For information about how to engage plan members to save for retirement, please contact us. We're here to help so that you can focus on what you do best.
Our world is full of universal truths. One that impacts us all is ageing. With four generations working together, we see the impact of economic forces as more Baby Boomers delay retirement. In addition to the legislative changes we’ve faced recently, our demographic realities affect how we approach saving for retirement.
The economic recession of 2008, changes to *OAS and **CPP along with the demographic shift that sees Boomers deferring retirement create pressure on employers in various ways. What changes employers consider to their pension plan design is mixed. Some may move from a Defined Benefit arrangement to a Defined Contribution (DC) plan. Smaller plans may consider moving from a DC arrangement to a Pooled Retirement Pension Plan (PRPP). Others may want to mix up their arrangements through a combination of tax-free savings account (TFSA) along with a group RRSP.
Along with the needs of plan members, investment management fees (IMF) play a part in the plan design decision-making process. Fiduciary responsibility, additional service support and plan features also demand consideration.
As a trusted advisor, I can help with these considerations as well as analyze the IMFs from different pension providers. In running a business, employers face many demands and challenges. Worrying about whether the pension plan is CAP compliant or if the IMFs are too high shouldn't be added to the list of concerns.
*Click here for details related to the 2012 changes to Canada's Old Age Security Plan
**Click here for details related to the 2012 changes to the Canada Pension Plan (CPP)
Dave Dickinson, B.Comm, CFP, CLU, CHFC
Experienced Benefits Specialist ready to optimize your group benefits and pension plans.