The financial services industry is amazing and challenging as a profession, but is can also be challenging in a bad way. Rather than go it alone, many organizations promote the idea of a peer-based study group. Study groups are great ways to bounce ideas off of other professionals, expand your knowledge, keep on top of important issues, and share any cool factoids you learn. Right now I’m active in two study groups – an international one through MDRT called the Consilium Study Group who meets in person once or twice per year and an Alberta-based study group comprised of Manulife Securities advisors called Focus Advisors, and we connect monthly.
One of the topics the Focus Advisors have been working on lately is the idea of how to differentiate a practice based on specialization. For example, if we compare retirement planning, versus retirement income planning, there is a huge difference in skill set, approach, and workload that needs to be taken when actually doing income planning. Same is true for cross-border taxation planning or financial planning for divorcing clients. Both are intensely complex areas of planning that should be trusted to specialists in those areas.
Myself, I’m specialized in comprehensive financial planning, lifetime income management, and business succession planning (to some degree – still pursuing a deeper knowledge base on this one). It’s where my skills are at, it’s what I love to do, and it’s where I’m continuing to advance my education.
As an income planner, one of the questions I run into all the time (so often, in fact, I’m surprised it never crossed my mind to write a column on it before), is whether or not individuals should take their CPP early or hold off to 65.
So there’s a bit of a math component – there’s a 0.6% penalty (as of 2016) for every month you take CPP before age 65, and a 0.7% bonus for every month delayed - but generally I recommend clients take their CPP as soon as they can. Here’s why:
Reason 1 – it’s not flexible
CPP is likely one of your least flexible sources of income, so it’s good to take it early and preserve your more flexible savings for later. For example, if you need a lump sum of cash for an emergency or an opportunity in the future, all CPP can give you is income. So tapping your least-flexible sources first and preserving your more flexible savings is an easy way to plan for unexpected expenses.
If you don’t need the income from CPP and are battling a tax decision, keep in mind that you can contribute the amount you receive from CPP into an RRSP for an offsetting tax deduction. If you’re going to do this, make sure #1 that you have RRSP contribution room, and #2 that you’ve requested no withholding tax on your CPP income. If tax is withheld at source, then the net amount you receive and subsequently contribute to your RRSP won’t provide a fully offsetting deduction.
Reason 2 – Estate Planning
The other catch with CPP is that you have to be alive to get it. There are some spousal benefits built in, but the survivor benefit only tops you up to what would otherwise be your maximum amount. So if both spouses are already receiving the maximum amount, the survivor benefit is nil. Therefore, it’s best to take CPP out while you’re alive and you know you can get it.
Again, in this case if you don’t really need the income, just contribute it back to an RRSP or a TFSA. Both allow you to name a beneficiary which, if everything goes smoothly, means the funds will pass around the estate and directly to your beneficiary of choice.
Reason 3 – the Consumer Price Index
While mutual fund investment returns are not guaranteed, and those that are, such as GICs, are at historical lows right now, the case can still be made for taking CPP early if your expected after-tax rate of return on investments is higher than the Consumer Price Index’s 1.3% growth. So why does the CPI matter anyways, you ask? It’s because the Canada Pension Plan Act requires CPP income to increase with the cost of living, which is determined by an annualized average CPI (fun fact: CPP income doesn’t go down when CPI is negative).
So when the decision is between after-tax compounding of greater than 1.3% and taking Canada Pension Plan income, it makes more sense to preserve your higher-growth investments at the expense of CPP, which is growth-limited.
Reason 4 – Lifestyle
The fourth reason I normally recommend that people take CPP early is that most people want to spend it. Of course, this would have to jive with your overall financial plan, specifically the longevity planning section, but the basic part about this is that people want to travel and experience life and spoil their grandchildren when they’re younger and healthier and mobile. So what if you’ll have more income overall when you’re 85? We call them less-active and passive independence for a reason. Again, this is dependent on your financial plan and your ability to cope with medical expenses, but in all honestly for most people it’s going to be more important to have the memories of doing the things you love than it will be to ensure you get as much cumulative income as possible.
Financial planning is so much more than just investment management, and income planning requires the depth and knowledge of a lifetime income specialist. It takes more than just a sense about the numbers – it takes an understanding of the soft benefits and the emotional complexities of independence as well. You just had your last pay cheque from work, and it’s time to turn the tap on from your investments. Make sure that the advisor in charge of your next paycheque is an income planning specialist.
If you have questions on how to determine if your advisor specializes in lifetime income planning, or for more information on creating a sustainable income stream for life, speak with a Certified Financial Planner today.
Written by Meagan S. Balaneski, CFP, R.F.P CERTIFIED FINANCIAL PLANNER®
Advantage Insurance & Investment Advisors
Investment Funds Representative
Manulife Securities Investment Services Inc.
The opinions expressed are those of Meagan S. Balaneski and may not necessarily reflect the views of Manulife Securities Investment Services Inc.