Are You Ready for Retirement?

Posted on February 12, 2013 by Rick

So you’re thinking about retirement. It may sound good; however, it can also be an emotional and stressful time of life. You begin to dream of playing golf every day, travelling the world, or just sitting back and relaxing. But there are other forces that will come into play.

You must be prepared for retirement both financially as well as emotionally. This is a process that takes time and planning. You don’t want to be making important financial decisions when you are stressed out or emotional. That is why planning and preparation are vitally important when getting ready for this new stage of life.

Close your eyes for a moment and try to imagine what your retirement will look like. Visualize a typical day in retirement. What will you do, where will you be doing it, and who will you be doing it with? The answers to these questions will begin to put a framework around your desired retirement income needs.

Retirement today is quite different from years gone by. Before, when one retired at age 65, the planning horizon was for 5 or so years. Today, with modern medicine, healthy lifestyles, and early retirement options, we may be preparing for up to 30 years in retirement. This is an enormous financial planning task.

Consider the sources of income that you will have to meet your retirement income needs. The main sources of income at retirement include government and private pensions and savings. If you come up short, you can always return to work. Many retirees are forced to work to make ends meet. Others choose to work to keep busy, and the extra money is a bonus. The idea is that if you plan your affairs accordingly you will have the option to work, which is always a much better situation, than being forced to work to keep food on the table.

Anxiety tends to build as one approaches retirement. Questions such as, “How should I invest my money?”, or “Do I really have enough money to retire?”, may come up. These doubts have the propensity to build stress. Other stressors may include the loss of identity. Many of us are defined by the work we do. Losing that identity can be an emotional, as well as stressful experience.

In the old days, the way to deal with the stress of making investment decisions was to convert all assets into guaranteed investments. Today, with retirement stretching over a potentially much longer period of time, this approach is no longer appropriate. If you need 4 to 5% of your capital to live and the guaranteed investment only pays 2%, you are guaranteed to deplete your capital each and every year. And we haven’t factored in inflation or other unexpected expenses that can further drain your capital.

With proper planning and sound decision making, you will cruise with confidence into your retirement lifestyle. Much of the stress will be removed because you have planned your savings to meet your income needs. The key is to establish your plan, commit to it, and monitor your progress.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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Tax Planning – A Year Round Event

Posted on February 11, 2013 by Rick

You are no doubt being inundated with all the virtues of the Registered Retirement Savings Plan (RRSP) and the tax saving benefits that come along with this program. The problem is that many Canadians only do their tax planning at this time of the year, when there is a contribution deadline and there are tax benefits to be realized in a few short weeks.

How often have you said to yourself, “I must buy my RRSP before the deadline to get the tax break”, or something similar? Is this really a good financial and tax planning strategy?

After all, unless you have an employer-sponsored pension plan, your RRSP may be your main source of income at retirement. It’s your personal pension plan. And if you do have an employer plan, your RRSP will be an excellent retirement income supplement.

Tax and retirement planning is not something to be rushed into at the end of every February. It takes time to review your situation, determine your goals, analyse your options and make proper decisions that are suitable to meet your long-term objectives.

So what are the appropriate steps you should be taking to prepare a well-drafted retirement and tax planning strategy? The first things you need to establish are your retirement date or age you would like to retire, how much income you would like to receive and for how long you will receive this retirement income. Given today’s healthy lifestyle and modern medicine, you may be planning for thirty to thirty-five years depending on your retirement age. And finally, you may wish to consider leaving an inheritance to your loved ones. Oh yes, and don’t forget to factor in inflation. To buy the same $100 of groceries today in twenty-five years it will cost you $164 with inflation at 2%, $266 with inflation at 4% and $429 with inflation at 6%.

Now that you know your lump sum retirement objective, you can work backwards to estimate how much you will need to save on a regular basis to achieve your goal. You can set up your savings program on an annual, monthly or weekly basis. The factors that will determine your regular savings objective will include your disposable income, your time horizon and rate of return. Given today’s low interest rates associated with guaranteed investments you may have to look at an equity-based investment plan to achieve a higher rate of return. This then involves an element of risk. You will want to ensure that you have the fortitude to be able to withstand market volatility and not panic at inappropriate times.

Once you have gone through all these steps and implemented your plan, it doesn’t end there. You will want to monitor your progress on a regular basis, at least annually. You want to ensure that you are on track to achieving your goals. If you fall behind, you will want to consider how to adjust. Will you extend your retirement date, save more, or seek higher returns?

As you can see there is a lot more to tax and retirement planning than just plunking down a few bucks at the end of February. You won’t hear much in the media about this subject other than at this time of the year. It’s up to you to ensure that you plan accordingly to meet your retirement goals and use the government programs to save tax at the same time.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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The Speed Limit of Equity Investing

Posted on February 11, 2013 by Rick

Many families rely heavily on a car in their daily lives. Visiting family, getting to and from school or work, and then on to sports events or lessons – the car and the roads we take it on are a major part of our lives. In our short essay today, we want to let car travel and traffic conditions be a metaphor to illustrate the long-term trend line of equities.

First, let’s look at history. The long-term trend line of equity investing rises up from the lower left to the upper right. The average return for equities after inflation is about 6.5 to 7% depending on which market you look at. Let’s call this trend line, or percentage return, the speed limit of equities. It’s the normal average return one has achieved by investing in equities over the long term.

Now I’d like you to think of the cars on a highway as individual stocks. We know that when we drive down the highway, where the speed limit is 100 KPH; there will be some cars that exceed the speed limit by a significant margin. Others stick close to the speed limit. The speeders are aggressive, take chances and tend to be more risky. The others take fewer chances, are less aggressive and tend to be less risky.

Speeders will get to their destination in less time. The others will take a little longer to get there. The speeder however also faces additional hazards. There is a risk of being stopped by the police. Then all the cars pass the speeder while he waits for a speeding ticket. This could likened to a corporate set back. It will take the company and the speeder some time to recover. However, this setback only affects the speeder. All other cars continue on their way following the trend line, or speed limit.

There may be other more serious hazards like construction, a snow storm, or a traffic accident that will slow down all cars on the highway. These obstacles can occur at any time. They are unavoidable and you must be mentally prepared in case they occur. A recession, terrorist attack or financial crisis could be considered examples of more serious hazards that affect all equities. Drivers as well as investors must be prepared at all times as these obstacles are unpredictable.

The equity market has seen a few serious hazards over the past decade and a half. Back in the late nineties we had a tremendous run up in equities. Most stocks were exceeding the trend line, or speed limit, to continue with our example. Then the Tech bubble burst in 2000 and all cars had to slow down. That hazard lasted about two years until the highway was safe for equities to again resume their long-term trend line. Then in 2007 the U.S. financial crisis hit. Once again the equity market was slowed down. Another two-year clean up was required.

All hazards eventually come to an end and traffic resumes its normal speed limit or trend line. Today many equities are travelling significantly below the long-term trend line, yet their products are in demand, they are well managed companies, and they are very profitable.

The goal of all drivers is to get to their destination safely and on time. Typically you don’t turn around and go back home when you encounter a hazard. You stick with your travel plans and continue. This is similar to a retirement goal. Stick to your plan, stay on the highway, and hazards will eventually be cleared for a smooth ride toward achieving your goal.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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No Medical Life Insurance

Posted on February 11, 2013 by Rick

Life insurance is an ideal solution to provide a tax-free benefit to your loved ones upon your death. The money can be used to pay debts, funeral expenses, and estate costs or provide a lump sum of cash to your survivors.

But if you’ve applied for insurance lately you know it may not be easy to be approved. You may have to go through medicals, get stuck with needles to provide a blood sample and have your doctor fill out medical reports. Even after going through all this you may still have a hard time obtaining coverage. Your health or lifestyle may require you to pay an extra premium or in the worst case you may be declined coverage. Or maybe you feel you are just “too old” or the premiums too expensive to be considering life insurance.

There is a solution. It’s called non-medical life insurance. You may have seen the ads on television. It’s true; you can apply for life insurance without going through the hassle of divulging your complete medical history. Just answer a few simple qualifying “yes” or “no” questions and that’s it. But you should be aware, there are a few catches.

First of all the cost is higher than traditional life insurance that requires you to go through the medicals. To some, that extra cost may be worth the convenience. But remember, the higher cost does not go away. You will pay a higher premium forever while your policy is in force.

There is an upper limit to the amount of coverage that is offered by no-medical insurance. Typically the coverage limit can be between $75,000 and $225,000 depending on the type of coverage and the company selected. That limit may not be enough coverage to fully protect your family. If not, then you are back to medicals and a traditional life insurance application. However you can select coverage amounts as low as $25,000 to cover very specific needs, such as funeral expenses.

Full coverage can take two to three years to take effect. Some plans will only refund the premiums with interest if death occurs by other than accidental means within the first two years. If death occurs by accidental means within the first two years the face amount is paid instead of a refund of premiums. Some plans will only pay 50% of the face amount if death occurs in the third year.

Depending on your answers to the qualifying questions you may be eligible for permanent coverage with a savings component that can be used by you later in life or used to pay premiums if needed. Term coverage with no cash savings component is the second option.

Non-medical life insurance may be an option for you if you have applied for life insurance and been declined, or your premium was rated or modified, or if you just don’t want to go through the medicals. As with all consumer choices, make sure you know what you are buying and understand the terms and conditions of your selected policy.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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Help Your Financial Planner Help You

Posted on October 6, 2012 by Rick

How strong is your relationship with your financial planner? There is no doubt that the past few years have been difficult for both clients and planners alike. It’s been a tough environment to make money. It’s situations like this that can put a strain on a client-planner relationship.

What is the solution? After all, a good financial planner is hard to find and the good ones have a limited capacity to take on new clients. When you are fortunate to find a planner with whom you “click” – someone you can understand and trust – you really want to solidify this relationship for years to come. You want to be the kind of client that any planner would love to work with over the long-term.

Be as open and candid as possible. You want a planner who really understands your situation and circumstances. Express your concerns and expectations about performance; however, understand that markets go through cycles. Recent events could not have been predicted and it’s not your planner’s fault.

Most planners specialize in working with a certain type of client: wealth builders; small-business owners; retirees. Find a planner who specializes in helping clients with your kind of needs. Make sure you are playing in the right league. The advice you get will likely be more thoughtful and appropriate.

Some people spread their investments across several financial institutions. However, giving an advisor a portion of your portfolio without telling what else you have invested is a bit like asking a doctor to treat you for a pain and not telling where it hurts. Consolidating your investments may have other advantages. Some companies offer clients with larger portfolios a break on fees.

The most important aspect of this relationship is trust. Your planner will take the time to explain the rationale behind his or her strategies, ensure that the recommendations are appropriate and that you are comfortable with your decisions. However, if you consistently resist taking advice, insist on actions that are opposite from the recommended strategy, or ask them to explain the same strategy over and over without ever making up your mind, pretty soon either you or your planner (or both) will wonder why you are paying them in the first place.

A planner-client relationship can be very rewarding experience over time. Like all quality relationships it requires patience and work. A great relationship can make the difference between a portfolio of generic investments that you don’t know much about and a portfolio that you are confident is meeting your goals and will help you finance your dreams. In the end, it’s your risk and your reward, so do what you can to help your advisor…help you.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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6 Tips on Cutting Costs for Working Students

Posted on October 6, 2012 by Lisa

If you’re working while you’re attending school in order to help finance your education, you know how expensive things can be. School costs a lot of money, not only for tuition, but also for things like books and supplies. You’ve also got your basic living expenses to think about. If you don’t manage your expenses well, your budget can get a bit too tight. Here are six tips for cutting costs as a working student.

1. Drop Unnecessary Coverage

If your car is getting up there in years, you might want to consider dropping all insurance coverage except the state-required minimum. Older cars aren’t usually worth much, so having collision coverage on it will be of little benefit should the car get totaled. By keeping the coverage, you’ll pay a lot more money in premiums than what the car is worth. Sticking with the minimum coverage can save you hundreds of dollars every month.

2. Eat Out Less

Studies have shown that the average person eats out a whopping 195 times every year. Even if your favorite restaurants offer a student discount, eating out still costs more than preparing your own meals from scratch. Nearly anything you can buy from a restaurant can be made at home for a fraction of the cost.

3. Buy Second-Hand

Most anything you need for school and home can be bought second-hand, saving you a ton of money. Clothing, furniture and housewares can be purchased from thrift stores for rock-bottom prices. There are even stores that specialize in buying and selling used college textbooks.

4. Ditch the Car

You can save a lot of money by giving up your car and walking, biking or using public transportation to get around. Cars are a constant money drain, and unless you live far from school and work, they’re not really necessary. Between fuel, insurance, maintenance and parking fees, you could be spending as much as half of your living expenses on your vehicle alone.

5. Live at Home

While many students opt to live on campus for the sake of convenience, it’s a costly choice. Thrifty students may want to consult their parents about continuing to live at home while they work and go to school to help them save money. Even if you have to pay rent, it’s likely going to be a lot cheaper than living in a dorm.

6. Don’t Be a Brand Snob

More often than not, the off-brand groceries are just as good, or better, than the big brands. In fact, they’re usually made by the same companies and sold with generic packaging. The off-brands are also much cheaper. You could save tens of dollars on every trip to the store by buying exclusively generic brands.

Dan is a blogger who is also a contributing writer for a good site here that explains a sipp well.

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Risk Free Returns or Return Free Risk

Posted on September 18, 2012 by Rick

Over the past few years there has been a flight out of equities and into government bonds. People fear the volatility that has plagued equities since 2008. This strategy appears to have worked. However, there is risk associated with this perception of a risk free investment.

Why is there risk when you are investing in government bonds, you may be asking? Let’s first look at what has happened with interest rates. The Bank of Canada web site shows us that the interest rate on 10-year government of Canada bonds has fallen from 3.1% in June 2011 to just 1.6% as of the end of July 2012. Falling interest rates are a positive influence for increasing bond prices. Here’s the caution. The same math that causes bond prices to increase in a falling interest rate environment will also cause bond prices to decline in value and suffer significant losses during a rising interest rate environment.

The greatest risk that bond investors face today is the risk of rising interest rates. This scenario is not only possible in the next few years, but it is highly probable. Hence, this is what we mean when we say that investors have shifted from risk free returns to return free risk.

The average interest rate on the 10-year government of Canada bond for the past 50 years has been 7%. Given today’s interest rate of 1.6%, the likelihood of interest rates rising is significant. We can’t say when it will begin or how high interest rates will rise, but it wouldn’t take much of an increase in interest rates for bond prices to decline in value by 10 to 30% as interest rates climb back up toward the long-term average.

In addition to the interest rate risk there are other risks associated with bond investing. With inflation running at about 2%, the bond investor is accepting a negative real return on their capital. If the money is not in a registered account such as a Registered Retirement Savings Plan (RRSP) or Tax Free Savings Account (TFSA), there will also be taxes to pay on the interest earned. This will further erode the negative real return on the bond investment.

Of course, there is the argument that bonds are guaranteed to return your capital in ten years. And you will receive a 1.6% return on your investment for the next ten years. The question to ask is how long you can sustain your retirement years on this type of return? An investment of $100,000 would yield $1,600 each year for the next ten years, and that does not include a deduction for tax. That might be enough money to buy groceries for one week per month for a retired couple. You would need $400,000 invested in your 10-year government bond, just to eat. What about your other living expenses?

If you are relying on your investments to provide or supplement your retirement lifestyle, you must look beyond bonds. There are alternatives. Take a closer look at equity prices. Try to eliminate the worries of Greece and Spain for just a few minutes. You will see that equity prices are cheap. Great, well-managed companies are rich with cash, and dividend yields are at historic highs. The dividend rates of many good companies are double or even triple the rate of 10-year government of Canada bonds. Yet equity prices continue to fall further every time there is another negative story about the woes of Europe.

Don’t follow the sheep. Do things differently. This could go down in history as the equity buying opportunity of the century. Don’t miss it.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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What’s Your Legacy?

Posted on June 18, 2012 by Rick

Estate planning is something that is supposed to be done before one dies. The legal document in the estate planning process is called the will. The will determines how a person’s financial affairs are to be dealt with at death. It shows how assets are to be transferred to the desired recipients at the desired times with details of any restrictions. It should suggest the simplest and most cost-effective way for the transfer to occur and with the least amount of tax paid.

It sounds like a lot of fun, doesn’t it? Not really. Who likes to think about their own demise? That’s why many put off and/or never get around to proper estate planning. We are about to suggest an alternative way to think about it and lead to a more holistic will. It’s called legacy planning.

The key word here is planning. Without proper planning you end up with a default legacy. Another type of legacy is the politically correct legacy. And the type of legacy that is the most rewarding is the organic legacy.

The first step toward organic legacy planning is to reflect back upon your life. We are not talking about glorifying the “good old days.” You want to gain an understanding of what your life has been all about. A journal is quite useful for this purpose. Remember when and where you made a difference. Identify personal, family, and career achievements. Recall people who made a difference in your life and where you made a difference in someone else’s life. As this process evolves you will develop an understanding of what you want to pass along and how you want to be remembered.

It is a demanding process that should not be tackled alone. It may require teamwork to do an effective job of developing your legacy. The baby boom generation is in the ideal position and should be ready, willing and able to assist their aging parents and other senior adults with this final task. Appreciate that our elders are not really “losing it”, but rather they are progressing through a different stage of life at a different pace. It’s a time when the older adult is not hurried and looking for the next promotion. Decisions are not necessary on the spot. Our older adults move more slowly, process information more slowly, and make decisions more carefully. The trick is to be patient with our elders and never allow them to feel that they have lost control.

It takes time and support to sort through one’s life. Invite your family or close friends to take part in your journey. Tell your stories and revisit the events that shaped your life. There will be good memories as well as bad ones. Some memories may be painful while others will be filled with joy. It will be an exhaustive inventory of events that need to be considered. It goes far beyond a mere recording of history for future generations. It is your personal search for your definition of purpose and meaning. When complete, you should have a clear understanding of your life events and how you want to be remembered. Then you can finalize your legacy plan and complete your will.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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Graduating with the Burden of Debt

Posted on June 18, 2012 by Rick

Depending on whether a student lives at home or away, the cost of a four-year university education ranges between $40,000 and $85,000. Long gone are the days when a student could fund their own education with summer jobs. Many families cannot afford to pay the tuition bill, and the student is forced to rely on the aid of government-sponsored loans. A 2011 report by TD Economics notes that at least 26% of students are taking on government-sponsored debt, and there are untold numbers who are borrowing from family, friends, and private sector lenders.

Don’t expect the costs to go down. With inflationary pressure, we can only see the cost of education rising from here. So there are two questions that need to be considered. First, is taking on all this expense and debt really worth it? And second, what plan does the student have to pay off the loans?

The TD report suggests that the cost of higher education is definitely worth it. More than 77% of students who graduate with a post secondary education are actively working in the labour force. When compared to the high school graduate who may have some post secondary education, the figures drop to 67%. For those who did not complete high school, the number drops to only 40% who are actively employed.

Now let’s look at salaries. The 2006 Statistics Canada Census showed that in 2005 the median earnings for those with no educational certificate or diploma were approximately $15,500 annually. For those with a high school diploma it jumped to $19,700. With a College certificate, the increase jumped to $27,700. And for those with a university degree, the median income was just over $35,000.

Let’s translate these numbers into a return on investment. The salary difference between the high school diploma and college certificate is about $8,000. That represents an annual return of about 10% or more depending on the total cost of education. The return jumps significantly when looking at the salary increase for a university degree.

So clearly the investment in education appears to be worth it. But for those who have had to rely on debt to fund their education, there may be a bigger problem: how to pay it off . The priority is to establish a repayment plan. The student must understand that they have a responsibility to creditors, and this was not a gift from the taxpayer.

There are a few things to consider when developing your debt repayment plan. First you should know the rules of government loans. When the student graduates there is an initial grace period of six months before the official loan payments must begin. This is not an interest-free holiday. Interest accrues from day one after graduation. If the student is lucky enough to secure a job within the first six months, it is recommended that payments be made on the loan as soon as possible. Not only will this lower the principal and reduce the balance on which interest is calculated, but it will also begin the development of good habits and a positive attitude toward debt repayment.

When the payment schedule is determined, the student can look at his or her income and decide if it makes sense to put a little extra on the loan each month. If the payments are set at $150 per month and the graduate decides to add an extra $100 per month, years of payments could be shaved off the loan. This is much like making extra payments on a mortgage. You can knock years off the amortization period by simply upping the payment by a few bucks.

Finally, don’t forget about the tax credit that applies to interest paid on student loans. You get a federal and provincial tax credit for each dollar that you pay in student loan interest. Any unused credits can be carried forward for five years. These credits are only available for federal and provincial loans. If the loan is refinanced, the credit disappears.

Of course it’s up to the student to apply the knowledge gained through education and obtain the best career and salary possible. This way the investment in education will be valuable and the debt repayment will be less of a burden.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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When Should You Start Collecting CPP?

Posted on June 18, 2012 by Rick

The normal age to start drawing from the Canada Pension Plan (CPP) is age 65. You can begin drawing as early as age 60, but there is a penalty for taking CPP early. So this is an important question that should be carefully considered.

In order to answer this question there is another question that needs to be answered first. “Do you need the income in order to live?” If yes, then taking CPP early is a must and should be started as early as possible.

Even if you do not necessarily need the income for day-to-day living, there may be other reasons to start drawing CPP early. It becomes a supplement to current income from employment, pension, RRIF, savings etc. It provides more money to do things while you are younger, such as travel, enjoy hobbies, or assist your children with their finances. If not needed then the extra money could be invested and saved to build a larger estate, or used for other purposes later in life.

Recent changes to the CPP have increased the penalty reduction for those who take CPP early prior to age 65. Under the old rules, if you started CPP early at age 60, it took until age 76 to accumulate the same amount of payments as if you had deferred until age 65. When the new rules have been completely phased in, by 2016, the breakeven point reduces to age 74 for those who take CPP early at age 60.

Let’s put some numbers to these ages. The maximum CPP benefit payable to a person age 65 in 2012 is $986 per month. A person starting CPP at age 60 in 2012 would see a penalty reduction. Under the old rules, the maximum reduction penalty was 30% or 0.5% per month for each month that a person starts CPP prior to age 65. Beginning in 2012 the reduction penalty will be increased by 0.02% per month and increasing by 0.02% each year until 2016. By 2016 the maximum reduction penalty will be 36% for a person starting CPP at age 60. So if a person is eligible for the maximum CPP benefit and ignoring any increases due to inflation, by 2016 the monthly benefit from CPP for a person age 60 will be reduced to $631.

Oh, and by the way, you can defer taking CPP until age 70. This will have the opposite effect and increase your CPP benefit. By 2013 the gross-up rate will increase to 0.7% per month. Using the same maximum benefit figure above and ignoring inflation, the monthly benefit for a person who begins drawing CPP age 70 will increase by 42% to $1,400 per month.

As you can see, there is a lot of math involved. Many people agonize, stress and worry about their decision to take CPP early or not. My view has always been that money in the hand today is always better that money in the hand in the future regardless of the breakeven point.

I guess the absolute and correct answer to this question can be found in your longevity. How long will you live? If you plan to live past age 76 under the old rules or age 74 under the new rules then you will receive more money by deferring the date that you start CPP. But how can you ever know how long you will live?

As with many personal financial planning issues the only answer is “it depends.” Only you can determine your personal goals. If you will have enough income from other sources to provide your desired retirement lifestyle beyond your mortality, then CPP becomes a bonus. Only then can you answer the question of whether or not to begin CPP benefits early.

The foregoing is for general information purposes and is the opinion of the writer. This information is not intended to provide personal advice including, without limitation, investment, financial, legal, accounting or tax advice. Please call or write to Rick Sutherland CLU, CFP, FDS, R.F.P., to discuss your particular circumstances or suggest a topic for future articles at 613-798-2421 or E-mail rick@invested-interest.ca. Mutual Funds provided through FundEX Investments Inc.

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