Don’t run out of money
In working with clients who are approaching retirement or early into it, there are two things they want to avoid.
- Large fluctuations in the value of their portfolio
It’s time to be enjoying life, not worrying about a potential downturn in the market
- Outliving their money
The thought of this can make you lose sleep at night.
Applying for your CPP
In a past video, we looked at the optimal time to apply for your Canada Pension Plan (CPP).
You can check it out here: https://transcanadawealthmanagement.com/when-apply-cpp/
Most people take it as soon as they are eligible, but if the two points outlined above are concerning to you, here’s a reason you should consider deferring your CPP to 70.
Benefits of deferring your CPP
Sheila is eligible to start her CPP at 60 and would receive $640 per month. If she defers her CPP, she will receive a bonus of 0.6% per month or an increase of 7.2% per year until she is 65.
At 65, Sheila’s CPP would pay her $1,000 per month. She can continue deferring her CPP until she turns 70 for a bonus of 0.7% per month or 8.4% per year.
At 70, she would receive $1,420 per month.
By deferring her CPP, Sheila is receiving a guaranteed return of 7.2% until 65 and 8.4% until 70. There aren’t any investments available that can pay her that return risk-free.
What if you need the money?
Had Sheila started her CPP at 60, she would be receiving $640 per month ($7,680/yr). By deferring her CPP to 70, she is missing out on $76,800 in payments.
If Sheila requires $640/m to sustain her current lifestyle, she can withdraw $76,800 out of her investment portfolio. Sheila would invest this money in something very conservative to ensure there are no significant fluctuations in the value of this account.
From this account, Sheila can pay herself $640 per month, just as she would’ve received from her CPP. This account would be depleted after ten years, at which point Sheila would begin to receive her CPP.
The rest of her portfolio can be invested to match her retirement plan.
This strategy allows Sheila to reduce the overall volatility of her portfolio as she’ll be relying more on her CPP and less on her investment portfolio to sustain her throughout retirement. Her CPP is also 122% higher at 70 compared to 60, ensuring she doesn’t run out of money in retirement.
She can also implement this strategy with her OAS as you can also defer it to 70 with a bonus.
There isn’t a one size fits all approach when it comes to applying for your CPP, but this is a strategy to consider if you are concerned with the volatility of your retirement portfolio or running out of money.