Major Changes Coming to the Canada Pension Plan

May 26, 2009


The Ottawa Citizen reported today that following a meeting between Jim Flaherty and provincial Finance Ministers, major changes to the Canada Pension Plan (CPP) are coming and will be phased in gradually starting in 2011. Among the changes:

  1. The current requirement that Canadians must stop working or significantly reduce their earnings to receive their CPP retirement benefit will be removed.
  2. The drop out provisions, which allow for a certain number of years with low or nil earnings to be excluded will be increased from the current 15% to 17%. This would allow a maximum of eight years to be dropped (up from seven) and should benefit early retirees.
  3. Those opting for early CPP benefits and are still working are required to contribute to the CPP at the same time. Contributions are optional for individuals who are 65 and over.
  4. Those who take CPP benefits before age 65 will have their pension reduced by 0.6% (from the current 0.5%) per month for each month that the pension is taken before age 65. Similarly, those who delay taking their CPP benefits will see it increased by 0.7% per month (from the current 0.5%). In other words, CPP benefits are reduced for a person who begins drawing at 60 by 36% (up from 30%) and increased for a person who waits until age 70 to 42% (again up from 30%).

Despite the above changes, the contribution rates to the CPP will remain at 9.9%. But more changes to the pension system may be coming. The Citizen reported:

Also Monday, Flaherty announced a panel of federal and provincial policy-makers would look into further changes to the country’s pension laws and report to Parliament with recommendations by year-end.

I don’t have an online link to the Citizen column but you can read about it all straight from the horse’s mouth: Department of Finance information paper on proposed changes to the CPP is available here.

The “What IF” Retirement Planner Review

May 10, 2009


Toronto-based engineer Ross Grant reached financial independence in his early 40s based on a simple and disciplined strategy of saving, investing and building a nest egg during his working career. His engineering background helped — he credits his success to meticulous planning using Excel spreadsheets, tracking his plan and revising and adjusting it over time.

Based on his experience, he has built a “What IF” Retirement Planner, which is essentially an Excel-based model for planning your retirement that sells for $19.95 (comes with a 30-day satisfaction guarantee) through the firstmillion4you website. On reading Mr. Grant’s story and learning about the planner in the March/April 2009 issue of Canadian Money Saver (you can read the article here), a reader asked me to test drive the product and write a review of it. In turn, I contacted Mr. Grant and he was kind enough to send me his Money Saver article and a copy of the Canadian version of the Planner.

The Planner is relatively straightforward to use: you key in data such as the inflation rate, the rate of return on investments, your age, when you would like to retire, your expected expenses in retirement, your current savings and future additions etc. Entering the initial information gives you an immediate estimate of how your nest egg will look like in future years. You can then refine your estimate by adding other income sources such as pensions, CPP and OAS benefits, rental income or part-time employment.

The results produced by any model are only as good as the input data: you need accurate estimates of spending in retirement and future savings to get an approximately correct estimate. You also need to have realistic expectations of future returns. For instance, if I assume a 6% return (and 2% inflation) for our own retirements, we need to keep saving. Instead, if I assume an 8% return, we could retire at age 55 without saving a penny from now on. To further complicate matters, the results are path-dependent because as you know, markets do not provide smooth average returns — they vary wildly from one year to the next and the sequence of returns has a significant influence on the end result.

Personally, I’ve done my rough retirement planning scenarios through a similar tool that comes bundled with Microsoft Money and I didn’t get that much extra value out of this planner. But if you’ve never done retirement planning or don’t have a copy of Microsoft Money, you will find this tool to be very helpful in a valuable exercise — taking the first steps to plan out your retirement.

[Note: I should point out that I have no financial interest in writing this post. I also thank reader Colin for the post idea and would love to hear any tips or post ideas you may have.

Update from Mr. Grant: “Also, from my experience I would recommend that you should not limit to a one-time exercise vs an ongoing process to get the real value out of planning and level setting to reality”.]

Fidelity’s ‘Scary’ Retirement Findings

October 24, 2007


Jon Chevreau and Rob Carrick have weighed in on the latest Fidelity study that finds that “Canadians are on track to replace only 50% of their pre-retirement income once they retire”. Fidelity continues to insist that this is well short of the “recommended 80% level” despite the shaky assumptions in their original research and another extensive study by Malcolm Hamilton showing that the replacement level on average is closer to 50%.

I don’t have a lot to add to their comments, since we’ve talked a lot about this topic already but you might find the nifty online “Retirement Readiness Snapshot calculator” interesting. The calculator allows you to play with different assumptions and check to see if you are on track for retirement. You can ignore Fidelity’s math and just enter the income you think you’ll need in retirement. For example, I figure we’ll need $60,000 per year in today’s dollars to retire when I am 55, so I entered $75,000 as my current annual income. The calculator tells us that we’ll need about $2 million in savings (in future dollars), which works out to $1.3 million in today’s dollars if inflation is around 2%. Despite the drawbacks of the study, Fidelity’s retirement number seems to be a reasonably conservative estimate (given that CPP/QPP and OAS benefits are estimated for an individual and not for a couple).