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.

Related Reading:

• Modest CPP Changes in the Works
• Liberal Proposals on the Canada Pension Plan
• Federal Budget Highlights
• Spending Patterns in Retirement
• Steep Increases Forecast for Ontario Electricity Prices

Major Changes Coming to the Canada Pension Plan is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

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".]

Related Reading:

• Book Review: You Can’t Eat Your Furniture
• How Much Should You Save to do a Derek Foster?
• Early Retirement Number
• The Amateur Investor Manifesto, Part 1
• Reader Question on Restricted Stock Units

The “What IF” Retirement Planner Review is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

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).

Related Reading:

• Spending Patterns in Retirement
• Are Canadians Saving Enough For Retirement? Part 2
• Smoke and Mirrors Myths, Part 1
• Fidelity’s Retirement Math
• Early Retirement Number

Fidelity’s ‘Scary’ Retirement Findings is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

• Homeowners simply subtract the price paid from the selling price to figure how much “profit” they made without accounting for interest expenses, taxes, maintenance and home improvements.
• Houses are not such great investments over the long-term if you figure in all the extra expenses of being a homeowner. Depending on the area, you could do a lot better, or a lot worse.
• The best way to rein in home ownership costs are to pay down the mortgage as fast as possible and avoid costly renovations.

I do feel though that the article is over reaching to make its point. In calculating the costs of owning a home valued at $290,000 over 30 years, they estimate the total costs of maintenance and repair and renovations to be $408,000, which I think is far too high. In my own experience, I find that maintenance costs averages about 2% of the value of the home.

Related Reading:

• How Much House to Buy?
• The Costs of Home Ownership
• Home Ownership Costs
• A Nest, Not A Nest Egg
• Personal Residence: Asset or Liability

A Home is a Nest, Not a Nest Egg is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

As with any study of this nature, the conclusions are very sensitive to what assumptions are made. I think two key assumptions made in the study are questionable:

1. According to actuary Malcolm Hamilton (who based his conclusions based on a 1997 survey), the median retired senior couple needs $24,700 for all spending, not just necessary expenses. Fully retired unattached seniors need only $15,000. His estimates are significantly less than the assumptions made in this study.
2. The study assumes that retirement portfolios will generate the same returns as Government of Canada bonds adjusted for various inflation assumptions. The return assumptions are far too conservative for a fully diversified, low-cost portfolio with a significant exposure to equities suitable for an investor with a 25-year+ time frame.

Related Reading:

• Spending Patterns in Retirement
• Fidelity’s ‘Scary’ Retirement Findings
• Fidelity’s Retirement Math
• Early Retirement Number
• Are Canadians Saving Enough For Retirement?

Are Canadians Saving Enough For Retirement? Part 2 is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

According to the StatsCan Wealth of Canadians survey, 27% of Canadian families in the 35 to 44 age group have no pension assets of any kind. The median value of all pension assets for a family unit in the same age group is around $50,000. The picture is the same with RRSPs with the median value at $22,500 and the average value at $49,100 and again suggests that while a minority is saving well, the vast majority are not. The report mirrors the findings of the recent study:

Private pension assets were concentrated in nearly one-third of family units. About 31% of family units with $100,000 or more in private pension savings held 90.3% of the value of these assets.

Related:

1. Jonathan Chevreau’s column in the Financial Post
2. Blog posts by Canadian Dream, Canadian Financial Stuff and Canadian Financial DIY.

Related Reading:

• Wealth of Canadians: Assets
• Wealth of Canadians: Debt
• How Wealthy Are You?
• Retirement for Canadians
• Low savings, not RRSP Contribution Limits are the problem

Are Canadians Saving Enough For Retirement? is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

The report finds that while prime age Canadians do have a larger income, most of their income goes toward taxes, mortgage, savings and providing for young children. In retirement, most of these expenses are greatly reduced and the amount available for consumption (which reflects the standard of living) is not much less than for prime age Canadians. For instance, senior couples, on average, earn slightly more than half that of prime age couples, but the amount available for consumption is only 14% less. In fact, the surprising finding of the report is that seniors are saving and gifting a full 16% of their gross incomes. It is hard to argue that consumption of seniors is reduced out of necessity when they save a significant portion of their incomes at a late stage in life.

The report concludes:

Much of Canada’s retirement system, both public and private, has been built on a faulty assumption — that seniors need to replace 70 per cent of their employment income to maintain their standard of living. Most of the evidence suggests that the required ratio is 30 per cent to 70 per cent depending on an individual’s circumstances, with the average closer to 50 per cent than 70 per cent. The fact that today’s seniors have roughly half of the income of prime age families, but can afford a similar standard of living, supports this conclusion.

The news is also encouraging for those who want to retire early:

Those who save heavily, either because they participate in expensive pension plans (as are common in the public sector) or because they adhere to a strict savings regime, will typically find that they can retire in their 50s and live comfortably on 50 per cent of their employment income. If they keep working until they achieve the conventional 70 per cent target, they may have trouble spending their retirement income, particularly as they push into their late 70s. The recent experience of public sector plans suggests that many Canadians are prepared to retire in their 50s with pensions that are at the low end of the range that has traditionally been considered adequate.

Related: The Truth About Early Retirement from Reader’s Digest.

Related Reading:

• Fidelity’s Retirement Math
• Spending Patterns in Retirement
• The Green Shift: A GST by Another Name
• Dividend Taxes are Going up
• Smoke and Mirrors Myths, Part 1

Research on Financial Circumstances of Retirees is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

The StatsCan data breaks down households into three categories based on the age of the reference person: (1) 55 to 64 [we'll call pre-retirees] (2) 65 to 74 [retirees] and (3) 75 or over [seniors]. The study finds that incomes dropped 34% between pre-retirement and retirement and a further 27% between retirement and senior years. But, expenses also dropped 30% between the first two groups and a further 28% between the last two. The study concludes that:

As households age, income drops steeply because of loss in earnings whereas the drop in personal consumption is more gradual.

It is difficult to say if lowered expenses are a result of reduced income or due to lifestyle changes. However, it is clear that total spending on consumption does not remain the same in retirement. Perhaps the critics are right in claiming that Fidelity has a vested interest in urging Canadians to save more.

Related Reading:

• Fidelity’s Retirement Math
• Research on Financial Circumstances of Retirees
• Fidelity’s ‘Scary’ Retirement Findings
• Are Canadians Saving Enough For Retirement? Part 2
• Smoke and Mirrors Myths, Part 1

Spending Patterns in Retirement is brought to you by Canadian Capitalist -- Helping you to invest & prosper.

Based on StatsCan data, the research assumes that retirees will be spending the same amount as they did in their working years (reduced work-related expenses, less taxes and no contributions to CPP/QPP etc. offset by higher leisure expenses and health care costs) and estimates how much of their income retirees need to replace, taking into account public pensions such as OAS, CPP and GIS.

The article cites an individual earning $80,000 per year and spending about $52,000 (Earnings minus taxes minus public benefits minus savings) and estimates that the person would need a retirement income of $68,249, of which only about 20% will be supplied by public benefits. The situation is brighter for a retiring couple. A retired couple with a household income of $80,000 need to replace 75% of their pre-retirement income, 40% of which will be covered by government pensions.

I’ve always been sceptical of a one-size-fits-all link between income and spending. While there is definitely a loose link between the two (our spending tends to go up as our incomes rise), in the example above, if the individual saved 25% of his income instead of 10%, he has to replace less of his pre-retirement income and a higher percentage of his retirement income would be supplied by public benefits. Still, the study is a useful step in researching guidelines for how much income we would need in retirement.

Related Reading:

• Spending Patterns in Retirement
• Fidelity’s ‘Scary’ Retirement Findings
• Research on Financial Circumstances of Retirees
• Are Canadians Saving Enough For Retirement? Part 2
• Early Retirement Number

Fidelity’s Retirement Math is brought to you by Canadian Capitalist -- Helping you to invest & prosper.