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May 18, 2016 | Think Again

A best-selling Canadian author of 14 books on economic trends, real estate, the financial crisis, personal finance strategies, taxation and politics. Nationally-known speaker and lecturer on macroeconomics, the housing market and investment techniques. He is a licensed Investment Advisor with a fee-based, no-commission Toronto-based practice serving clients across Canada.

LONELY modified

Yesterday I offered a few nuggets. Like not getting divorced and throwing your adult kids out of the basement. But two caused a stir – leasing cars and taking CPP early. Let’s dig in a little.

The car thing is easy. Buying used (or new) with cash and riding the wheels off seems to save money over the high monthly cost of leasing. But that’s not the point. Cars are depreciating assets and almost all of them eventually go to zero. Leasing makes sense, but only if you take the money you don’t spend and invest is instead. That twenty grand in a growth-oriented TFSA over thirty years will end up being $132,000.

This is money you can withdraw free of tax. Better still, at 6.5% return it will provide you with more than $700 a month income for the rest of your life – money not added to your taxable income which doesn’t affect CPP or OAS. Over 20 years of retirement, that’s more than $171,000 in cash flow, plus you still have the $132,000 left. This is a $293,000 reason why you should have leased that car.

No, how about taking that CPP at age 60 instead of 65? I said it was a non-brainer decision, and it is.

Shockingly, most people need the pittance the CPP delivers (along with the OAS pogey, to which nobody contributes directly). A survey by one of the banks found that 89% of Canadians believe they’ll require these bucks to make ends meet. A third of those said they’ll lean on CPP “heavily.” It’s an indictment of us all that the number is so large. If you’ve lived six decades and still can’t support yourself, you probably made bad choices.

Well, you can start getting pension cheques now at age 60 even if you’re still working, and pocket the money until death. No longer does anyone have to give up a paycheque to get public money – a decision the federal government will long regret (and may some day reverse).

In order to stem the tide, the feds have built in a financial incentive to wait, so at age 60 you receive less than you would at 65 or age 70 – when the amount augments by about a third. Like buying a car versus leasing one, people do the wrong math when it comes to CPP. They studiously contemplate the point at which you’d be better off waiting (around 73), then conclude that because they’ll live forever, it’s more profitable to wait and get more later.

It isn’t. Here (again) are some of the reasons why everyone should collect at 60.

  • Any time the government gives you money, take it. Handing over pensions five years before most people think of retiring, when they are still employed, is idiocy. This could, and probably will, be changed on a whim in the future.
  • But what about the 30% more if you wait five years? If you absolutely know you’ll live to 95, delay. And don’t eat red meat. Or Hoverboard. But for most of us it makes way more sense to collect the largesse as soon as possible, and invest it. Sixty monthly payments of $600 from age 60 to 65, for example, equals $36,000. That amount invested for a decent return becomes almost $60,000 in ten years, tax-free if inside your TFSA – turning out enough income to increase your OAS by 50%. That sure beats waiting to get an extra $150 a month.
  • Delaying until 65 or 70 to get more CPP income might also edge you into a higher tax bracket if you’re drawing from RRSPs. That would pretty much wipe out any benefit. Remember that during the year you turn 71 all RRSPs must be converted into RRIFs, meaning you’re forced to start taking the capital as taxable income. Why not bank your pension cheque for 11 years before that happens? Put the loot into a TFSA and when it comes out, no impact on your tax bracket.
  • You can split your CPP payments with your spouse, reducing the tax bite.
  • Finally, you’ve contributed to this plan your entire working life, so it makes sense to suck out cash the moment you have a chance. That way you’ll drain far more from the plan than you ever contributed, which is excellent revenge for being, like, really old.

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May 18th, 2016

Posted In: The Greater Fool

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