Thursday, March 31, 2022

A Conversation About CPP

Close Friend:  My wife and I are just a year away from being able to start our CPP benefits when we turn 60.  I’m not sure if we should start them right away or wait until we’re older to get bigger benefits.

Michael James: I don’t usually get involved with giving this kind of advice about people’s specific situations, but you’re a close enough friend that I’ll try to help.  Let’s go through a standard checklist of questions to help you decide.

CF:  Fire away!

Do you need the money?

MJ:  The first question is “Do you need the money?”

CF:  Of course I need money.  What kind of question is that?

MJ:  Hmmm.  You’re right.  That question isn’t very clear.  I think the idea is whether you need CPP benefits to be able to maintain your standard of living.

CF:  Well, I’m retiring in a few months, and I don’t really know what standard of living I can afford.

MJ:  Another good point.  Let’s try to make the question more precise.  If you don’t start your CPP until you’re 65 or 70, will you have less money available to spend before CPP starts than you’ll have after CPP starts?

CF:  I’m not sure.  My wife and I have $600,000 saved in our RRSPs that we could live on during our 60s.

MJ:  That’s more than enough to live on while you wait for larger CPP benefits at 65 or 70.

CF:  Okay, next question.

Life expectancy

MJ:  Do you have a shorter than normal life expectancy?

CF:  My dad died at 82, but my mother and both my wife’s parents are still kicking.  One of my uncles died in his 60s.  Maybe I should take CPP now in case that happens to me.

MJ:  We can all imagine dying young, but it’s more important to make sure you don’t run out of money if you live a long life.  Maybe a better way to phrase the question is “Are you willing to spend down all your savings before you turn 80 because you’re sure you won’t live that long?”

CF:  No, I’m not.

MJ:  So, even though you don’t know how long you’ll live, you’re going to have to use your savings sparingly in case you live a long life.

CF:  Does that mean I should take CPP at 60 so that I won’t spend as much of my savings in my 60s?

MJ:  No, it means the opposite.  When you spend some savings in your 60s, you’re buying a larger guaranteed CPP payment that is indexed to inflation.  You’re taking part of your savings that you spend over exactly 10 years and turn it into an income stream that could last for decades.  By making this choice, you’ll be able to safely spend more money each month starting today.

CF:  I’m starting to see a trend toward taking CPP at 70.

More money while young

MJ:  Let’s see.  The next question here is “Do you want more income available to spend while you’re young?”

CF:  I suppose so.  But can’t I just spend extra from the RRSPs during my 60s to boost my income over the next decade?

MJ:  Good point.  This question doesn’t make a lot of sense.  In fact, if you spend some of your RRSPs now in trade for higher guaranteed CPP benefits for the rest of your life, your safe spending level starting today will already be higher.  Choosing to spend even more during your 60s just means you need more savings to cover this spending.  Because you have enough savings to spend extra in your 60s, you’re still better off taking CPP at 70.

CF:  Sounds good to me.

Do you want the money now?

MJ:  The next question is “Do you want the money now?”  Seems like a weird question.  Of course it’s your choice to make, and you can do whatever you want.

CF:  I thought the point of these questions was to figure out what is best for me rather than just me going with my gut.

MJ:  I agree.  Of course people can do whatever they want.  But if they give nonsensical reasons for their choice, they have to expect others to point out that the reasons make no sense.

CPP contribution history

MJ:  Next question: “Do you have many years when you contributed little to CPP?”

CF:  I had some low income years, and my wife had even more because she took time off to look after our children.  What difference does this make?

MJ:  There’s a complex set of rules around calculating your CPP benefits.  You get to drop out a certain number of years of low contributions.  If you don’t work from 60 to 65, you’ll drop out those years, but that takes away from dropping out other low contribution years.  Fortunately, the primary caregiver gets an extra drop out for the years when the kids were under age 7.  And there’s also an extra provision allowing you to drop out the years from 65 to 70.

CF:  Does this mean I’d be penalized for delaying CPP?

MJ:  Yes, but not by very much.  In my own case, my wife and I will be penalized by close to the maximum possible amount, and we’re still better off delaying CPP.  The amount the benefits rise during the years from 60 to 65 is far more than the penalty from not working from 60 to 65.

CF:  So, things are still pointing toward delaying CPP.

Superpowered investments

MJ:  The next question is “Do you expect a high return on your investments in the future?”

CF:  Beats me.

MJ:  This question doesn’t make much sense, really.  It might as well ask “Are you unrealistic.”

CF:  What difference do my future investment returns make?

MJ:  The idea of this question is that you could take CPP at 60 and invest for a high return.  The hope is that you’d invest so well that a decade later, this CPP money would be more than the larger CPP benefits you’d get if you took CPP at 70.

CF:  I understand that stocks have gone up an average of around 10% per year during my lifetime.  Is that enough to keep up with the increase from delaying CPP?

MJ:  No, it isn’t.  The reason is that CPP benefits are indexed to inflation.  Stocks have only beaten inflation by 5-6% per year, and your portfolio has some bonds in it.  So, you can’t expect the eye-popping returns necessary to keep up with rising delayed CPP benefits.

Surviving Spouse

MJ:  Are you concerned about whether the surviving spouse would have enough money if one of you died young?

CF:  Of course I am!

MJ:  I think what this question is getting at is that if you delay CPP to age 70 and you happen to die just before you start to collect, you will have been spending down the savings left for your wife.

CF:  That sounds bad.

MJ:  It’s not as bad as it sounds.  Most of your savings would still be there, and if your wife doesn’t get a maximum CPP pension, she would get a modest survivor’s pension after you die.  This is a case where it makes sense to do the calculations necessary to see what your wife’s income would be like, and how much her needs would drop without having to feed and clothe you and pay for your golf trips and other expenses specific to you.  If there is a modest shortfall, you could buy a small amount of term life insurance on both of you to run from, say, age 65 to 75.

CF:  It’s hard to get the image of my wife being destitute out of my head.

MJ:  I understand.  This area can spark strong emotions.  That’s why it’s important to run the numbers to see how you or your wife would fare if one of you died around age 70.  In my case, if my wife and I take CPP at 70, my wife’s standard of living would rise if I died at 70.

CF:  How is that true?

MJ:  We worked out how much the family income would drop, and it turned out to be less than the portion of our family expenses that are spent on just me.


MJ:  “Are you concerned with how much money you’d leave your kids if both you and your wife die young?”

CF:  I’d like to leave something to my children whether I die young or old.

MJ:  This is another strange question.  Why is it okay to give no money at all to your children when they’re in their 30s if you don’t die young, but it’s suddenly important that they get a lot of money if you do die young?

CF:  Doesn’t make sense.

MJ:  Whatever you decide about bequests, you can set aside some of your savings or maybe get some life insurance.  You might even choose to give some money to your adult kids while you’re still alive, as long as you don’t jeopardize your retirement.  This whole area seems like something you should think about and make some plans rather than use it as a way to be fearful about spending some of your savings in your 60s.

Decision time

CF:  It sounds like waiting until we’re 70 to start CPP is the best choice for us.  Is it the same for most other people?

MJ:  Perhaps.  But there are definitely some who should start CPP sooner.  For example, some people have very little money saved, and sadly, others have compromised health.  Some low income people have complex situations where they’re trying to maximize their Guaranteed Income Supplement (GIS).  Some wealthier people have complex tax considerations where they’re trying to minimize the amount of their Old Age Security (OAS) that gets clawed back.

CF:  I’m lucky my decision is simpler.  Thanks for the help!

Friday, March 25, 2022

Short Takes: Life Insurance Renewability, CPP Timing, and more

Recently, I had some trouble getting a sensible limit on my new credit card because I wasn’t given a chance to properly explain my capacity for making payments.  I finally got to speak to a human at BMO who eventually increased my credit limit.  She told me that valid sources of income include investment income.  However, she seemed to be reading a script and couldn’t expand on whether that only meant taxable income, or if it includes any type of investment return (such as unrealized capital gains).  So, I just presumed that unrealized capital gains were fine and got my credit limit increase.

The larger lesson here is that getting credit after retiring can be challenging.  So, be careful about giving up a high-limit credit card until you’re sure you can replace it.  My efforts to tell BMO the size of my portfolio (mostly held by their bank) fell on deaf ears.  An eccentric person with $20 million in a chequing account at BMO couldn’t get a credit card under their standard application system.

Here I describe my solution for eliminating credit card currency exchange costs:

Avoiding Currency Exchange Fees for Snowbirds

Here are some short takes and some weekend reading:

Preet Banerjee explains the importance of renewability of term life insurance, a feature that is missing from some policies.  This isn’t exciting stuff, but it’s important, and Preet makes it as interesting as it can be.

Robb Engen at Boomer and Echo
has a sensible take on when early retirees should take their CPP.  The comments section drew plenty of tired and flawed counterarguments, the worst of which was someone who claimed to be able to invest at a higher rate than the increases from delaying CPP but failed to account for the fact that CPP payments are indexed to inflation.  However, the many sensible comments were encouraging.  The two groups that push hardest against clear thinking on CPP are certain financial advisors who have been giving out poor advice and some Canadians who have already started their CPP at 60.

John Champaign has some good advice on negotiating a salary once you’ve been offered a job.

Thursday, March 24, 2022

Avoiding Currency Exchange Fees for Snowbirds

With each passing year I’ve been spending more time in the U.S. during Canada’s winter.  When I was young I embraced winter, but not so much now.  I guess I’m becoming a snowbird.  Over the years I’ve paid a lot in currency exchange fees, but I’ve finally done something to cut these fees.

Until recently, I just used a Canadian credit card to pay amounts charged in U.S. dollars.  This has felt painless, because the credit card company automatically applies an exchange rate so I can pay my bill in Canadian dollars.

Hidden in the exchange rate my credit card company uses is an extra 2.5% fee.  Most people, myself included, don’t know the exact fair exchange rate between Canadian and U.S. dollars at any given moment, so it’s easy to forget about this extra fee.  However, almost all Canadian credit cards charge this extra 2.5%.

So, when I recently spent a little over US$6000 to rent a nice place and was charged nearly CDN$8000 on my credit card, roughly CDN$200 of that was the extra currency exchange fee.  Ouch.  I decided to get a U.S.-dollar credit card and a U.S.-dollar account to pay it from.

As a retiree, I maintain a cash buffer at all times, and I don’t mind holding some of this cash allocation in U.S. dollars.  However, I do want any significant amount of cash I hold to pay some interest.  This rules out any of the big banks’ accounts.

Fortunately, EQ Bank has a U.S. account that pays 1% interest, so I now have one of these accounts along with a BMO U.S.-dollar MasterCard.  I have it set up to automatically pay my bill in full each month from the EQ account, and the first payment went smoothly.  So far, so good.

(Disclaimer: For concreteness, I decided to be specific about the bank account and credit card I used, but I get nothing from these companies for naming their products.  I may go elsewhere at any time if a competing product looks better.)

A Snag

I did run into a curious problem that’s not a show-stopper, fortunately.  While EQ’s Canadian-dollar accounts allow you to pay bills, their U.S.-dollar account doesn’t.  So, if I go into my EQ online banking and try to manually pay my credit card bill, it won’t work.  I also tried going into BMO’s online banking to manually pay my credit card bill from my EQ account, but they only allow manual payments from a BMO account.  

So, I’m in a strange position where my credit card bill gets paid automatically from my EQ account, but I can’t do it manually.  If I get close to my limit and want to make a manual payment, I have to transfer U.S. cash from my EQ account to a U.S. bank account at BMO.  (I have one associated with an Investorline account.)  This process can take a couple of days.  Then I can pay the credit card bill from the Investorline account.  The process seems silly, but apparently unavoidable.

A Near Complete Success

So, now I can live in the U.S. for part of the year without paying the 2.5% currency exchange fee, and I get some interest on my U.S. cash savings.  The only irritation is the inability to manually pay off the credit card directly, but I find this restriction tolerable for now.

Friday, March 11, 2022

Short Takes: Sanctions Against Russia, Evidence-Based Investing, and more

Over the past decade or so, I’ve read many articles about Tesla that confused me.  It took me a while to figure out that a lot of the nonsense originated from oil “boosters” and supporters of competing car companies.  But, even after filtering out these “stories,” I still found some articles confusing.  I realize now that many writers discuss Tesla the stock instead of Tesla the technology company.  I’ve never cared about Tesla stock, but I’m fascinated by Tesla the technology company.  They were incredibly ambitious, and failure was all but certain.  Yet they succeeded.  

Tesla remains dedicated to excellent engineering and technology.  As a Tesla car owner, I know that their cars have some issues like any other car, but they seem committed to correcting their errors, as I can see from the frequent software updates I get.  Overall, my Model 3 has been the best car I’ve ever owned.  That said, I would buy a competing electric car if a better one comes along, but I see a lot more marketing than substance so far from competitors.

Another aspect of Tesla that has impressed me is their charging network.  This is irrelevant while I’m at home because I just plug in my car in the garage.  But when I travel in Canada or the U.S., chargers are everywhere, and I can always charge slowly from a regular 110 volt plug if I want to avoid stopping at a charging station.

Tesla makes me even more optimistic about the future.  Where politicians and large established businesses have failed us, Tesla and certain other technology companies are leading the way to a better future.  I don’t care which companies win the stock market battle, as long as people dedicated to quality engineering keep moving us forward.

Here I look at the practical matter of what income to put on a credit card application when you have no income and live off your savings:

How Does a Retiree Answer the Question ‘What is Your Income?’

Here are some short takes and some weekend reading:

Preet Banerjee explains what the SWIFT system is and why banning Russia from SWIFT would have severe repercussions well beyond Russia.

Robb Engen at Boomer and Echo looks at some investor choices through the lens of evidence-based investing.  One part I don’t think much of is Ayres and Nalebuff’s time diversification; Engen seemed lukewarm about it as well.  The idea is for young people with modest savings to borrow to invest in stocks so they have adequate stock market exposure at all times.  However, our ability to add to our long-term savings throughout our lives is much riskier than it appears looking back over our personal histories.  Nobody can save the mythical $1000 per month every month of their working lives.  Families often can’t save for a while, and may even be forced to dip into savings sometimes.  Financial success may be the result of good long-term habits, but it can be destroyed by being exposed at the market’s worst moments.  If the stock market crashes and you lose your job while you’re leveraged into both a house and stocks, you could lose your house and all your savings.

Andrew Hallam explains why indexes beat actively-managed funds.  He makes his points clearly and convincingly.  But I always worry that many people reading articles like this would then think “Thankfully, I don’t pay any fees on my mutual funds.”  It can seem hard to believe, but there are still many Canadians who don’t realize that their savings are a piggy bank for advisors and mutual fund companies to dip into.

Monday, March 7, 2022

How Does a Retiree Answer the Question ‘What is Your Income?’

Recently, I applied for a new credit card.  Among the questions I had to answer was ‘What is your income?’  Before retirement that was an easy question; I’d just tell them my salary.  But now that I’m retired, I’m not sure how to answer it.

I have no salary.  I have no workplace pension.  I’m not drawing from CPP or OAS yet.  There’s nothing I can point to that is the rough equivalent of a salary.

I chose to answer the question with my previous year’s taxable income.  However, that number has little relationship to what I can afford to spend.  A big chunk of my spending comes from non-registered accounts that contain savings that have already been taxed.

I do draw from my RRSPs, but this is only for lifetime tax efficiency.  Late in the year I withdraw the right amount to manage my income up to the top of a particular tax bracket.  I could just as easily have an income near zero and collect the HST rebate.

So, my taxable income for the year has little bearing on what I can afford to pay.  If I had applied for a credit card in person, my first answer to ‘What is your income?’ would have been to tell the person how much money I have in their bank.

I got my credit card, but it came with a disappointingly low credit limit.  In requesting a higher limit, I got hit again with the ‘What is your income?’ question.  I gave the same unsatisfactory answer I gave the first time, and now I wait.  There must be a better way for banks and credit card companies to deal with retirees applying for credit cards.