tag:blogger.com,1999:blog-5465015914589377788.post6660830440284460999..comments2024-03-20T09:32:16.592-04:00Comments on Michael James on Money: Is Delaying CPP “Actuarially Neutral”?Michael Jameshttp://www.blogger.com/profile/10362529610470788243noreply@blogger.comBlogger9125tag:blogger.com,1999:blog-5465015914589377788.post-91199149692356056612021-01-14T10:01:44.233-05:002021-01-14T10:01:44.233-05:00Hi Potato and Returns Reaper,
Good points. This ...Hi Potato and Returns Reaper,<br /><br />Good points. This makes it clearer that it's wrong to say that “you won’t usually go too far wrong if you start [payments] any time after you retire and are eligible.”Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-20791154877712648792021-01-14T09:19:52.117-05:002021-01-14T09:19:52.117-05:00Good point @Potato. This is why I feel the most us...Good point @Potato. This is why I feel the most useful comparison is to compare the cost to delay CPP (in extra spending from savings) with the cost of an equivalent annuity. If your situation would benefit from an annuity, then you need to consider whether it is more beneficial to purchase one from an insurance company, or from the government. The difficulty here as discussed earlier is that the availability of good comparables in the private sector is lacking. I feel the CPP-based annuity has the right characteristics for longevity insurance; namely, it is inflation indexed. While a 2% increasing payout on an annuity mitigates this somewhat, these products seem rather rare and still don't provide insurance against unexpectedly high inflation.<br /><br />The question as to whether it is beneficial to purchase an annuity in retirement is a topic unto its own. But I think is something that should be seriously considered when guaranteed income streams in retirement fall short of income needed to maintain a comfortable lifestyle. An exception here might be if you have excessive wealth and have virtually no chance of running out of money before you die, even if you live to a very old age.<br /><br />Personally, I intend aim to have a guaranteed income that meets my basic needs for as long as I live, then use my remaining capital for more discretionary spending to enjoy retirement. Even if others agree with this approach, I expect the definition of "basic needs" is likely vary widely from person to person. I'm not even sure I have a good definition of it yet, but I'm still many years from retirement.Returns Reapernoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-56150026685861845482021-01-14T08:45:46.895-05:002021-01-14T08:45:46.895-05:00To put another spin on the same idea, say it is ac...To put another spin on the same idea, say it is actuarially neutral. Well, term life insurance is actuarially <i>negative</i> for the buyer (the insurance company makes a profit), that doesn't mean buying it is a bad idea for many, many people. Potatohttps://www.blogger.com/profile/18157102363273750204noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-75398429856225169952021-01-12T15:05:55.941-05:002021-01-12T15:05:55.941-05:00Hi Returns Reaper,
You're right that the annu...Hi Returns Reaper,<br /><br />You're right that the annuities market is very opaque. You can find fixed annuity quotes online, but I've never been able to get an online quote for an annuity with rising payments (say, 2% per year).<br /><br />For those who don't think about the enormous difference between a fixed annuity and CPP (a CPI-indexed annuity), the fixed annuity's cost can appear to be competitive. But once you factor in the indexing, the fixed annuity's price isn't competitive at all, as you say.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-78607370163779258932021-01-12T14:20:14.539-05:002021-01-12T14:20:14.539-05:00Hi Michael, I know we've traded thoughts along...Hi Michael, I know we've traded thoughts along these lines before, and I believe we're largely on the same page. But I'm throwing them out again to contribute to the discussion.<br /><br />I liken spending my savings to allow me to increase my CPP as "buying" an inflation indexed annuity from the Canadian government. To determine if someone is coming out actuarily ahead, you would compare the opportunity cost of the foregone CPP benefits with the additional CPP benefits as a purchased annuity, then compare that to the cost of a similar annuity on the insurance market.<br /><br />I think one of the biggest problems here is the availability of such products is virtually non-existent (inflation indexed annuities in Canada are difficult to find in my experience). For any such products that do exist, I bet it is difficult to get pricing information in order to make comparisons like this simple.<br /><br />I did some very rough math a long time ago and don't recall specifics. But I believe that if you compare the cost of the CPP annuity to the cost of a non-indexed annuity that provides the additional benefits, delayed CPP looks expensive (but you get much better benefits long term). If you compare it to an annuity that provides the additional benefits you might expect at age 95 due to inflation increases, the CPP option looks inexpensive. Neither of these comparisons is really helpful anyways. The conclusion that I came to when looking at this is that delaying CPP is a good deal if you have the savings to comfortably get you to age 70.Returns Reapernoreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-55526568044867373612021-01-12T12:39:01.016-05:002021-01-12T12:39:01.016-05:00Hi Eric,
My point is that CPP isn't actuarial...Hi Eric,<br /><br />My point is that CPP isn't actuarially neutral for the average person because he or she might live a long life. When it comes to longevity, it's not how long you will live that matters to CPP and OAS, it's how long you might live. Once you decide how far you intend to stretch out your savings in case you live to 95 or 100, that gives you what you need to decide if it makes sense to delay CPP and OAS. Trying to predict the future of COVID and other uncertain things is futile.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-55731065440011324842021-01-12T12:25:05.978-05:002021-01-12T12:25:05.978-05:00The CPP may be actuarially neutral for the average...The CPP may be actuarially neutral for the average person with average mortality. Once someone starts gaming the system then it is possible to come up with rationales to justify taking it early or late. These assumptions may be correct... but many will be wrong. Who anticipated covid lockdowns and early mortalities. Isn't this gaming the system akin to people who feel they can time the market and pick specific stocks, vs those who prefer to buy the whole market in an ETF?<br />One needs to be aware of the rules and assumptions of systems like CPP in order to make good decisions, and this article contributes to better understanding ... but i get skeptical of the cascade of assumptions that goes into some calculations of when to take CPP as there are so many variables in the "algorithm". Eric Darwinhttps://www.blogger.com/profile/01042460139621819388noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-35952772039034987262021-01-12T09:53:18.172-05:002021-01-12T09:53:18.172-05:00Hi Garth,
Glad you liked it.Hi Garth,<br /><br />Glad you liked it.Michael Jameshttps://www.blogger.com/profile/10362529610470788243noreply@blogger.comtag:blogger.com,1999:blog-5465015914589377788.post-14651733473245165802021-01-12T09:18:14.920-05:002021-01-12T09:18:14.920-05:00Excellent arguments and explanations. Well done!Excellent arguments and explanations. Well done!Garthhttps://www.blogger.com/profile/14367654772040176371noreply@blogger.com