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Tag: saving for retirement

  • Having a financial plan more than doubles your retirement confidence—here’s why so many Canadians are skipping it – MoneySense

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    That’s a massive gap—and it’s widening at a time when more Canadians are rethinking their financial strategy. The survey of 1,045 Canadians found that 52% said economic uncertainty is causing them to consider creating a financial plan or overhauling an existing one.

    Having a plan is clearly beneficial, so why aren’t more people doing it? According to the survey, there are three culprits: cost, complexity, and confusion about what a financial plan even is.

    The barriers holding Canadians back

    Nearly half (45%) of survey respondents haven’t worked with a professional planner before:

    • 43% say they’re unsure about the process or whether it’s worth the money
    • 42% think it’s too expensive
    • Only 44% have a “very clear” understanding of a financial plan entails

    But here’s the thing: among the 55 per cent of Canadians who have worked with a professional planner, 56% say the value was completely worth the cost. Another 37% said it was somewhat worth it—so that’s 93% who felt they got their money’s worth.

    The KPMG report shows that 53% of Canadians believe a financial plan is “extremely valuable,” but it seems that misconceptions about cost and complexity are preventing them from taking that next step.

    Also read: Financial planning for the first time? A guide for women on a single income

    DIY plans beat no plan, but professional guidance wins

    Of the survey respondents, there are three groups: 55% have a professional plan, 25% created their own, and 20% have nothing. Those who went the DIY route feel significantly more confident than those without (72% vs. 36%), but they still lag behind those who sought the help of a professional planner.

    The generational split on technology

    Age also seems to play a role in how Canadians view financial planning:

    • 54% of Gen Z (ages 25–30) would prefer a self-service digital tool to a human advisor
    • 41% of Millennials (ages 31–45) want tools plus human support
    • Gen X (ages 46–60) is evenly split across all three options
    • 56% of Baby Boomers (ages 61–79) want to work exclusively with a human advisor

    There’s one thing every age group agrees on: 72% want real-time access to their financial plans, saying it would enhance their experience.

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    The bottom line

    The survey data appears compelling: professional financial planning delivers measurable results. But, at the end of the day, some plan is better than no plan. If cost or complexity is holding you back—or you simply prefer using online tools to do things yourself—have a go at creating your own plan. You can always check in with a financial advisor for feedback and suggestions to help boost your confidence and ensure you’re on the right track towards a comfortable retirement.

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    About Jessica Barrett


    About Jessica Barrett

    Jessica Barrett is the editor-in-chief of MoneySense. She has extensive experience in the fintech industry and personal finance journalism.

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    Jessica Barrett

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  • What is Sun Life’s new decumulation product? – MoneySense

    What is Sun Life’s new decumulation product? – MoneySense

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    A Canadian retiree’s main decision with this Sun Life product is the age they want the funds to last until (the maturity age). They can choose from 85, 90, 95 or 100 (or select a few with a combination of ages); but they can also start drawing down as early as age 50. Sun Life recalculates the client payments annually, at the start of each year, based on the account’s balance. That has the firm looking at the total amount invested, payment frequency, number of years remaining before the selected maturity age, estimated annual rate of return (expected return is 5.5% but a conservative 4.5% rate is used in the calculations) and any annual applicable regulatory minimums and maximums.

    Birenbaum says holders of MyRetirementIncome can arrange transfers to their bank accounts anywhere from biweekly to annually. While the payment amount isn’t guaranteed, they can expect what Sun Life calls a “steady income” to maturity age, so the payment isn’t expected to change much from year to year. If the client’s circumstances change, they can alter the maturity date or payment frequency at any time. While not available inside registered retirement savings plans (RRSPs), most other account types are accommodated, including registered retirement income funds (RRIFs), life income funds (LIFs), tax-free savings accounts (TFSAs) and open (taxable) accounts.

    Compare the best RRSP rates in Canada

    Emphasis on simplicity and flexibility

    In a telephone interview, Eric Monteiro, Sun Life’s senior vice president of group retirement services, said, in MyRetirementIncome’s initial implementation, most investments will be in RRIFs. He expects that many will use it as one portion of a retirement portfolio, although some may use it 100%. Initial feedback from Canadian advisors, consultants and plan sponsors has been positive, he says, especially about its flexibility and consistency. 

    As said above, unlike life annuities, the return is not guaranteed, but Monteiro says “that’s the only question mark.” Sun Life looked at the competitive landscape and decided to focus on simplicity and flexibility, “precisely because these others did not take off as expected.” The all-in fee management expense ratio (MER) is 2.09% for up to $300,000 in assets, but then it falls to 1.58% beyond that. Monteiro says the fee is “in line with other actively managed products.”

    Birenbaum lists the pros to be simplicity and accessibility, with limited input needed from clients, who “simply decide the age to which” they want funds to last. The residual balance isn’t lost at death but passes onto a named beneficiary or estate. Every year, the target withdrawal amount is calculated based on current market value and time to life expectancy, so drawdowns can be as sustainable as possible. This is helpful if the investor becomes unable to competently manage investments in old age and doesn’t have a trusted power of attorney to assist them. 

    As for cons, Birenbaum says that it’s currently available only to existing Sun Life Group Retirement Plan members. “A single fund may not be optimal for such a huge range of client needs, risk tolerance and time horizons.” In her experience, “clients tend to underestimate life expectancy” leaving them exposed to longevity risk. To her, Sun Life’s approach seems overly simplistic: you “can’t replace a comprehensive financial plan in terms of estimating sustainable level of annual draws with this product.” 

    In short, there is “a high cost for Sun Life doing a bit of math on behalf of clients… This is a way for Sun Life to retain group RRSP savings when their customers retire … to put small accounts on automatic pilot supported by a call centre, and ultimately, a chatbot. For a retiree with no other investments, it’s a simple way to initiate a retirement income.”

    However, “anyone with a great wealth advisor who provides planning as well as investment management can do better than this product,” Birenbaum says. “For those without advisors, a simple low-cost balanced fund or ETF in a discount brokerage will save the client more than 1% a year in fees in exchange for doing a little annual math.”

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    Jonathan Chevreau

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  • New to Canada and no pension: How to save for your retirement – MoneySense

    New to Canada and no pension: How to save for your retirement – MoneySense

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    The difficulties facing newcomers to Canada with respect to retirement planning are particularly acute. Given how Canada’s immigration points system works, economic immigrants are usually in their late 20s or early 30s—and they face unique challenges:

    1. Depleted savings: If you’re a 30-year-old newcomer, chances are you’ve used a large portion—if not all—of your savings to set up your new life in Canada. So, you’re behind in the retirement savings game. If retirement savings were a 100-metre race, lifelong Canadians have a 20- to 30-metre head start over newcomers.
    2. Lower income: If you’re a newcomer to Canada, you’ve probably had to restart your career a few rungs lower on the corporate ladder because of your lack of Canadian work experience. This means you’re not earning as much as others your age who have similar experience. Consequently, your ability to save for retirement is lower.
    3. Lack of knowledge: You need to understand Canada’s financial and tax systems to maximize its retirement planning opportunities, and gathering this knowledge takes time.
    4. Reduced contributions: Joining the Canadian workforce later in life than their Canadian-born peers, immigrants have fewer years to contribute to the Canada Pension Plan (CPP) and build up registered retirement savings plan (RRSP) and tax-free savings account (TFSA) contribution room. For this reason, they rely on less tax-efficient unregistered savings and investment vehicles to sustain their retirements to a greater degree than their neighbours.

    But there’s good news. As Toronto-based financial advisor Jason Pereira points out, “Canada’s retirement system does not discriminate against newcomers. The rules are the same for everybody.” So, with the right knowledge and expertise, you can work towards building a strong retirement plan. 

    How to start retirement planning as an immigrant

    To plan for retirement, you need to know:

    • How much money will you need each month in retirement? The simplest method to estimate your income requirement in retirement is to consider it to be 70% to 80% of your current income. For example, if you earn $75,000 a year today, 70% of that is $52,500—that’s $4,375 per month—in today’s dollars. Alternatively, you could estimate the amount you’d need in retirement using this tool.
    • How much you’ll receive from government pension and aid payments: You need to estimate approximately how much you’ll get from the Canada Pension Plan (CPP) and other government programs: Old Age Security (OAS) and the Guaranteed Income Supplement (GIS). The tool at this link will help you do so. Ayana Forward, an Ottawa-based financial planner, notes that “some home countries for newcomers have social-security agreements with Canada, which can help newcomers reach the eligibility requirements for OAS.”
    • How much you’ll receive from your employer-sponsored retirement plan: Workplaces without a defined benefit pension plan sometimes offer a registered investment account (usually a group RRSP), with contributions made by you and your employer or only your employer. If you have a group RRSP from your employer, what will its estimated future value be at the time of your retirement? You could use a compound interest calculator to find out.
    • How to make up for a shortfall: The CPP, OAS, GIS and your group RRSP likely won’t be enough to fund your retirement. You’ll need to make up for the shortfall through your personal investments or additional sources of income.

    Sample retirement cash flow for a 35-year-old (retirement age 65)

    This table illustrates the types of income you could have in retirement. The amounts used in the table are hypothetical estimates. (To estimate your retirement income, try the various tools linked to above.)

    Amount (today’s value) Amount (inflation adjusted)
    A Amount needed $52,500 $127,400
    B Government pension and aid payouts
    (CPP, OAS, GIS)    		 $22,000 $53,400
    C Employer-sponsored pension plan
    (group RRSP)    		 $8,000 $19,400
    D B + C $30,000 $72,800
    E Shortfall (A – D) $22,500 $54,600
    F Needed value of investments in the year of retirement (E divided by 4%, based on the 4% rule) $562,500 $1,365,000
    G Needed flat/constant monthly investment amount from now to retirement $969

    In the example above, the person faces an annual shortfall of $22,500. In other words, this person needs to generate an additional $22,500 per year to meet their retirement income needs, after accounting for the typical government pension or aid payouts and their employer-sponsored retirement plan. To do this, they’d need to invest about $969 per month, assuming an 8% annual rate of return from now to retirement 30 years later. How could they fill this gap and meet their shortfall? Enter self-directed investments, real estate and small-business income.

    Build your own retirement portfolio

    An obvious and tax-efficient way to cover your retirement income shortfall is to build your own investment portfolio from which to draw income in your retirement years. These investments can be held in registered or non-registered accounts. Registered accounts, such as the TFSA and RRSP, offer useful tax advantages—such as a tax deduction and/or tax-free or tax-sheltered gains, depending on the account—but the amount you can contribute to these accounts is limited. Non-registered accounts have no contribution limits but offer no tax advantages. 

    Newcomers often have lower TFSA and RRSP contribution room compared to their peers because they’ve lived and worked in Canada for a shorter period. “TFSA contribution room starts accruing the year of becoming a resident of Canada,” Forward explains. “RRSP contribution room is based on earned income in the previous year.”

    Your TFSA and RRSP contribution room information is available on your Notice of Assessment from the Canada Revenue Agency, which you’ll receive after you file your tax return. To check your TFSA limit, you can also use a TFSA contribution room calculator.

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    Aditya Nain

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  • How to manage as a single parent with no pension – MoneySense

    How to manage as a single parent with no pension – MoneySense

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    “If someone’s not lucky enough to have a company pension, it’s that much more crucial for them to be building up savings on their own,” says Millie Gormely, a Certified Financial Planner at IG Wealth Management in Thunder Bay, Ont. “But that’s really hard to do when you’re supporting yourself and your kids, because you’re having to stretch that income that much further.”

    As of 2022, there were about 1.84 million single-parent families in Canada, and they face unique financial challenges. For starters, the primary caregiver may be covering more than their share of the responsibility and cost of raising their kids, footing bills for everything from food to clothing and childcare. And, thanks to inflation, we all know the cost of living has gone way up in recent years. Plus, a single parent may also be shouldering the burden of saving for their kids’ education (read about RESP planning), taking on medical expenses and more. And then there’s the fact that single parents tend to have less income to work with in the first place. According to Statistics Canada, lone-parent families with two kids report an average household income that’s only about a third of what dual-earner families of four bring in. (Not half, a third.) 

    All this financial strain can be a serious hurdle to retirement planning, but it doesn’t mean it’s impossible to save for your future. 

    Pinpoint your goals

    The first step is to identify your long-term goals (consulting a financial planner can help with this part). You’ll want to figure out your desired income in retirement and how much saving you’ll need to do to reach your goal. The next step is to take a hard look at your spending habits and your budget to find funds you can set aside for your retirement. 

    You may wish to review past bank and credit card statements to get a clear picture of what you’re spending on essentials (which can include rent, groceries, transportation and daycare). You’ll also want to get a clear picture of your debts like credit card balances, personal lines of credit and mortgage instalments to help you identify your fixed costs. All of this will help you figure out a budget you can live with—and what you have left over for retirement savings.

    If what’s left isn’t much, don’t despair. Even a small monthly savings will help you in the long run, says Gormely. “Contributing something rather than nothing on a regular basis is going to put you so much further ahead than if you just throw up your hands,” she says.

    Assess potential sources of retirement income

    You may have more options than you realize. A registered retirement savings plan (RRSP) is a long-term investing account that is registered with the Canadian federal government and helps you save for retirement on a tax-deferred basis. It allows for plenty of room to help your money grow. For example, your RRSP contribution limit for 2024 is equal to 18% of your 2023 earned income (or $31,560, whichever is lower). You also can tap into unused contribution room from past years.

    A tax-free savings account (TFSA) is another option. Like an RRSP, a TFSA can hold any combination of eligible investment vehicles, including stocks, bonds, cash and more, and the growth will be tax-sheltered. “In general, for someone at a lower income level, they might be better off maxing out their TFSA first, and then looking at their RRSP as a source of retirement income,” says Gormely.

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    Karen Robock

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  • Which savings should retirees draw down first? – MoneySense

    Which savings should retirees draw down first? – MoneySense

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    Working as a financial planner, I am often asked, “What is the most tax-efficient way to draw down on investments?” From the outset, I question if a decumulation plan based on tax efficiency is the best use of someone’s money. I wonder whether it is even possible to design “the best” long-term, tax-efficient withdrawal strategy.  

    I have modelled many different combinations of withdrawal strategies, such as RRSP first, non-registered first, blending the two, depleting registered retirement income funds (RRIFs) by age 90, dividends from a holding company, integrating tax-free savings accounts (TFSAs), and so on. In most cases, there is no significant difference to the estate over a 25- or 30-year retirement period, with the odd exception.

    You may have read articles suggesting the right withdrawal strategy can have a major impact on your retirement. The challenge when reading these articles is you don’t know the underlying assumptions. For example, if the planner is using a 5% annual return, is it all interest income and fully taxable? What is the mix of interest, dividends, foreign dividends, capital gains and turnover rate that makes up the 5% return? There is no standard all planners use, which leads to confusion and can make things seem more complicated than they need to be.

    Think spending, not decumulation

    Here is my approach to designing a decumulation plan. First, think about my opening. You have about 20 years of active living left to get the most out of your money. What do you want to do? Twenty years from now, do you want to look back on your life and say, “I sure was tax-efficient,” or would you rather say, “I had a great time, I did this and that and I helped…” I write this because it is not uncommon for me to see people be too restrictive on their spending in the name of tax efficiency, or not wanting or having the confidence to draw down their investments when they could.

    Stop thinking decumulation; that puts the focus on the money. Instead, think spending. How do you want to spend your money? I know you can’t predict over 20 years, so focus on this year. How can you make this a fantastic year while living within your means? Do you even know the limit to your means? 

    Now prepare an expense sheet so you can see where you are spending your money and where you want to spend it. This is where a financial planner with sophisticated software can help. Have your expenses modelled and projected over time. Will your income and assets support your ideal lifestyle or even allow you to enhance your lifestyle?

    Now do the math

    Once you have a spending plan supported by your income and assets, do the projections showing different withdrawal strategies. You need the spending plan first, because the amount and timing of your spending dictates the withdrawal plan. Plus, detailing your spending gives you a better view behind the curtain to see the impact of spending amounts and frequency on tax and capital changes of different withdrawals. What does spending on things like vehicles, special vacations and renovations mean?

    I suspect that as you work through this exercise, ideally with a planner capable of using sophisticated software, you will see that the withdrawal order doesn’t matter too much and can be easily influenced by various assumptions. If that is your result, you are in a good position. It allows you to manage your affairs so you are tax-efficient each year. 

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    Allan Norman, MSc, CFP, CIM

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  • 40 and no pension: What do you do? – MoneySense

    40 and no pension: What do you do? – MoneySense

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    It’s not as big a problem as you might think. The key is to try to mimic the pay-yourself-first approach by setting up an automatic contribution to your registered retirement savings plan (RRSP) to coincide with your payday. A good rule of thumb to strive for is 10% of your gross income. Remember, in most cases the employees blessed with a defined-benefit pension are contributing around the same 10% rate (sometimes more) to their pension plan. You need to match those pensioners stride-for-stride.

    How much to save when you’re 40 and have no pension

    Let’s look at an example of pension-less Johnny, a late starter who prioritized buying a home at age 35 and has not saved a dime for retirement by age 40. Now Johnny is keen to get started and wants to contribute 10% of his $90,000-per-year gross income to invest for retirement.

    He does this for 25 years at an annual return of 6% and amasses nearly $500,000 by the time he turns 65.

    Source: getsmarteraboutmoney.ca

    Keep in mind this doesn’t take any future salary growth into account. For instance, if Johnny’s income increased by 3% annually, and his savings rate continued to be 10% of gross income, the dollar amount of his contributions would climb accordingly each year.

    This subtle change boosts Johnny’s RRSP balance to just over $700,000 at age 65.

    How government programs can help those without a pension

    A $700,000 RRSP—combined with expected benefits from the Canada Pension Plan (CPP) and Old Age Security (OAS)—is enough to maintain the same standard of living in retirement that Johnny enjoyed during his working years.

    That’s because when his mortgage is paid off, he’s no longer saving for retirement, and he can expect his tax rate to be much lower in retirement.

    40-year-old Johnny spends $40,000 per year, plus mortgage until the mortgage is fully paid off at age 60. Johnny retires at age 65 and continues spending $40,000 per year (inflation-adjusted) until age 95.

    CPP and OAS will add nearly $25,000 per year to Johnny’s annual income (in today’s dollars), if he takes his benefits at age 65. Both are guaranteed benefits that are paid for life and indexed to inflation. 

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    Robb Engen, QAFP

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  • Why a reverse mortgage should be a last resort for Canadian retirees – MoneySense

    Why a reverse mortgage should be a last resort for Canadian retirees – MoneySense

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    “This leaves a total outstanding now of $204,939, with the interest owing being 25% of the balance owing after only five years,” says Ardrey. “As time goes on, this can overtake the entire value of the home. Thankfully, they do note that there is no negative equity, but there is not much left at the end of the day for the home owner or their heirs.” 

    Heath points to the fact that reverse mortgage rates tend to be much higher than traditional sources. “A borrower can expect to pay at least a couple percentage points more than mortgages and lines of credit. But if you read the fine print in your home equity line of credit agreement, the lender typically reserves the right to decrease your limit or even call the outstanding balance.”

    So, homeowners should not count on their HELOC being available when they need it.

    Right now, reverse mortgage variable rates are in the 9.5% range, while 5-year variable mortgage rates are about 6% and 5-year fixed mortgage rates are about 5%. HELOC rates are generally 1% above prime, so they’re currently around 7.95%. “There is definitely a premium paid to take advantage of reverse mortgages,” says Heath.  

    Ardrey raises another concern: how retirement living care can be paid for. “Often a home can be sold when a senior moves into retirement living, allowing them to pay for this care. In this example, the ability to use the home for this purpose would be significantly impaired.”

    He suggests that instead of using a reverse mortgage that could cripple the financial future, retirees need to look honestly at their situation and the lifestyle they can afford. “Though it may not be preferable to sell their home and live somewhere else, it may also be their financial reality. This speaks to the value of planning ahead to avoid being house-rich and cash-poor.”

    What are the alternatives to a reverse mortgage for Canadian retirees?

    Allan Small, senior investment advisor with IA Private Wealth Inc., says reverse mortgages “have not played a part in any of the retirement plans and retirement planning that I have done so far in my career. I think the reverse mortgage idea or concept, for whatever reason, has not caught on.” Also, “those individual investors I see usually have money to invest, or they have already invested. Most downsize their residence and take the equity out that way versus pulling money out of the property while still living in it.” 

    Finance professor and author Moshe Milevsky told me in an email, that when it comes to reverse mortgages—or any other financial strategy or product in the realm of decumulation—“I always ask this question before giving an opinion: Compared to what?” He worries about the associated interest-rate risk, which is “difficult to control, manage or even comprehend at advanced ages with cognitive decline.”  

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    Jonathan Chevreau

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  • “Help! My RRSPs are all over the place” – MoneySense

    “Help! My RRSPs are all over the place” – MoneySense

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    On the other hand, if you aren’t happy with any of these options, do some research, says Ulmer. “Talk to people who you think are financially savvy and ask them for referrals. Then consult with three different advisors to see what’s the best fit for you.”

    Approach the provider you want to transfer to—not from

    Thankfully, you don’t have to have a big meeting or emotional “break-up” conversation to initiate an RRSP transfer. Instead, contact the provider you want to transfer the funds to with the request to move over the specified accounts. They will need the names of the financial institutions where you have your other RRSPs and the account numbers to fill out the appropriate form (CRA T2033, Transfer Authorization for Registered Investments), which they will send to you to sign and return. Some providers even handle all of this online. “They’re in the business of increasing assets under management, so they want to make it easy to transfer your money to them,” says Trahair.

    Opt for “in kind” transfers, where possible

    The provider you’re going with will ask you if you want to move the assets over “in cash” (which means all your investment holdings will be sold before they are transferred) or “in kind” (which means all your investments go over exactly as is). Both Trahair and Ulmer say to transfer your investments in kind, so long as the receiving institution can hold those investments. (Some proprietary mutual funds, for example, may not be available to other providers.)

    There are a couple of reasons why experts prefer in-kind over in-cash transfers. First, the timing may not be in your favour. If, for example, you happen to liquidate your investments right after a downturn, that money could be out of the market for a few weeks before it gets transferred and reinvested and you could miss the market rebound. In other words, you could end up breaking the first rule of investing by selling low and buying high. Second, selling your investments could trigger “back-end” fees, as explained below.

    Be aware of possible deferred sales charges for “in cash” transfers

    Some investment funds incur deferred sales charges (DSC) if you sell them within a specified number of years (typically seven) from the date of purchase. Those fees can be quite hefty and really add up, so you’ll want to avoid them if at all possible. Find out if you have any DSC funds and, if so, what the redemption schedule is. If you’re beyond that period, you can sell your holdings with no strings attached. If not, you can sell up to 10% of the fund every year without paying the fee, says Trahair. 

    “An advisor should think to check for deferred sales charges when you transfer investments to them,” says Ulmer. Otherwise, it’s a red flag that they’re failing to protect clients from unnecessary fees.

    DSCs will be less of a concern in the future—Canadian regulators banned the sale of mutual funds with DSCs on June 1, 2022. However, the redemption schedules for any existing DSC mutual funds still apply.

    Ask about account closing fees

    Although there shouldn’t be any fees to transfer your RRSPs, you might need to pay $50 to $100 to close each old account. Make sure to ask the receiving institution if it will cover all or part of those fees. It may be willing to do so to gain your additional business.

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    Tamar Satov

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  • CPP payment dates this year, and more to know about the Canada Pension Plan – MoneySense

    CPP payment dates this year, and more to know about the Canada Pension Plan – MoneySense

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    About the Canada Pension Plan (CPP)

    The Canada Pension Plan is a retirement pension that offers replacement income once a person retires from working life. The CPP is a social insurance plan, and it’s one “pillar” of the retirement income system for Canadians—the other three are Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and personal savings. The CPP is funded by contributions from workers, employers and self-employed individuals. It’s not paid for by the government, despite what many Canadians may think.

    A federally administered program, the CPP is mandatory, meaning that all Canadian workers and employers must contribute. The plan covers all of Canada except for Quebec, which has the Quebec Pension Plan (QPP) for residents of that province. Below are the remaining 2024 CPP payment dates.

    CPP payment dates for 2024

    • January 29, 2024
    • February 27, 2024
    • March 26, 2024
    • April 26, 2024
    • May 29, 2024
    • June 26, 2024
    • July 29, 2024
    • August 28, 2024
    • September 25, 2024
    • October 29, 2024
    • November 27, 2024
    • December 20, 2024

    Where does the CPP money come from?

    Unlike OAS and the GIS, the CPP is funded by employers and employees, and by self-employed people. These contributions, which show up as deductions on a paycheque, are aggregated and invested. For self-employed people, the CPP owed on your net business income is added to your tax bill. The principal plus any revenue earned goes back into the program.

    In January 2024, CPP contributions were raised as part of a seven-year government initiative, started in 2019, to increase retirement income. Read more about the CPP enhancement to see how much more you will pay as an employee or a freelancer.

    Who manages the CPP’s investment portfolio?

    The pension plan’s investments are managed by CPP Investments, a Crown corporation operating at arm’s length from the government. Every three years, the Office of the Chief Actuary of Canada evaluates the sustainability of the plan; the next review will be in 2025. “The CPP is projected to be financially sustainable for at least the next 75 years,” CPP Investments states on its website.

    Am I eligible for CPP?

    If you’re at least 60 years old and have made at least one contribution to the CPP, you are eligible to receive CPP payments. You may also be eligible if you’ve received CPP credits from a former partner or spouse who paid into the plan. CPP benefits are available to Canadian citizens, permanent residents, legal residents or landed immigrants.

    Should I apply for CPP or QPP?

    If you contributed to both the CPP and/or the QPP in Quebec during your working years, your residency at the time of your application determines which plan you’re eligible for—if you’re a Quebec resident, you apply for your pension from the QPP. Otherwise, you apply to the CPP.

    When you can start receiving your CPP

    You’re eligible to start receiving your pension anytime between the ages of 60 and 70 years old, but the younger you are when you begin receiving CPP, the smaller your monthly payouts will be. Many Canadians choose to begin receiving payouts at age 65.

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    Keph Senett

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  • How much money should I have saved by age 40? – MoneySense

    How much money should I have saved by age 40? – MoneySense

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    All the while, you’ve got a serious case of FOMO every time you check social media—all those friends who are jetting off on lavish vacations, buying new cars and splurging on cottages. How are ordinary Canadians actually doing this? And how can you get ahead and save more?

    What’s the average savings for Canadians in their 30s? How much should they have saved?

    A lot of Canadians are managing to save, despite the above financial challenges and obligations. According to Statistics Canada’s 2019 figures (the most recent available), the average person under age 35 had saved $9,905 towards retirement (RRSPs only) and held $27,425 in non-pension financial assets. For Canadians aged 35 to 44, these numbers are $15,993 and $23,743, respectively.

    The table below shows the average savings for individuals and economic families, which Statistics Canada defines as “a group of two or more persons who live in the same dwelling and are related to each other by blood, marriage, common-law union, adoption or a foster relationship.” In 2019, the average household savings rate was 2.08%.

    Financial assets, non-pension No private pension assets, just RRSPs Private pension assets and RRSPs
    Individual under age 35 $27,425 $9,905 $25,263
    Economic family under age 35 $105,261 $140,662 $60,305
    Individual aged 35–44 $23,743 $15,993 $39,682
    Economic family aged 35–44 $131,017 $138,488 $399,771
    Source: Statistics Canada

    The pandemic had a positive effect on savings; the disposable income of the average Canadian rose by an additional $1,800 in 2020, according to the Bank of Canada. That meant most Canadians were able to save an average of $5,800 that year.

    Despite this pandemic silver lining, most Canadians aren’t saving enough for their age groups. When CIBC polled Canadians in 2019 on how much money they’d need in retirement, on average they guessed they would need $756,000. The actual amount you’ll need depends on many factors—to estimate your own number, check out CIBC’s retirement savings calculator.

    How to prioritize financial goals and obligations in your 30s

    With so much going on in your 30s, it can be very challenging to save when you have so much to pay for. After all, you may be carrying a lot of debt due to student loans, a car loan or a mortgage. In the third quarter of 2023, Canadians aged 26 to 35 owed an average of $17,159, and Canadians aged 36 to 45 owed $26,155, according to a report from Equifax.

    Maybe debt is less of a concern for you, but you’re saving for a big goal—like a down payment on a home—and you’re feeling the strain of a high interest rate and inflation. Perhaps you’d like to start a family, but you’re worried about the costs of raising a child. Or you’ve dabbled a bit in the stock market and want to make a few more investments.

    Whatever your situation, talking to a financial planner about your finances and your priorities can help you map out a customized financial plan that factors in your immediate goals—as well as long-term savings and retirement strategies. This might include focusing on paying off high-interest debt, putting aside money for a home, shopping around for life insurance and ensuring that you save each month.

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    Anna Sharratt

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  • A review and summary of Die with Zero and 4,000 Weeks – MoneySense

    A review and summary of Die with Zero and 4,000 Weeks – MoneySense

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    Die Broke is the book where I first encountered the colourful quip about how the last cheque you write should be to your undertaker, and it should bounce. In other words, the closer you can get to spending all your money just as you die, the less you have to fork over to Uncle Sam—and for us, the Canada Revenue Agency (CRA).

    Problem is, of course, that no one can accurately predict when they will die. As one unknown wag once remarked, retirement planning would be a cinch, if you just knew the day you’re dying.

    Summary of Die with Zero 

    So, it was of interest to me when an old college friend mentioned how much he enjoyed reading a book titled Die with Zero (HarperCollins, 2021), by Bill Perkins. My first reaction was that it sounded just like Die Broke, but I valued my friend’s opinion enough to check out a free copy on the Libby app and also on the paid book service Everand (formerly Scribd). The books have similar premises: there are trade-offs between time, money and health. Indeed, the Die with Zero subtitle is “Getting all you can from your money and your life.” 

    Essentially put, we exchange our time and life energy for money, which can therefore be viewed as a form of stored life energy. So, if you die with lots of money, you’ve in effect “wasted” some of your precious life energy. Similarly, if you encounter mobility issues or other afflictions in your 70s or 80s, you may not be able to travel and engage in many activities for which you had been saving up. The “money as life energy” idea is most memorably articulated in another classic book about financial independence: Your Money or Your Life (Penguin Random House, 2008). 

    But, what about the children? The issue of inheritance and leaving money to your heirs is deftly handled by Perkins in Die with Zero. The advice amounts to the old bromide that it’s “better to give with a warm hand than a cold one.” In other words, why not give them some of your money when they really need it, and you’re still healthy enough to enjoy their company, and presumably their gratitude.

    Die with Zero review

    After I read Die with Zero and started to write this column, I happened to chat with blogger Mark Seed of MyOwnAdvisor. Quite independently, he published a review of Die with Zero on the website Cashflows & Portfolios back in January 2024, along with a book giveaway promotion.

    “It was ‘OK’ in terms of content,” Mark told me in an email. “Some of the writing was not very good, but the premise is good: avoid hoarding money you could otherwise gift, spend, enjoy, etc.” The review starts with the following quote from Perkins: “The real golden years—the period of maximum potential enjoyment because we have the most health and wealth—mostly come before the traditional retirement age of 65.” The review further says that most of us know this intuitively, but “so many of us might be giving up years of semi-retirement or retirement enjoyment, only to find out we’ve saved too much or put off many valuable experiences for far too long.” The reviewers liken the main premise and the notion that it’s better to give now rather than later, but they also found it quite repetitive and lacking a real recipe for implementing the Die with Zero mantra. 

    Living the Die with Zero mantra

    If you read and absorb the thesis, you may find that the book changes your day-to-day behaviour. This happened to me recently, when my wife and I spent a few days in Fergus and Elora, Ont., for a birthday celebration. Initially, we booked a tiny room at a correspondingly tiny price. Once we checked in, we asked to look at a more spacious and luxurious room. We had both read Die with Zero and, having discussed the book, mutually decided to upgrade our room, despite the price being roughly double. It’s a small example, but it may just be the beginning for us. 

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    Jonathan Chevreau

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  • Single, no pension? Here’s how to plan for retirement in Canada – MoneySense

    Single, no pension? Here’s how to plan for retirement in Canada – MoneySense

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    • Canada Pension Plan (CPP) deferral: CPP deferral is worth considering for any healthy senior in their 60s. If you live well into your 80s, you may collect more pension income than if you start CPP early, even after accounting for the time value of money and the ability to invest the earlier payments or draw down less of your investments. CPP deferral can protect against the risk of living too long, especially for a single retiree, and particularly for women, who tend to live longer than men. CPP can be deferred as late as age 70. The benefit increases by 8.4% per year after age 65, plus an annual inflation adjustment.
    • Old Age Security (OAS) deferral: Like CPP, deferring OAS can be beneficial for seniors who live well into their 80s. One exception is low-income seniors who might qualify for the Guaranteed Income Supplement (GIS) between 65 and 70. Single seniors aged 65 and older, whose income is less than about $22,000, may qualify. OAS can be deferred as late as age 70. The benefit increases by 7.2% per year after age 65, plus an annual inflation adjustment.
    • Annuities: Almost everyone wants a pension, yet almost no one is willing to buy one. You can buy an annuity from a life insurance company using non-registered or registered (ie. RRSP) savings. (What is a non-registered account? How does it work?) Based primarily on your age and resulting life expectancy, an insurer will pay you an immediate or deferred monthly amount for life—even if you live until 110. If interest rates are higher when you buy an annuity, the monthly payment amount may be slightly higher as well. If you don’t have a pension and you want the security of a monthly payment, an annuity can be worth considering. Especially if you’re in good health and are a conservative investor.

    Survivor benefits in Canada

    Most DB pension benefits are payable only to surviving spouses. Some pensions have survivor benefits for children or a guaranteed number of months of payments to an estate.

    A CPP survivor pension can be paid to the spouse or common-law partner of a deceased contributor. Single retirees are somewhat disadvantaged since their children will usually not qualify for a benefit if they die.

    Children’s benefits are only payable if a surviving child is under 18, or if they are attending full-time post-secondary education and are between 18 and 25.

    Advice, accountability and cognitive decline

    One of the challenges everyone faces as they age is making sound financial decisions. Our experience and knowledge may increase as we age but our ability to process complex decisions tends to begin declining before we retire.

    Single seniors don’t have a partner to bounce ideas off, so many may find themselves stressed about retirement and financial planning. And not everyone feels comfortable talking about money with their children and friends, and not everyone has a financial advisor, either. (Use the MoneySense Find a Qualified Advisor Tool to find an advisor near you.)

    Partners, adult children and friends can provide accountability, as well with spending and other financial decisions and keep each other in check.

    A single retiree can certainly be successful, but the challenges they face are different from that of couples.

    For these reasons, being conservative, deferring pensions, considering annuities, seeking financial advice, and proactively planning are all strategies to consider when planning for retirement as a one-person household—especially if you have no pension plan.

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    Jason Heath, CFP

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  • How to cope with the RRSP-to-RRIF deadline in your early 70s – MoneySense

    How to cope with the RRSP-to-RRIF deadline in your early 70s – MoneySense

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    Unless taxpayers make a request, there are no withholding taxes on the minimum RRIF withdrawal. This can result in the Canada Revenue Agency (CRA) requesting quarterly tax installments in the future: after filing a tax return where net taxes owing (taxes owing less the taxes deducted at source) exceed $3,000. 

    If this looks to be an annual event, it’s wise to pay the tax installments, as the CRA will charge installment interest on the amounts outstanding or paid late, Ardrey says. “That rate of interest is currently at 10%.” 

    (Of course, if you overpay installments, the CRA will not pay you any interest.)

    Withholding taxes is another consideration. These are not the same as your final tax bill (after you die), Birenbaum says, but instead are “a default percentage the government takes upfront to ensure they get (at least some) tax on RRSP or RRIF withdrawals.” If you’re in your 60s and have ever taken money from your RRSP, you know you pay 10% withholding tax for withdrawals of $5,000 or less, 20% between $5,001 and $15,000, and 30% over $15,000. Amounts are higher in Quebec.

    But the rules are different for RRIFs; there are no withholding taxes required on minimum withdrawals. Outside Quebec, withholding taxes are the same for RRSPs, says Birenbaum. For systematic withdrawals, withholding taxes are based not on each individual payment but on the total sum requested in the year that exceeds the minimum mandated withdrawal. 

    You don’t necessarily want to pay the least in withholding taxes, as many may know from making RRSP withdrawals in their 60s. You can always request paying a higher upfront withholding tax on RRIF withdrawals, if you expect to owe more at tax-filing time due to other pension and investment income. You can also set aside some RRIF proceeds in a savings account dedicated to future tax liabilities. 

    Do RRIFs trigger OAS clawbacks?

    Another complication of extra RRIF income is that it can trigger clawbacks of Old Age Security (OAS) benefits. If your total income exceeds $90,997, OAS payments will be clawed back by $0.15 for every dollar over this amount until they reach zero.  

    Income splitting with a RRIF

    Fortunately, there are ways to minimize these tax consequences. If you are one half of a couple, you can benefit from a form of pension income splitting: RRIF income can be split with a spouse on a tax return when appropriate, providing the taxpayer is over 65. An income split of $2,000 can provide a pension tax credit for the spouse, which could be the difference between being impacted by the OAS clawback or not.

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    Jonathan Chevreau

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  • How to start saving for retirement at 45 in Canada – MoneySense

    How to start saving for retirement at 45 in Canada – MoneySense

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    Are you on track, or are you playing catch up?

    For some Canadians, that may feel like plenty of time to ramp up their retirement savings, especially if expensive childcare years are behind them. For others, starting to save for retirement at 45 can feel like they missed the window on savings growth.

    I’ll turn 45 this summer, and so I felt compelled to take on the assignment about saving for retirement at this age. While I’d like to think I’m in a better financial position than most Canadians my age (Lake Wobegon effect, perhaps?), I’m also keenly aware that I’m closer to my 60s than I am to my 20s. Retirement planning is a chief concern.

    Indeed, according to the latest annual retirement study conducted by IG Wealth Management, while 72% of Canadians aged 35- and over have started saving for retirement, 42% of them are doing so without a retirement plan, and 45% are confident they know how much money they will need for retirement—granted, that’s a tough question to answer.

    Saving for retirement

    If you’ve read David Chilton’s classic, The Wealthy Barber (Stoddart Publishing, 2002), you’ll know a popular rule of thumb is to save and invest 10% of your gross (pre-tax) income for retirement. Simply “pay yourself first” with automatic contributions to your retirement accounts and you’ll be in good shape for retirement. (You can download The Wealthy Barber Returns for free.)

    But not everyone has the ability to save in this linear fashion. For instance, those who work in public service as a nurse or a teacher already have a significant portion of their paycheques automatically deducted to fund a defined benefit pension plan. Should they also save 10% of their gross income for retirement? Of course not! In fact, they might find it impossible to do so.

    Similarly, couples in their 20s and 30s who are raising a family are faced with a host of competing financial priorities such as childcare (albeit temporarily) and more expensive housing costs. 

    What this means is a 45-year-old with little to no retirement savings might actually have 15 to 20 years of pensionable service in their workplace pension plan. It might mean that a 45-year-old with little to no retirement savings just got out of the expensive childcare years and now finds themselves flush with extra cash flow to start catching up on their retirement savings.

    The “rule of 30” for retirement savings

    That’s why I like the “rule of 30,” popularized by retirement expert Fred Vettese in his book of the same title (ECW Press, 2021). Vettese suggests that the amount you can save for retirement should work in tandem with childcare and housing costs. (Read a review of Vettese’s latest book, Retirement Income For Life.) 

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    Robb Engen, QAFP

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  • How to model retirement income in Canada – MoneySense

    How to model retirement income in Canada – MoneySense

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    Mike, you are at risk of leaving too much money after you die, and it may not be until you reach age 70, 75 or 80 when you realize it. You could think, “I have all this money, and only so much time and energy left. If I had known, I would have done more.” 

    Lucky for you Mike, you are already thinking about it. Now, it is time for you to engage in some serious play and run some “what ifs” with the projection model you created. Experiment by finding the maximum you can spend each year until your deaths, and then do the same thing again but to the end of your expected health span, when you are too old to enjoy yourself.

    When the money runs out in the model you created, find out the value of your house and farm. Would you sell these to support your retired lifestyle? How much money, if any, do you want to leave your beneficiaries? Play with a few different combinations to see what spending patterns are possible.

    Don’t worry about how you will draw any funds, taxes or other planning strategies. Just get a good sense of what is possible for you.

    Then you will know how much you can spend each year. It’s up to you to decide how you are going to spend or gift your money, which is easier said than done.

    Don’t worry if you can’t identify future plans. Instead, make this year a good one, and do the same next year. If you string together a good year after another and after another, and so on, over your lifetime, you will have lived a full and rich life, with no regrets. Once you have a good sense of how you want to live in your retirement, that’s when you can apply tax and planning strategies. 

    How to model out retirement income

    Mike for some people, the risk of dying with too much money is all-too real. For all the emphasis Canadians place on investments and on tax and planning strategies, there’s very little on the important thing: maximizing life satisfaction.

    Using the model as I have described will give you a glimpse into your future, so you can make confident spending decisions today. Updating the model annually will keep your assumptions honest, keep you on track and allow you to enjoy yourself without feeling guilty spending your money.

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    Allan Norman, MSc, CFP, CIM

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  • Are GICs worth it for Canadian retirees? – MoneySense

    Are GICs worth it for Canadian retirees? – MoneySense

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    In other words, during the near-zero interest rates that prevailed until recently, investors wanting real inflation-adjusted returns had almost no choice but to embrace stocks. (Read more about TINA and other investing acronyms).  

    GICs have a place in locking in some real-returns, especially if inflation tracks down further. But Raina says investing in bonds offer opportunities to lock in healthy coupon returns, with the prospect of higher capital appreciation opportunities if interest rates fall further, since bonds currently trade at a discount. The risk is the unknown: when interest rates will start falling. Based on what the Bank of Canada (BoC) announced in the fall, Raina feels that could be some time in 2024. (On Dec. 6, the BoC announced it was holding its target for the overnight rate at 5%, with the bank rate at 5.25% and deposit rate at 5%.)

    CFA Anita Bruinsma, of Clarity Personal Finance, is more enthusiastic about GICs for retirees in Canada. “I love GICs right now,” she says. “It’s a great time to use GICs.” For clients who need a portion of their money within the next three years, she says, “GICs are the best place for that money as long as they know they won’t need the money before maturity.”

    Other advisors may argue bond funds could have good returns in the coming years, if rates decline. However, “I would never make a bet either way,” Bruinsma says, “I think retirees looking for a balanced portfolio should still use bond ETFs and not entirely replace the bond component with GICs. However, I do think that allocating a portion of the bond slice to GICs would be a good idea, especially for more nervous/conservative people.” For Bruinsma’s clients with a medium-term time horizon, she recommends laddering GICs so they can be reinvested every year at whatever rates then prevail. 

    GICs vs HISAs

    An alternative is the HISA ETFs. (HISA is the high-interest savings accounts Small referred to above). HISA ETFs are paying a slightly lower yield than GICs and also do not guarantee the yield. “I also like this product but GICs win for the ability to lock in the rate,” says Bruinsma.

    When investing in a GIC may not make sense

    Another consideration is that GICs are relatively illiquid if you lock in your money for three, four or five years or any other term. “If you are uncertain if you will need those funds in the near future, you can look at a high interest savings account ETF like Horizon’s CASH,” says Matthew Ardrey, wealth advisor with Toronto-based TriDelta Financial. “This ETF is currently yielding 5.40% gross—less a 0.11% MER.”

    Apart from inflation, taxation is another reason for not being too overweight in GICs, especially in taxable portfolios. Even though GIC yields are now roughly similar to “bond-equivalent” dividend stocks (typically found in Canadian bank stocks, utilities and telcos), the latter are taxed less than interest income in non-registered accounts because of the dividend tax credit. In Ontario, dividend income is taxed at 39.34% versus 53.53% for interest income at the top rate in Ontario, according to Ardrey. This is why, personally, I still prefer locating GICs in TFSAs and registered retirement plans (RRSPs). 

    When GICs are right for retirees

    Ardrey says GICs can be a valuable diversifier when it’s difficult to find strong returns in both the stock and bond markets. “This is especially true for income investors who would often have more of a focus on dividend stocks.” Using iShares ETFs as market proxies, Ardrey cites the return of XDV as -0.54% YTD and XBB is 1.52% year to date (YTD). “Beside those numbers a 5%-plus return looks very attractive.”

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    Jonathan Chevreau

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  • What is the CPP enhancement? – MoneySense

    What is the CPP enhancement? – MoneySense

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    The second phase of the Canadian Pension Plan (CPP) enhancement program has come into effect as of January 2024, and with it, the final CPP contribution rate increase for most Canadians. In an effort to ensure adequate retirement pensions, this seven-year government initiative involving incremental raises to the contribution rate came into effect in 2019, and it involved incremental raises to the contribution rate.

    Now, the second CPP enhancement is introducing an additional “earnings ceiling,” which will affect some middle- and high-income earners. Does that include you? Learn everything you need to know about the CPP enhancement and the 2024 changes in this explainer.

    Why are CPP contributions increasing?

    The CPP is one of three primary government programs, along with Old Age Security (OAS) and the Guaranteed Income Supplement (GIS), designed to provide Canadians with income to last them throughout retirement. For some workers, this amount is supplemented by an employer-provided defined benefit (DB) plan, which guarantees a certain amount of income for life, while others save for retirement using vehicles like registered retirement savings plans (RRSPs).

    According to Evan Parubets, head of the advisory services team at Steadyhand Investment Funds Inc., this approach worked for many decades. “We used to have average savings rates of over 20% in Canada, back in the early ’80s,” he says, “but saving rates have basically been falling for decades.”

    Declining personal savings isn’t the only issue. “Over the last several decades, companies have let go of defined benefit plans and replaced them with defined contribution plans,” Parubets says. These packages have employers matching employee contributions for investment. “This brought in more unpredictability towards retirement.”

    By 2019, it became clear that many Canadians were not going to have sufficient savings or assets for their retirement, says Parubets. “The government made a decision to essentially enhance the government benefits to make up for the lack of private benefits.” 

    The CPP enhancement

    Introduced in 2016 and begun in 2019, the CPP enhancement is a seven-year program designed to boost retirement pensions by increasing the amount of CPP contributions.

    How CPP contributions are calculated

    Since the CPP was introduced in 1965, Canadian workers have contributed by way of payroll deductions or, in the case of self-employed people, at tax time.

    Each Canadian worker can earn up to $3,500 (the “basic exemption amount”) without paying into CPP. Think of this as your personal base rate when you file your taxes. Any money you earn after that is subject to CPP deductions—up to the year’s maximum pensionable earnings (YMPE). The YMPE is also called an “earnings ceiling”—that is, anything earned above this amount will not be subject to additional CPP contributions.

    In 2018, prior to the first enhancement, the rate for Canadian employees was 4.95% (with employers matching this contribution). Self-employed Canadians paid double—or 9.9%—because for these purposes, they serve as both the employer and employee. So, with a YMPE of $55,900 in 2018, an employed person earning that much or more would pay 4.95% in CPP on $52,400 ($55,900 minus the basic exemption amount of $3,500), for a total of $2,593.80. A self-employed person making $55,900 or more would pay double, for a total of $5,187.60.

    The first enhancement (CPP1)

    The federal government introduced the CPP enhancements as a seven-year plan with two phases, each with escalating YMPEs and CPP contribution rates. This way, Canadians wouldn’t have to absorb the new costs all at once.

    The first enhancement, CPP1, went into effect in 2019 with a YMPE of $57,400 and a CPP contribution rate of 5.1% (10.2% for self-employed people). Over the next five years, both the YMPE and the contributions rates increased marginally. In 2023, the YMPE was $66,600 with a contribution rate of 5.95% (11.9% for self-employed people).

    The second enhancement (CPP2)

    The final phase of the CPP enhancement starts in January 2024. Instead of raising the rates further, this phase adds a year’s additional maximum pensionable earnings (YAMPE), or second earnings ceiling, with a contribution amount of 4% for employees and 8% for freelancers and other self-employed Canadians. In other words, the second earnings ceiling is meant to capture a portion of the income of higher-earning Canadians.

    To understand how the CPP enhancements work, let’s use an example of someone with an annual salary of $100,000, to make the math clear. 

    Jameela from Edmonton earns $100,000 annually as an employee. Under CPP1, with the 2023 rates of 5.95% and a YMPE of $66,600, she would owe $3,754.45, based on the following formula: ($66,600 minus the basic exemption amount of $3,500) x 5.95%. Jameela would pay nothing on any amount she makes over $66,600.

    In 2024, with a YMPE of $68,500 and a YAMPE of $73,200, Jameela’s CPP contributions are a bit different. She will pay 5.95% on the first $68,500 (minus $3,500), for a total of $3,867.50. In addition, she owes 4% on the money she earns between the first and second earnings ceilings (or between the YMPE and YAMPE), which is: $73,200 – $68,500 = $4,700. Multiplied by 4%, that comes out to $188. Her contributions will total $4,055.50.

    How much are CPP contributions going up in 2024?

    As of 2024, the CPP contribution rates for employees and the self-employed are the same as in 2023: 5.95% and 11.9%, respectively, unless they make more than the YMPE, which is $68,500 in 2024 and an estimated $69,700 in 2025.

    Workers who make more than the YMPE will contribute more—at a rate of 4% for employees and 8% for freelancers. This rate will only apply to the earnings between the first and second earnings ceilings.

    How does the CPP enhancement affect freelancers?

    Self-employed Canadians have always had to pay both the employer and employee portions of their CPP contributions, and it’s no different with these enhancements.

    “Compared to employed individuals, they are certainly at a disadvantage in the sense they have to pay double,” Parubets says. “Nevertheless, it is a form of savings. You’re getting that money back.” Plus, everyone can claim a federal tax credit of 15% of their CPP contributions. Self-employed contributors can also deduct the employer portion of their CPP contributions yielding tax savings at their marginal tax rate.

    As with Canadian employed workers, just how much a Canadian freelancer will pay depends on their income. For example:

    James is a freelancer in Quebec City who makes $55,000 per year, so his earnings fall under the first earnings ceiling. He will pay 11.9% on his eligible income. However, in 2025 he takes on a new client and his earnings jump to $80,000. Therefore, he will pay 11.9% up to the YMPE and 8% on the money between the YMPE and the YAMPE.

    It bears mentioning that in the example of James, living in Quebec, he will be contributing to the Quebec Pension Plan (QPP). The QPP mirrors the CPP in terms of contributions and earnings thresholds, as well as pension payments.

    What about low-income Canadians?

    Most Canadians, no matter their incomes, will benefit from the raised CPP rates when they retire due to a higher pension, with one notable exception—retired workers who qualify for the GIS.

    “Say you’ve been working low-income jobs all your life and contributing to CPP. Eventually you’ll get your money back,” says Parubets. “But if you’re still low-income and on GIS, they’ll claw back the GIS pension money that you would have otherwise been entitled to.” (A clawback is a means-tested reduction in government benefits.) The clawback rate hovers somewhere between 50% and 75%. “A person who’s never worked and never contributed to CPP will likely get most if not all their GIS benefits.”


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    Keph Senett

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  • Infinite banking in Canada: Should you borrow from your life insurance policy? – MoneySense

    Infinite banking in Canada: Should you borrow from your life insurance policy? – MoneySense

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    Now, after a fair bit of research and a few interviews with experts on infinite banking, I feel I know enough to pass on the basics—plus what you should think about before signing up. 

    What is infinite banking?

    According to a useful primer from independent insurance firm PolicyAdvisor, “Infinite banking is a concept that suggests you can use your whole life insurance policy to ‘be your own bank.’” It was created in the 1980s by American economist R. Nelson Nash, who introduced the idea in his book Becoming Your Own Banker. He launched the “Infinite Banking Concept” (IBC) in the U.S. in 2000, and eventually it migrated to Canada.

    An article on infinite banking that appeared both on Money.ca and in the Financial Post early in 2022 bore a simplistic headline that said, in part, “how to keep your money and spend it too.” The writer—Clayton Jarvis, then a MoneyWise mortgage reporter—framed the concept by declaring that the problem with the average Canadian’s capital is that it’s usually doing just one job at a time: it’s spent, lent or invested. 

    “But what if you were able to put your money to a specific purpose and continue using it to generate income? That’s the idea behind infinite banking (IB),” Jarvis wrote. He compared IB to a reverse mortgage: “In both cases, you still possess the appreciating asset being borrowed against—your policy or your home—and you have the freedom to pay back the loan at your leisure[.]” But Jarvis also evinced some skepticism when he added: “those who have sipped rather than chugged the IB Kool-Aid say it’s a strategy that may be too complex to be marketed on a mass scale.”

    Borrowing from your life insurance policy

    If you’re not familiar with the finer details of insurance, infinite banking does seem a bit arcane. Rather than put your money in a traditional bank—which until the last year or so paid next to nothing in interest on accounts—you would invest in a whole life or universal life insurance product, both of which provide some “cash value” from the investment portion of their policies. Then, if you want to borrow money, instead of making hefty interest payments to a bank, you would borrow against your life insurance policy. 

    As PolicyAdvisor explains, “Because you’re only borrowing from your policy, the insurance company is still investing your entire cash value component. So, your cash value still grows even though you’ve borrowed a portion of it.” 

    Those new to infinite banking should watch a YouTube primer made by Philip Setter, CEO of Calgary-based insurance broker Affinity Life. In it, he readily concedes that much of the marketing hype portrays infinite banking as some kind of “massive secret of the wealthy,” which essentially amounts to buying a whole life insurance policy and borrowing against it. Setter has sold many leveraged insurance products himself, but to his credit, in the video he calls out some of the conspiracy-mongering that seems to be attached to infinite banking, including the primary message from some promoters that traditional banks and governments are out to rip off the average consumer. 

    Infinite banking seems to be geared to wealthy people who are prepared to commit to the long term with the leveraged strategy, and who can also benefit from the resulting tax breaks (more on this below). It’s not for the average person who is squeamish about leverage (borrowing to invest) and/or is not prepared to wait for years or decades for the strategy to bear fruit. As Setter warns in his video: “Once you commit to this, there’s no going back.” If you collapse a policy too soon, it’s 100% taxable: “It only is tax-free if you wait until you die … you commit to it until the very end.” 

    Get personalized quotes from Canada’s top life insurance providers.All for free with ratehub.ca. Let’s get started.*This will open a new tab. Just close the tab to return to MoneySense.

    How are insurance advisors paid for selling infinite banking products?

    Asked how advisors are paid, Setter said they receive a lump-sum commission based on the premium amount of the policy. I also asked this of Asher Tward, financial head of estate planning at TriDelta Private Wealth. In an email, Tward said it’s “the same as with any insurance policy—mostly upfront commission based on premiums paid (higher if there is more initial funding). Fundamentally, this is a life insurance sale. If one undertakes an external or collateralized loan versus a policy loan, they may be compensated on the loan as well.”

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    Jonathan Chevreau

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