CPP and OAS

The Canada Pension Plan (CPP) and Old Age Security (OAS) form the base of Canadian retirement income. If you are entitled to the full CPP and OAS pensions you can receive roughly $23,000/year at age 65 (as of 2022). These programs are not meant to supply your full retirement income and will need to be supplemented by retirement investments or other pension plans.

What is OAS?

Old Age Security is a monthly payment out of general government revenues. You can begin collecting OAS at any time between age 65 and 70.

Eligibility

If you are living in Canada, you must:

  • Be 65 years old or older
  • Be a Canadian citizen or legal resident at time of OAS approval
  • Have resided in Canada for at least 10 years since the age of 18

If you are living outside Canada, you must:

  • Be 65 years old or older
  • Have been a Canadian citizen or legal resident of Canada on the day before you left Canada
  • Have resided in Canada for at least 20 years since the age of 18

To receive full OAS benefits you need to have lived in Canada at least 40 years after age 18.

How much can you collect?

The 2022 payment is $666.83/month (8,004/year) if you began collecting at 65 and are eligible for the full amount. If you are 75 and over, an automatic 10% increase to your OAS was enacted July 2022.

For every month you delay OAS the benefit payment increases by 0.6% (7.2%/year) up to a maximum increase of 36% at age 70. If you delay benefits till age 70 the monthly benefit is $906.89 ($10,883/year).

Guaranteed Income Supplement (GIS)

GIS is an additional tax-free monthly payment for low-income seniors. Low-income in 2022 is considered below $20,208 if single or $26,688 as a couple (not including OAS/GIS income). The amount of benefit received depends on the net income of the previous tax year. To calculate your exact eligibility refer to the Government of Canada website.

OAS pension recovery Tax (clawback)

OAS clawback refers to the repayment of OAS benefits at net income levels over $81,761 (2022). For every dollar of net income above this threshold 15 cents of OAS is repaid. OAS is fully repaid at $134,253 (under age 75) or $136,920 (age 75 and over). Effectively this is a 15% additional tax on income between these thresholds, resulting in some of the highest marginal tax rates in Canada.

What is CPP?

Canada Pension Plan (CPP) is a contributory pension plan. All employees and self-employed individuals in Canada (except Quebec, which has QPP) contribute to CPP. These individuals then receive pension income in retirement.

Contributions

Employees contribute 5.70% of employment income with the employer matching the contribution. The maximum contribution for an employee is $3,499.80 (2022) and there are no contributions on employment income over $64,900 (2022). A self-employed individual must pay both the employee and employer portions; therefore, the rate is 11.40% to a maximum of $6,999.60 in 2022.

Investment Fund

Unlike OAS, the Canada Pension Plan is an independently managed pension fund. It is separate from government revenues/expenses and is managed by an arm’s length organization, CPP Investments. The mandate of CPP Investments is “to invest the assets of the CPP Fund with a view to achieving a maximum rate of return without undue risk of loss.”

As of March 31, 2022, the fund value was $539 billion, and the fund had a rate of return of 10.8%/year over the last 10 years. The investments within the fund are wide-ranging, from Canadian farmland to publicly traded companies and private equity.

The CPP Investment Fund is subject to actuarial review every 3 years by the Office of the Chief Actuary. This is a fully independent office that reviews various pension plans and social programs, including CPP and OAS, to ensure that they are stable, secure and being managed appropriately. The most recent report on CPP was issued December 2019 where it was noted that CPP is sustainable for at least the next 75 years.

How much can you collect?

The CPP benefits you collect in retirement are determined by three main factors:

  1. Amount contributed annually
  2. Number of years contributions were made
  3. Age that pension withdrawals begin

To receive maximum CPP you need to have contributed the maximum amount for 39 years between 18 and 65. You can refer to your My Service Canada Account for your CPP estimate.

The maximum monthly amount you could receive if you started your pension at 65 is $1,253.59 (2022). Meanwhile the average benefit is $727.61/month in 2022.

CPP benefits can be started at any time between age 60 and 70. For every month before your 65th birthday that you begin CPP benefits your pension is reduced by 0.6% (7.2%/year) for a maximum reduction of 36% if taken at age 60. Each month you delay CPP after your 65th birthday increases your pension by 0.7% (8.4%/year) for a maximum increase of 42% if started at age 70.

Therefore, if you were eligible for maximum CPP your monthly payment could be between $803 (age 60) and $1,780 (age 70) depending on when you begin withdrawing your benefits.

Refer to the CPP website for further details such as post-retirement benefit, disability pension, survivor’s pension and more.

Differences

Although Canada Pension Plan and Old Age Security are pensions to support Canadian retirees, they have significant differences.

Next month we will explore the benefits of delaying your pension benefits.

Emergency Fund

If there is anything we have learned the past few years, it is to expect the unexpected. From a worldwide pandemic to war in Europe to the highest inflation in decades; we have been confronted with large, unexpected events. This has driven home the importance of having a safety net to protect from these shocks.

An emergency fund is intended to protect you and your family from these shocks and help you weather financial setbacks without getting pushed off course. 

It will keep you from entering debt to cover unexpected expenses or tapping into your retirement savings to cover a work absence due to a month-long accident/illness. It is also there to provide peace of mind and free you up to be more aggressive with your other investments. 

An emergency fund is typically suggested to equal three-to-six months of basic living expenses. Depending on your situation it may make sense to have even nine or twelve months worth.

Figuring out your monthly spending means tracking your expenses for a few (at least three) months. If you cannot bring yourself to complete a full tracking of your spending then just average three months worth of your income (paycheque, pension, RRIF withdrawals etc.) to get a rough estimate of monthly needs.

Now you must decide how many months of expenses to cover. This depends on your personal situation and risk tolerance. Here are questions to consider:

  • Is your job and pay stable? If no, then the higher end of the range would be better.
  • Do you often worry about money? If money is a significant stressor for you, then have a larger emergency fund.
  • Are you a one-income household? If yes, then yet again, have a larger fund.
  • If retired, is most of your income from guaranteed sources (pension, CPP, OAS)? Yes, then a smaller emergency fund is reasonable.

These are just a few of the relevant considerations when determining the size of your emergency fund. Keep in mind your emergency fund shouldn’t be too large either. It is only to provide safety for financial shocks, it is not meant for long-term investing goals.

Where to Keep your Emergency Fund

The most important characteristics for the emergency fund are liquidity (easy accessibility) and safety from loss. If you can earn a small return, even better. For these reasons keeping it in a high interest savings account is ideal. In a chequing account you won’t earn any (or much) interest. Also, a locked-in product is not a good fit. An emergency fund is useless if you can’t access it when an emergency arises.

Most banks will offer a high-interest savings account and online banks tend to have the best rates. There are also mutual fund and ETF high-interest savings accounts available.

Don’t keep your emergency fund inside of your RRSP/RRIF as you will need to pay taxes when you withdraw the money. If you have TFSA room, it can be kept there, but you will eventually use your TFSA to hold long-term investments.

NexT Steps

To begin building your emergency fund, start by setting up automatic weekly, biweekly or monthly withdrawals from your chequing account that go straight into your high-interest savings account.

​Once your emergency fund is fully funded move on to paying down debt or investing for other goals. Do not skip setting up an emergency fund, it is an essential step towards healthy finances and reduced financial stress.

Dollar-Cost Averaging

Even if you have not heard of dollar-cost averaging there is a good chance you have used it in your investment portfolio or through an RRSP at work. It is a powerful investment strategy during the accumulation stage of your financial life.

What is Dollar-cost averaging?

It is the system of investing a fixed dollar amount at regular intervals (monthly, weekly) to purchase investments. Here is a quick example to explain:

You decide to save $500/month and set up an automatic contribution to your investments. Here are the purchases for the first three months.

MonthContributionCost per unitNumber of units
January$500.00$50.0010
February$500.00$30.0016.67
March$500.00$40.0012.50
Total$1,500.0039.17

After the purchase in March, you have 39.17 units and a total investment of $1,566.80 (39.17 * $40.00). Seeing the unit price decline 20% from January to March, you might assume that you lost money. In fact, you are up almost $67 or 4.45%. This is because dollar-cost averaging automatically makes you purchase more units when an investment is “on sale” and buy less when it is expensive. This is the beauty of dollar-cost averaging, it uses the volatility of investments to your advantage.

Other Benefits

A big benefit of dollar-cost averaging is the simplicity to implement, all you need is to determine the amount you can regularly contribute and then you leave it on autopilot. It also helps form the habit of regularly and automatically contributing to your investments.

Dollar-cost averaging helps to control the emotional response when volatility inevitably strikes your investments. When your investments decline in value you can know that you are taking advantage of this decline by buying more “on sale”. This reduces stress and regret through the volatility inherent in long-term investing.

Most importantly dollar-cost averaging removes the decision on when to invest because it is on aut0pilot. It is no longer necessary to spend time wondering “is now a good time to invest? Or should it wait till next week or next month?”. This automatic approach reduces the stress around the timing of contributions and stops the futile attempts to time the market.

The Other Option

Without the scheduled contributions of dollar-cost averaging you must make the decision on when to invest each contribution. This inherently leads to trying to time the market with your contribution. Using the same investment as above; here is an example of what can happen when not using dollar-cost averaging.

The first month you don’t want to put the money in as you don’t know where the market is going, so you save the $500. In the second month you don’t want to invest in something that just lost 40%, so again you wait. Now you have $1,000 in cash and no investments. In the third month you see the investment increase to $40. Now that it is moving in the right direction you invest. Good thing you didn’t buy at $50, too bad you didn’t buy at $30.

In this example you end up investing the same $1,500 but you only have 37.5 units at the end instead of 39.17 units. You also missed any dividends or interest paid out by the investments in the first two months. The worst part is that each month (or week or day) you must decide if you are going to invest or wait for the market to drop/increase. This is a mentally exhausting way to invest. It is impossible to consistently invest at the “right” time, so there will inevitably be regrets on the timing of your investment.

Conclusion

Dollar-cost averaging is a high-impact contribution strategy that is simple to implement and reduces stress and regret. It is a great fit for long-term investment goals that require regular contributions over an extended period of time (ex. retirement).

Increased inflation

Canada’s inflation rate is the highest it has been since 2003. Last year we experienced a 4.7% increase in the Consumer Price Index (CPI) (StatsCan: reported November 2021). Annual inflation in the US is running at 6.8%, Germany 5.2% and the UK 4.6% (Source: OECD). This is much higher than many of us have experienced in over 20 years and those under the age of 40 may have never experienced in their lives.

Inflation is in the news with good reason – because we see and feel price increases when we shop too. We want to be a part of the discussion and navigate it together with you.

WHat is Inflation?

Inflation is the decline of purchasing power of your money over time. It is often measured by comparing the price of a basket of goods and services from one year to the next. If the basket cost $100 in the first year and $102 in the second, then inflation would be calculated at 2%. This basket of goods and services method is a useful tool to measure inflation. Yet it is only measures inflation of the goods and services included in the basket in the proportion they determine. Alcohol, tobacco and recreational cannabis, for example, feature prominently in this basket. If your spending on goods and services differs from the CPI proportion, you may experience higher or lower prices than the CPI would indicate. Click here to see what is included in the CPI basket.

A one-year increase may seem inconsequential but over decades this can really add up.

Hyperinflation

The most extreme examples of inflation are those in countries such as Zimbabwe in 2007 – 2009 and Germany between World War I and World War II. In these countries inflation was so high that the prices of goods were doubling every few days. This led to wheelbarrows of cash being used to buy groceries, or cash being burned because it was cheaper than using it to buy wood. These are extreme outliers often driven by unique and specific circumstances such as civil unrest and war (Source: Forbes). We have here in our office a $50 trillion bill (its current value is ~$20, but only as a collector’s item) from Zimbabwe that serves as our reminder of what “money” means. It is simply a claim against real goods and services. If more money is injected into an economy with no more goods and services to consume with that money, then it stands to reason that more dollars are competing for the same things and prices must increase.  This is a truth learned the hard way in countries such as Zimbabwe where the value of a dollar became effectively worthless.

WHat causes Inflation?

The causes of inflation are both simple and complicated.

The simple reason for inflation is a mismatch between demand and supply. This is because either there is additional demand or a reduction in supply that forces the price up. In a healthy economy this inflation is mitigated, businesses can increase production to meet the demand and most supply disruptions are temporary in nature or can be worked around.

During the pandemic we have experienced both. Many service businesses closed, resulting in individuals having more money available to purchase goods. At the same time disruptions in production and shipping resulted in lower supply. This combined to increase the costs of many goods and services.

The more complicated causes of inflation are driven by fiscal and monetary policy. Stimulative fiscal policy moves by the government such as cutting taxes or spending on infrastructure projects lead to increased demand for goods and services leading to inflation. The monetary policy decision to reduce interest rates leads to more money being available to be lent to business and consumers. This increases the money available throughout the economy to be spent on goods and services, increasing the costs.

Those in charge of fiscal and monetary policy have a tight rope to walk as they navigate keeping the economy growing while at the same time keeping inflation low.

Over the past two years extraordinary amounts of money has been added to economies and interest rates at historically low levels were dropped even further to mitigate the financial effects of the pandemic.

Finally, inflation is also driven by sentiment. If businesses believe their costs will increase in the future, they will increase their sale prices. If individuals believe the price of goods will increase, they will demand higher wages which increases costs for their employers which leads to increased sale prices. As you can see the fear with inflation is that it feeds on itself and becomes self-reinforcing.

What Are the predictions?

Economists are about as good at making accurate predictions as meteorologists, but many of them see this increase in inflation being temporary. As we move past the pandemic and supply chains are repaired, many economists see inflation settling back to the 2-3% range by the end of 2023 (Source: OECD).

To achieve this goal of decreasing inflation, central banks across the developed world will begin increasing interest rates, likely multiple times in 2022 and 2023. This reduces the availability of money in the economy and should result in a dampening of inflation.

What Can We Do?

The first advice is not to panic. It is unlikely we will see inflation anything like the double-digit inflation of the 1970s. Inflation is higher than we are used to and is likely to stay higher for the next two years. This does not forebode a new world where drastic action is necessary.

As mentioned earlier, inflation is the decline of purchasing power of a currency. Therefore, those who are most affected are those who are holding large amounts of cash or assets denominated in currency, such as bonds. These assets become less valuable in a high inflation world.

We believe that the best place to invest your money over the long term is into the ownership of a diversified basket of quality businesses through the mutual funds you own. These are businesses that can increase prices to maintain their profit margins and have the flexibility and ability to adjust to changing business conditions. This approach is what has enabled our clients to succeed in a variety of economic environments over 50 years – and why we are committed to continuing with this discipline.