Can a Risk Averse Saver Boost Her Retirement Income?

Yes, by turning her ‘Human Capital’ into ‘Financial Capital’

Alexandra Macqueen 26 January, 2021 | 2:00AM
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Hands in front of piggy bank

Marion is a 62-year old college instructor. She earns $80,000 per year and has a paid-off house. She also has Registered Retirement Savings Accounts totalling $114,000 – $14,000 of which is allocated to a balanced Canadian equity mutual fund and the remainder to low-risk GICs.

As Marion reaches the “normal” retirement age of 65, she’s wondering what steps she should take to guarantee a secure financial future. She has very little investing experience and no real desire to take investment risk but worries that’s what will be required to boost her retirement income. How can she maximize her retirement cash flow?

Two Silver Bullets
If Marion retires in three years at age 65, her projected Canada Pension Plan (CPP) entitlement is just under $950 per month. While this is higher than the average monthly amount for new beneficiaries today (about $690), it reflects the years earlier in her working career when her income was much lower. At age 65, she will qualify for the full Old Age Security (OAS) benefit. If she takes both her CPP and OAS benefits at age 65, her estimated monthly income is approximately $1,500. 

Living on the yearly income from CPP and OAS would be challenging for Marion. She is concerned that expenses like a bump in her property tax bill or unexpected inflation (like the higher food costs projected in 2021) could deplete her savings faster than is sustainable.

As it turns out, Marion has two silver-bullet strategies: first, her willingness and ability to continue working; and second, a little-known provision of the CPP which will significantly boost her retirement benefit – if she keeps punching a clock.

Marion wants to continue working in her current role as long as she’s able and interested – all the way to age 70. She can continue to take advantage of her “human capital” balance – the remaining value of her future earnings. She hopes to continue to convert her human capital to financial capital for the next eight years, by continuing to work. 

CPP Strategies for the 65+
In retirement, your CPP benefit is based on the number of years you work and contribute to the plan, and the amount you contribute during your working years. Taking the benefit “early” (from age 60 to 65) drops the age-65 benefit by 0.6% per month, by up to 36%; while deferring the benefit (from age 65 to 70) increases it by 0.7% per month, increasing the age-65 benefit by up to 42%.

Low- and no-income years reduce your retirement benefit but can be “dropped out” or, if you continue to work past age 65 without starting your CPP benefit, can be “swapped” with higher-income working years after age 65. For a Canadian who has some years of low income during their career and who is looking to increase their retirement income, working past age 65 can increase the CPP retirement benefit by more than the adjustment available by deferring.

This is Marion’s silver-bullet strategy.

Here’s how the numbers look for Marion’s CPP retirement benefit:

Estimated CPP benefit starting at age:  Amount of CPP benefit: Cumulative yearly increase from continuing
to work and delaying CPP (%):
65  $947 -
66   $1,058 11.7%
67   $1,173 22.5% 
68   $1,291 32.7% 
69   $1,414 41.1% 
70   $1,539 51.0% 

Calculations completed by using the CPP Calculator developed by David Field, CFP®and Doug Runchey.

If Marion stopped working at age 65 and deferred taking her CPP benefit, her age-65 amount would increase by 42% – the same “deferral bonus” available to all Canadians. By continuing to work and contribute to the CPP, her benefit at age 70 is 51% higher than the age-65 amount, as she swaps out lower-income years for years of higher earnings. In Marion’s case, her CPP benefit at age 70 if she employs this strategy is more than her estimated CPP plus OAS benefits at age 65.

This strategy gives her a “return” on her human capital, by “remaining invested” in the labour market and contributing to CPP. This return far exceeds the return she can expect on her savings – and all without investment risk. 

Looking Beyond Financial Capital
For Canadians approaching retirement with concerns about money, one strategy may be to look beyond conventional assumptions about retirement age and sources of financial return. A retiree’s resources may not be limited to their portfolio – in Marion’s case, leveraging her remaining human capital balance can transform her financial balance sheet in retirement.

Of course, not everyone has the desire, or ability to work past 65. But in Marion’s case, working past the “normal” retirement age can boost her income security without requiring her to take on investment risk.

Due to the provisions of the CPP which favour older-age workers with low-income histories,  the last five years of human capital turn out to be extraordinarily valuable in generating secure retirement income.

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About Author

Alexandra Macqueen  Alexandra Macqueen CFP®, regularly consults to businesses, organizations and other planners on retirement income planning, annuity analytics, and other personal financial topics. Follow her on Twitter at @moneygal.  

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