There’s a large subsection of the Canadian population who believe that the Canada Pension Plan won’t be around when it’s time for them to retire. Thus, retirement projections for years have told people to save enough so CPP isn’t needed. But is that really prudent?
On the one hand, it’s smart to plan for all sorts of contingencies. There are going to be all sorts of curveballs that come up in your life between now and crapping your pants in a nursing home, and having extra money is a good way to plan for almost all of them. You can pay people to do just about anything, most of which I’ve tried. God, I’d love a butler. And a chef. I know Buffett’s wife is basically his butler and chef, but man I’d have more fun than he does if I was a billionaire.
Sorry, got distracted there.
As much as crazy frugal zealots would like us to, most people reading this blog are not going to be in the position where they can save 50-75% of their income. Most people want a reasonable (read: big) house, two relatively new cars in the driveway, and to take an annual vacation somewhere warm while dropping off the kids at Grandma’s. They want that because everyone wants that, and talking the average human into not spending up to the level of their peers is about as effective as Pete Carroll’s play calls late in the 4th quarter. (SCORCHING AND ALSO TOPICAL)
So most people don’t really have the spare cash to squirrel away towards retirement. This is why I get a little frustrated when the solution to a potential retirement problem is “save more.” Well, duh. I wouldn’t really rate that as very helpful advice.
These days, the average Canadian past 65 can expect about $600 per month in CPP, as well as $600 in Old Age Security, which is basically welfare for poor old people. Your OAS starts to get clawed back at $72,000 per year, vanishing completely if you make $115,000 per year. There are also additional social programs for old people who basically have nothing but those two income sources. We’ll ignore OAS for this post, because we want to be conservative.
First, let’s figure out just how much you’d have to save to replicate $600 per month from your own savings. Based on a 4% withdrawal rate, $7,200 worth of retirement income would need a nest egg of $172,000. Assuming you’re 31 year-old Nelly and you want to save that much extra by retirement age, here’s what you’d need to do.
Remember, $180,000 is worth $360,000 34 years from now. Go check out last week’s post if you don’t believe me.
You’re looking at close to $200 per month for the next 34 years to replicate what CPP is going to give, and that’s assuming that you can do as well investing as the Canadian Pension Plan Investment Board can. We all know there’s a tiny (read: very large) chance of you underperforming the smartest minds in the business. Maybe you better put aside $300 per month just to be safe, plus the $13,000 per year I told you to put aside last week to get a nest egg worth $1.5 million in retirement in today’s dollars.
Hopefully you can begin to see how planning for all these contingencies starts to get expensive. The average family doesn’t have thousands of dollars each year getting pissed away. I don’t care what Mr. Money Mustache tells you.
So let’s take a closer look at CPP. Fortunately, the CPP investment board does just that for us.
Current assets are about $223 billion, and are projected to keep growing until 2022. At that point, the government will start to slowly liquidate assets in the fund, which is mostly offset by contributions made by working saps like you and me. Since the assets are projected to grow faster than liquidations (if you grow assets by 7% a year and only withdraw 1-2% a year, you’re still going forward), the plan is actually projected to get stronger as time goes on, not weaker.
Read the whole report here, but be warned. It’s pretty long.
Even if CPP runs into issues, a full-scale cutting of benefits to retirees is about as likely as my Taylor Swift and Katy Perry threesome fantasy. The government can increase the age needed to take benefits, which it has already done once before. It can also increase contribution requirements, which are currently set at 9.9% of your salary. Finally, the Feds can encourage immigration to help fix the demographic problem. There are so many solutions that aren’t “throw up your hands as the program collapses.” The people who believe CPP is on the verge of collapse are no better than 9/11 truthers. BOOM ANOTHER PETE CARROLL JOKE I’M RED HOT.
I didn’t want to wait until retirement to be financial independent, so I saved my ass off during my teen years and twenties. If you’d rather enjoy life now, that’s your business. You should still be saving for retirement, but I think you can still plan on CPP being around. I’d plan for a reasonable retirement using your own means, and then look at CPP cash as your play money. That way if you come up short with the other stuff, CPP can save your ass.