Unlocking the Hidden Value of CPP: How AI Legalese Decoder Can Help Decode Complex Retirement Strategies
- March 2, 2024
- Posted by: legaleseblogger
- Category: Related News
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### Understanding the Importance of CPP in Retirement Planning
When it comes to planning for retirement, many Canadians underestimate the value of the Canada Pension Plan (CPP) as a crucial component of their financial future. CPP is often seen as one of the best retirement assets money can buy, providing a stable source of income throughout retirement. Despite its significance, there is a lack of understanding among individuals about how CPP works and how it can impact their retirement lifestyle.
### Increasing Awareness and Building Knowledge about CPP
To ensure a comfortable retirement, it is essential for Canadians to educate themselves about the benefits of CPP and how it can supplement other sources of income in retirement. By gaining a better understanding of CPP and its various features, individuals can make informed decisions about their retirement planning and maximize the benefits they receive from the program.
### How AI Legalese Decoder Can Help
AI Legalese Decoder is a powerful tool that can assist individuals in deciphering complex legal language often found in CPP documents and regulations. By using AI Legalese Decoder, individuals can easily navigate and understand the terms and conditions of CPP, ensuring that they make the most of their benefits and optimize their retirement income. With AI Legalese Decoder, Canadians can confidently plan for their retirement and secure their financial future with CPP as a valuable asset.
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>A less appreciated aspect of the CPP benefitÔÇÖs contribution to retirement outcomes is that it allows investors to take more risk with their other financial assets, increasing their expected returns without increasing their chances of financial ruin.
This seems obvious when you read it but wasn’t something I had really thought much about.
CPP is a good societal investment, even if itÔÇÖs not an optimized individual investment.┬á
The reality is that people are bad at saving, and this social security net is at least trying to become self funding (it is still mostly pay as you go). 
I think a lot of people on here forget how terribly poor most people are at saving. CPP can really save a lot of people that waited too long to think about retirement.
All you people who think the average Canadian will actually take the money and actually invest it themselves are delusional. Like actually delusional.
Many people are going to paycheck to paycheck that extra money is going to disappear and won’t be invested. Many people also have no idea first thing about personal finance. You may have some idea but the average Canadian doesn’t.
Felix gets to the heart of the matter in the very first line about “scathing replies on Twitter”. The objections to CPP are mostly just based on feelings – a lot of people simply do not want to accept even the possibility that a social program that pools our interests could be a net positive. Full stop. No information about CPP or anything else could possible change their minds. Their minds are closed on the matter.
Why are inflation adjusted annuities not available for purchase privately in Canada?
Personally, I would prefer have mine and my employerÔÇÖs contributions invested in an SP500 ETF for 30-40 years and take whatÔÇÖs at the end. But most people can barely tie their shoes or budget. So call it a win I guess.
> This is an asset that hedges three of the most important risks that retirees face: longevity risk, inflation risk and sequence-of-returns risk. Inflation-indexed annuities are not available for sale privately in Canada.
Except if you die early and cannot collect, spouse and kids might not get what you paid in, much less gains.
I generally agree with Ben Felix, but something about this part:
> When contributors live longer than expected, they gain ÔÇ£mortality creditsÔÇØ from the contributors whose lives ended earlier than expected.
Poor people don’t live as long as wealthy people. This means CPP is a reverse Robin Hood. Obviously not intentional, but it is in fact the result of the program.
Ok I am really sorry to ask, but I might need some exploration here, do I have to opt into the CPP or as the article says am I going to automatically get 33.33% of my pre retirement income?
Yep. An inflation-adjusted annuity, essentially. Valuable if you contributed for many years.
If someone is self employed, and must pay both employer and employee contributions, would it still be seen in the same light?
There was a segment on this in a recent *Rational Reminder* episode as well:
* https://www.youtube.com/watch?v=jwDrUKY_Rcs&t=48m23s
* https://rationalreminder.ca/podcast/291
Seems pretty obvious that anyone who is looking to cash on it soon would say that
It is a very good investment for what it costs you. I have put in $48k over my lifetime and will receive $1400 a month at age 65. As long as I can live to age 68 I have recouped my investment
It is okay. Just sucks that if you die before 65 and never get to use it the account disappears. Would be nice if the money would go down to family.
Or even if it could be used for funeral expenses or something.
I moved to Alberta, and of course they want to leave CPP. ƒÿÑ
Where do we draw the line though? Like I think we all agree with some sorta pension fund for the public, but with recent changes and addition contribution, it seems over the top….. Especially when there not threat of a going concern. If anything deduction should be reduceed.
only problem is IÔÇÖm 26 now and I fully expect the retirement age to be 75+ maybe even 80 when IÔÇÖm near retirement age, and I donÔÇÖt wanna work until then and plus IÔÇÖm not 100% healthy I donÔÇÖt even expect to live past 80, or at least be mobile enough to enjoy retirement when IÔÇÖm at that age. so IÔÇÖd rather have the money now to invest it myself, i donÔÇÖt need the gov, wish thereÔÇÖs a way to opt out of it somehow
Dirty little secret is that if you don’t work a day in your life, your GIS will be the same amount or more than the CPP. People in lower paying jobs don’t have much of a difference in retirement income after working 40 years!
Not great for a personal investor. See it as a tax, could do better investing my and my employers contribution myself annually.
No shit. Honestly I wish I could put way more into CPP for more stable returns on retirement rather than gambling on stocks myself.
This is just Ben Felix being Ben Felix : the king of bears.
Here are some numbers and i would LOVE someone smarter than me to show me where im wrong here. Yes, the fund itself has great returns. but as a contributor and beneficiary, you receive no direct benefit from the performance of the fund. Your return can only be calculated through money in and money out (contributions vs withdrawals). I think it is absurd that people talk about the cpp fund earning 10% per year being a good thing, when really it serves as a slap in the face of the people who dont actually get a personal return of 10%, which makes the actual return of the fund irrelevant under the current CPP pension structure.
Here are our assumptions: Enhanced CPP Claims you can boost your retirement benefit earnings by 50% in the future by maxing out not only the base cpp, but also the enhancement. Current CPP benefit is 1350$ per month max. which means the enhancement will in theory max out at 2025$ in todays money. We will look at someone who is 20 and just landed a job that will see them maxing out CPP this year, and all future years to get that 2025$ in real today dollars, and we will assume a long term average inflation rate of 2.5% for both the contributions into CPP every year, and the benefit payments out of CPP in retirement. current CPP max payment is 8000$ for 2024. and the CPP fund proudly boasts about how their long term average returns are 9.6%. And we will assume the average life expectancy to be 85.
So if contributions are 8000$ every year for 40 years (from age 20-60) and that money grows at 9.6% as CPP is constantly bragging about, AND that 8000$ contribution is indexed each year to increase at 2.5%, you would be at 4.2mil$. So in theory, based on the actual contribution limit and the actual stated fund returns, your lifetime CPP contributions would be worth about 4mil$ at age 60. And at age 60, with 2.5% average inflation, the CPP enhanced maximum benefit would have grown from 2025$ to 5440$. (and, to give CPP the benefit of the doubt, we will use the full 5440$ at age 60, which in reality that number would actually be lower since the full 5440$ is what you would get at 65, so we are already cheating a bit in favour of CPP). so if you start withdrawing 5440$ a month (65,280$ per year) at age 60, and index those withdrawals at 2.5% every year until age 85 on average, you will have withdrawn a cumulative indexed nominal total of 2.3mil$ from CPP. So even with some generous assumptions in favour of CPP, in this scenario, you will still BARELY ever on average withdraw HALF of your entitlement at age 60. And this assumes that the 4mil$ entitlement doesnt grow for the next 25 years (which it obviously does). so in reality, if you account for your principal to also grow for 25 years in retirement, you would retire at 60 with a 4mil$ entitlement in the CPP fund, you would withdraw from it for 25 years for a total of 2.3mil$, and your remaining balance at death would be 31,000,000$. THIRTY ONE MILLION DOLLARS. so when you die at age 85, the money you contributed to CPP at their quoted return of 9.6% per year on average would grow to 31 million dollars LEFT OVER after all your withdrawals. this is the math that makes your actual return (which is the benefit payout at retirement) look terrible. And i would love for someone to show how any of these numbers are wrong because it looks like you get absolutely hosed for 95% of the money you are entitled to. and again this is assuming you get the full age 65 payout early at age 60, so in reality CPP looks even worse when you factor that in. this is simply how much money you contributed, compounded at the rate the CPP fund claims it regularly achieves, and extrapolated out 65 years until death. you would on average have received 2.3mil$ in benefits and there would be 31mil$ left over that YOUR contributions grew into that you never received.
Lets artificially manufacture a worst case scenario for a retail investor who doesnt pay into CPP and instead invests on their own, and make it as pessimistic as possible just to show how bad CPP is. Lets say you have someone who saves 8000& every year into an RRSP and NEVER increases their payments, just 8000$ a year static investment for 40 years. and say they get a very modest, conservative return of 7% every year. At age 60, this will be worth 1.6mil$. lets assume at age 60 when they retire, they switch their investments to an ultra conservative allocation where they only earn 4% during retirement to be safe. in this scenario, you would be able to get the 5440$ ammount per month until age 85 and still have 600k left over. You could continue withdrawing until beyond age 90 too for extra safety. (which is more than you would get from CPP at 60 but we are trying to give CPP every possible advantage just to be nice). in this scenario, someone who earns below average, conservative returns for 40 years (CPP brags about much higher returns), who never increases their retirement contributions (CPP requires an increased contribution every year), who switches all their assets to ultra stable, low growth income funds in retirement (CPP doesnt do this because a pensions fund SHOULD have the advantage of averaging everyone out and continuing to invest in long term growth equity as their investment horizon is much longer than that of any individual), and you are still better off with an RRSP. even with everything biased in favour of CPP, this below average scenario for any average investor crushes the inflated, biased version of CPP we are comparing it too. in reality the RRSP would be even better. again i would love to see any reason why any of these numbers are wrong in a way that flips the script and shows CPP actually wins.
again, i would love some real, honest, constructive feedback on why i might be totally off base here. because it seems pretty grim when i ran the two scenarios. If you invest on your own and earn even 8%, your retirement could pay you out nearly double what CPP returns to you as an individual. Ive tried to make sure every assumption that I have to make is biased in favour of CPP to give it the best chance, and even with all the assumptions going against the retail investor, the retail investor still destroys CPP.
If you want to justify that CPP should pay some people less in order to subsidize and redistribute retirement wealth as a sort of ‘tax’ that takes money from those who pay a lot into CPP and gives it to lower income people to supplement their CPP and redistribute the funds, thats an entirely other discussion that I could totally get on board with. If you pay 8000$ indexed into CPP for 40 years but dont get your monies worth because that money is taken and redistributed so everyone gets a better retirement, im okay with this. absolutely. and we can have that discussion. But that does NOT justify or pertain to the notion “CPP is one of the best retirement assets money can buy” because YOUR return on YOUR dollars are terrible as that money is taken and redistributed. which again, is another discussion that i might even agree with. but you cant use that to justify why CPP is a good investment as an individual, and that it is money well spent for an individual for the purposes of retirement…if that money is largely taken and given to other people. As a social service, that is fantastic. but as a return on your money, its horrific.
And this doesnt even touch on the fact that the CPP fund actually benefits from a lot of advantages that large pension funds have over investors, like that fact that they dont have to hedge against longevity as much as a retail investor does, because for every person who lives to be 100 and withdraws more than their fair share, there is someone who dies at age 59 and never withdraws a penny. As an individual investor if you pass early, your wealth can be used and inherited by others, whereas in CPP that money could vanish into thin air, which is ANOTHER drawback of CPP.
If it is that good, let me opt in and opt out as I please instead of forcing me into it. I’d rather have the assets listed in my name and decide on my asset mix.
Yet another tax really
Last time I did the math, if a male lives to his actuarial age at death, the real rate of return is -0.8%. For females it was around +1.3%. That’s accounting for ALL of the CPP contributions (employer+employee).
It’s basically an inflation-adjusted savings account. It’s NOT a good asset. It’s a colossal waste of money.
And it’s a Ponzi scheme on top of that, since it’s only partially funded and relies on future generations picking up the tab to get your payout.
CPP sucks for small business owners but pretty great for everyone else.
It’s a bad deal full stop. People who say otherwise can’t do basic math. I guess if your a boomer and maybe older gen x it’s great but I’m gen z so my real return is going to be 2-3% which is dog. People need to say it how it is and stop with the BS.
The state takes it away from you when you die. That makes it a terrible investment.
Yeah, no. If you die and your next of kin get $2,500 after a lifetime of payments, that’s not a good thing. Also, he clearly does not factor in the employer side of the contributions.