Friday, September 14, 2012

Rule #16 Plan on Financial Independence without CPP

(Note: FYI, this post is mostly relevant in Canada as it talks about the Canada Pension Plan. I am not familiar with other government run pension plans in other countries but I would bet many of the points I raise here are similar.)

I generally don't trust that the government will do what is in my best interest.  I am usually skeptical of any incentive that they offer us as citizens and taxpayers, and I usually challenge whether whatever they are "offering" is truly good for me and my family or not.  I value my freedom and don't take kindly to being coerced or forced into doing things I don't like or want.  An example of this is the Canada Pension Plan.

The Canada Pension Plan takes 4.95% of your first $42000 of earned income and sends it to a government office to manage your money for you.  Thats about $2000 a year.  If I am an employee, I am required to pay into it annually. I am not permitted to opt out of it.  To us, this a bad deal.  The other kick in the teeth is that your employer has to match your contribution... so there is about $4000 per year being funnelled into the CPP each year per employee making over $42K.  But Ryan, why wouldn't you want a government managed pension?  The government has decided to look after you, isn't that a good thing?  No, it isn't.  Not for us.  I would rather manage that money myself.

The maximum amount that CPP pays you if you were to retire in 2012 in before-tax dollars is $986.67 monthly. Not much, eh?  You have to be aged 65 and have worked 40 or more of those years, while maxing out the contributions, in order to qualify for the max pension.  If you didn't make the max contribution, your amount goes down. If you take your benefits early at age 60, your amount goes down.  If you didn't work 40 years or more, for whatever reason, your amount goes down.  Now me, I went to Graduate School so I didn't start working 'til I was 28.  I've also taken two Leave of Absences to be with our boys when they were born.... So fat chance I'm going to get the full $987.  My wife always planned to take some time off and raise our kids so odds of her making that maxed amount is also nil.

There are some other reasons why I am not a fan of the CPP.  If you are single and you die before you are old enough to collect a pension - age 60 I believe for a reduced amount for example - no residual value is left to your estate or your heirs.  If you die the day after your first pension cheque, your surviving spouse may, from what I understand, get up to 60% of it, but if you have no spouse or they have already died, poof your pension is gone.  Again, there is no residual value to pass on to your heirs.  Its essentially an insurance plan that the government forces you to pay into... and not a very good one at that.  You will have paid into if for all those years and gotten very little or none of it back if you expire early.  I can think of a better way to use my own $2000 per year AND have some residual value left over.  Remember Mr Gunter?

When I look at the CPP, I see it as a retirement savings vehicle for people who are not savers.... and to some extent another example of the government encouraging people not to take responsibility for their own well-being.... Or, as in our case, the government not letting people take care of themselves.

When we started planning our finances years ago, we looked at the above CPP conditions and said to ourselves "These are way too restrictive!" For one, we won't be working 40+ years.  If one or both of us want to take a few years off here or there, that small amount gets smaller and smaller.  Then we said "Do we really want to work continuously 'til we are 65" The answer to this was a resounding "No."  Its not to say that we won't work 'til 65... or even beyond... It was that we would be required to work that long because the government would be holding this carrot over us to make us continue to work.  "Screw That!"  So our plan is to make sure that we can look after our monthly liabilities without relying on the government managed CPP. We plan to stop working when we want, if we want.... not because we were forced to work until a certain age. When making up our master plan, CPP doesn't even factor into it.

So our solution is that we plan our finances as if there will be nothing in CPP for us when we get there. If there is anything for us in CPP we would take any benefits into a system that we were forced to pay into, regardless or how poorly it fits for us.  Based on our plans we expect to be just loose change.

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