Originally Posted by Locke
Heres a question to you regarding the self-employed:
Many self-employed individuals pay themselves via dividends for tax purposes, however one of the drawbacks to that is that people who strictly earn dividends dont contribute to CPP or generate new RRSP room and thus wouldnt be eligible to collect, or would collect less, CPP upon retirement.
There are tax-planning alternatives to counter this but what would your advice be? Is it better to maintain strict dividends and effectively opt out of CPP because individuals can invest and plan for their own retirements better than the Government can? What value would you place on the certainty or guarantee of CPP?
Sorry for the delay here because I know that you posted last week and I wanted to answer but give a reasonable response. Its a tough question in some ways, but here are a couple considerations. First of all, CPP is indexed and while not fully guaranteed I'm of the opinion that it would be political suicide for a government to just stop the payments. At this point it looks sustainable and lets go on that assumption.
If a guy was retiring today and collected the average CPP payment he would get about $640/month. Over 30 years (lets say that puts him at 95 years of age) that means he collects about $230k, which is a decent chunk of money. While its indexed though, you still have to discount it back and I used the figure of 5%....you can disagree with that figure and there are some reasons it might not be the right figure to use, but this is fairly rudimentary! I come to a value today then of about $118k. So essentially what that means is that that if you were making a decision on whether to take that income stream of $639.44 per month for 30 years, or take a lump sum you would want $118k to keep things even.
So to equivocate that a person on their own would have to save about $1250/year based on a 7% average rate of return for 30 years; its definitely doable. So when you look just at that figure you might think its not really an advantage; save $100/month on your own for 30 years and you're all set. To me there are a couple issues. First being that some people (a lot) won't actually save that money. Second, what people need to do is save more than the $100 because $640 indexed isn't enough to live on...so they should be saving 3-4x that figure in a lot of cases and particularly if they aren't going to use CPP.
I have to point out though that I'm using averages and making a lot of assumptions here. People shouldn't really base their life savings or life savings plans off this post! I think its relatively accurate, but if you choose to take this as gospel and wind-up eating cat-food in your retirement don't blame me.