The Math is Straightforward

The Math is Straightforward

 

I am often the odd duck in the room.  I regularly find myself surrounded by advisors debating the answer to any given problem and invariably there is an argument of opinions.  But I’m a math guy in a financial world, so opinions are not productive and mostly irritating.

In our CFP class last week we were looking at a question about the Canada Pension Plan (CPP) benefit.  The question was… at what age should Mary start receiving her CPP benefit: 60, 65 or 70?

The class started offering their answers and were somewhat evenly split between the 3 options.

My answer is always the same:

You don’t have to guess, do the math.  The numbers are the numbers are the numbers.

So I did a spreadsheet.  It took 5 minutes.

There are some variables so we build them in as variables.  In this scenario we had to determine an interest rate that represents what you would earn on the payments that were received early (called the time value of money) and that number could be inputted as anything from 0% to 10%.  I used 3%.

The other variable is age at death.

So the spreadsheet says… If you die age 75 or earlier, start your CPP payments at age 60.

If you die between age 76 and 85, start your CPP payments at age 65.

If you die after age 86, your best option is to defer your payments so they start at age 70.

Now you can make a decision armed with the math.  It’s a better way to make financial decisions.  Is it perfect?  No, but it sure beats the opinion of someone who doesn’t know the math.

3%
CPP Start Age
606570Accumulated Values
60768791
617681,606
627682,445
637683,309
647684,200
657681,2005,1171,236
667681,2006,0612,509
677681,2007,0343,820
687681,2008,0365,171
697681,2009,0686,562
707681,2001,70410,1317,9951,755
717681,2001,70411,2269,4713,563
727681,2001,70412,35410,9915,425
737681,2001,70413,51612,5577,343
747681,2001,70414,71214,1699,318
757681,2001,70415,94515,83011,353
767681,2001,70417,21417,54113,449
777681,2001,70418,52219,30415,607
787681,2001,70419,86821,11917,830
797681,2001,70421,25622,98820,120
807681,2001,70422,68424,91422,479
817681,2001,70424,15626,89724,909
827681,2001,70425,67228,94027,411
837681,2001,70427,23331,04429,989
847681,2001,70428,84133,21232,643
857681,2001,70430,49735,44435,378
867681,2001,70432,20337,74338,194
877681,2001,70433,96040,11241,095
887681,2001,70435,77042,55144,083
897681,2001,70437,63445,06447,161
907681,2001,70439,55447,65250,331
917681,2001,70441,53250,31753,596
927681,2001,70443,56953,06356,959
937681,2001,70445,66755,89060,423
947681,2001,70447,82858,80363,990
957681,2001,70450,05461,80367,665
967681,2001,70452,34664,89371,450
977681,2001,70454,70868,07675,349
987681,2001,70457,14071,35479,365
997681,2001,70459,64574,73183,501
1007681,2001,70462,22678,20987,761