Costs are higher. I know you’re not surprised by this statement; I wanted to add some additional context.
- Canada Pension Plan base plan contributions are 5.95% of salary up to $71,300. That puts the maximum dollar amount at $4,034.10 this year. For companies that deduct CPP in the first 6 months of the year, this will reduce your take-home pay by $672.35 per month from January to June. In a household with two employees, that’s $1,344.70 less in the first 6 months of the year. This makes a difference to how you are managing expenses & saving. Depending on your fixed expenses, this is a noticeable amount. This is a 46.8% increase in the 2019 amount. CPP retirement benefits have been increasing, and the maximum pensionable earnings have also increased. This money will come back to you, and it is a noticeable cost today.
- Mortgage rates are higher now than in 2020. Many people have a 5 year mortgage. If you were able to start or renew your mortgage at the lowest rate (for a while in 2021, mortgage rates were less than 2%), you are close to your renewal date. 2020-2021 were also extremely high house prices. When these mortgages renew, the homeowners will have less money to spend on everything else; they may not be able to afford the mortgage payments; or they may extend the amortization to keep their home.
- Cars are more expensive and the auto industry has had a rocky year. The average car price has increased 60% since 2015. This doesn’t include the impact of tariffs and supply chain disruptions, or the EV mandates that currently exist.
I highlight these 3 points because they are all fixed costs that most of us carry. Contributing to CPP is not optional, unless you have a privately-owned corporation and choose to pay yourself dividends. We all need to live somewhere. Most of us need to own a car; Canadian public transportation is sparse in many places.
Fixed costs are difficult to impossible to reduce without significant lifestyle changes.
What does this mean for you?
If you are early in your career, building assets and saving to buy a home, your planning will take your priorities and show you what’s affordable. Most of the clients I work with in this stage want to know how to buy a house and still save for the future, how to manage the cost of children, how to increase their career earnings.
If you are mid-career, have a surplus and have new goals, your planning will show you the various outcomes. What if you buy a larger home or a second property? What if you stop working earlier than you initially thought you would? How much do you need to save to be financially flexible in retirement? How might you be able to help your own kids in the future and still be stable yourself?
If you are later in your career, your planning will focus on how to use the assets that you have in a way that meets your goals and leaves you will maximum flexibility. How you spend what you’ve saved can make a big difference. Which accounts do you draw on first? How to manage expenses and taxes over time? Much has been written about tax efficiency while saving; much less written about tax efficiency in retirement- this matters to you. Timing of CPP matters to you; likely not in the way that you thought.
Whatever stage you are in now, don’t be surprised after you make a financial decision. Planning incorporates all of the environmental information and applies it to your situation. Make confident decisions using relevant information; don't guess.
If this has sparked a question for you that we haven’t covered in your planning yet, please let us know. Email your questions to Lindsay at [email protected] and we’ll cover those at our next meeting.
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