In this episode, we discuss the 4% Rule and all its intricacies… and rename it the 4% Assumption! Listen in as we turn this core FIRE concept inside out… and leave you with thought-provoking questions, answers, and observations.
References
Great article laying out the 4% Rule in easy-to-read terms: https://fourpillarfreedom.com/the-trinity-study-updated-for-2018/
Chrissy mentions Mr. Money Mustache’s optimistic view of the 4% Rule: https://www.mrmoneymustache.com/2012/05/29/how-much-do-i-need-for-retirement/
Chrissy mentions that more equities is safer, referring to Ed Rempel’s article here: https://edrempel.com/reliably-maximize-retirement-income-4-rule-safe/
Chrissy and Jason mention Michael Kitces’ The Extraordinary Upside Potential Of Sequence Of Return Risk In Retirement
More insight into “Lean” and “Fat” FIRE: https://www.financialtoolbelt.com/resources/blog/personal-finance/differences-between-lean-vs-fat-fire/
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This was a really great show and I love a lot about your interpretations of the 4% assumption!
BUTTTTTT, I got so stuck on the CPP comment! I know it was really only a passing sentence, but I take issue with the thinking that CPP isn’t sustainable and probably won’t be around when Gen X/ Millennials retire. You’re certainly not alone in thinking that, a recent survey showed that 2 out of 3 Canadians feel the same way, but its just not true! I’ll try to organize my thoughts so this comment doesn’t end up being a whole book haha
In 1997 there was a *huge* overhaul to the CPP payment system when the flaw was discovered that perhaps it wasn’t sustainable. At that time, the government increased CPP premiums and set up several fail safes to make sure that CPP will be around for generations to come. They increased the premiums so much that not only does it pay for everyone currently collecting CPP, but it also builds a buffer each and every year so that in times of hardship when the population isn’t paying in enough (hasn’t happened yet but is predicted in the future), then there will still be enough money to pay out.
Additionally, they created the CPP Investment Board (CPPIB), which invests the funds in a variety of investments throughout the world, and it has done pretty well. Over the last 10 years it’s average rate of return on investments was 5.7%, over the last 5 years it was 10.4% – that’s all money that’s going to continue compounding for the benefit of Canadians that won’t even begin collecting it for decades.
Finally, they created the Chief Actuary, which is an independent body that reviews the CPP finances every 3 years to make sure that things are on track and remain sustainable. Their last report stated that they are confident with current CPP amount of money invested and population trends, payments are sustainable until at least 2090 – and that’s without increasing contributions or scaling back benefits. That’s a long time! Certainly enough for my lifetime and I’m in my 30’s. Also, that was based on them predicting that the CPPIB gets an average return of 4% after inflation, which most financial advisors would agree is sustainable and attainable.
Andddd finally – how can you guys say that CPP isn’t worth much and not worth including in your FIRE calculations? Maximum benefits currently sit at over $1K each month. Last year, the Liberals introduced new legislation that increased contribution rates and made CPP *even more* sustainable, and will increase max CPP benefits to over 20K annually for future generations. That’s not chump change!
I mean sure, there are government benefits that I wouldn’t want to rely on or count in my FIRE number. OAS & GIS could technically disappear with the whim of a fickle government (though really, what politician would be unwise enough to anger the largest voting population?) – but CPP is safe. Super safe. And if ever it started to show even the slightest crack in the armour, the Chief Actuary would catch it and correct course literally 70 years before it had any effect. I think that’s good enough for me 😉
Love this podcast so much, it really delves into fascinating subjects and makes me fire up the ol’ brain machine to think things out in detail that perhaps I haven’t given enough attention to in the past. Keep up the great work!
EEK! I knew this remark would come back to haunt me! Megan, you are of course right but I’d like to clarify my stance (even if that differs from what I said – I’m human people so I’m willing to change!) I think the CPP is one of the most sustainable pensions in the world, the active management has proven over and over again that they can get high returns for Canadians – no argument that the money I’ve contributed so far will be there for me at 65.
What I will say is since I am 29 years old and I will be FIRE’d in my early 30’s, the CPP is irrelevant. Under no circumstances should I build the CCP into my retirement plan – How the hell could I even reliably calculate 30 years of existence with who knows how much income (therefore, contributions) and what changes will be made to my future or to the CPP’s future? There is no way of knowing and as it stands now my contributions for the last 11 years of employment aren’t going to be worth ALL that much – I’m relying on my own portfolio to see me through the years. Even that can be foggy, like I said without a crystal ball I don’t really know if my own portfolio will season the storms. I’m assuming it will but I don’t want to rely on employment (and therefore contributions to the CPP) to do so.
Thank you so much for the constructive criticism! You’re a wealthy of knowledge clearly… when are you coming back onto the show??
You’re so right, it feels impossible to predict that far in the future! All hope is not lost though, you can get a reasonably accurate prediction of your cpp eligible amount by logging onto the “my service Canada” government website. They take all of your contributions so far and tell you what you’d be eligible for at ages 60, 65, & 70. Worth a gander if you’re ever curious how much you’re “worth” at this point. I’m 34 and worked only part time for the last several years and my payout at 60 is still calculated at over $400 a month – that’ll pay a lot of bills!
With that said, you’re totally right that in all those years it’s entirely possible there could be changes to the program that affect when/how/how much you collect. It’s simply too far away to *really* count on the money. But still, it should play into your calculations somehow…. I’m just not sure exactly how. Maybe you guys should have an episode on figuring that out! Surely this isn’t the only asset people will have trouble calculating. Personal pensions, the sale of real estate…there’s got to be more. How can one reasonably and responsibly predict values for things that might be 30, 40, 50 years into the future? It’s a real thought experiment.
That’s a fantastic idea – I think this information would be really valuable to highlight the early retirement scene in Canada. I suspect I will retire earlier than most so I might make a good case study for how CPP will influence that decision. Somebody FIRE’ing in their 50’s should certainly count CPP into the calculations. This is really valuable math that should be episodes in the future, although I’m not committing to anything yet – we got our hands full with FI School and online meetups at the moment. Stay tuned!
I didn’t know all this about CPP until recently. The myth that it’s an unsustainable program is one that most Canadians seem to hold.
Thank you for taking the time to leave such an informative, helpful comment. Hopefully, with you and others sharing your knowledge, more Canadians will realize the value and long-term sustainability of CPP.
Absolutely! I wouldn’t even really call it a myth, at one point in time (the 90’s), it was completely true that it was unsustainable and headed for failure. Fixing CPP was one thing the government got right, and we can all be thankful for that!
And really I don’t even think it’s terrible that people think they can’t rely on it. I mean, if the general population thinks they won’t have anything to fall back on in their old age then maybe it will motivate them to save more now? Wishful thinking perhaps.