Navigating Financial Transition: Disability Payments End, CPP Reductions Loom
Mark, a Canadian approaching 65 in less than two years, faces a significant financial shift as his disability payments due to a chronic illness will soon terminate. Concurrently, his Canada Pension Plan (CPP) payments are set to be reduced, though this decrease should be partially offset by Old Age Security (OAS) benefits. With savings and annuity payments in place, Mark seeks expert guidance on budget planning and asset allocation to navigate an uncertain life expectancy.
Understanding the Financial Challenge
Financial advisor Allan Norman, who has personal experience with disability through his wife's mild brain injury and CPP disability collection, emphasizes the difficulty of managing finances while single and disabled. He stresses that taking control of cash flow is paramount for Mark and individuals in similar situations. Budgeting, while useful for specific goals like vacations or renovations, often proves challenging for daily life due to the discipline required.
Implementing a Cash Flow Management System
Norman recommends adopting an automated cash flow management system, such as the Certified Cash Flow Specialist Program for financial professionals. This system is designed to control spending, free up funds, and operate on autopilot once established. The process involves categorizing expenses into two distinct groups:
- Working Cash Flow (WorkingCF): These are fixed, necessary expenses with no risk of overspending or emotional pull to spend more. Examples include phone bills, hydro, fuel, and debt payments. They are easily automated and typically represent needs rather than wants.
- Active Cash Flow (ActiveCF): These are variable expenses often driven by emotional desires, such as entertainment, vacations, and some groceries. They are harder to automate and require careful monitoring to avoid overspending.
Practical Steps for Financial Stability
After listing and tallying expenses in both categories, calculate weekly spending for WorkingCF and ActiveCF. Determine your weekly take-home pay and aim for ActiveCF expenses to constitute 20% of this amount. If financial strain is severe, consider reducing this to 15%. To automate the system, set up two bank accounts labeled WorkingCF and ActiveCF. Deposit income into the WorkingCF account to cover all WorkingCF expenses, automating payments and avoiding ATM withdrawals. Attach a credit card to this account for expenses like gas that cannot be automated, ensuring it is paid off monthly. Each week, automatically transfer 20% of your weekly take-home pay to the ActiveCF account for discretionary spending.
Asset Allocation for Uncertain Life Expectancy
With an uncertain life expectancy, asset allocation becomes critical. Mark should diversify his savings and annuity payments to balance growth and security. Consulting a financial advisor can help tailor a strategy that accounts for his chronic illness and retirement timeline, ensuring his resources sustain him through potential longevity.
By mastering cash flow management and optimizing asset allocation, Mark can transition smoothly from disability benefits to retirement income, mitigating the impact of CPP reductions and securing his financial future.
