Episode 301 - Optimal Government Pension Claiming, and Life Well-Being w/ Prof. Meir Statman

Benjamin Felix

This is the rational Reminder podcast, a weekly reality check on sensible investing and financial decision making from two Canadians. We're hosted by me, Benjamin Felix, and Cameron Passmore, portfolio managers at PWL Capital.

Cameron Passmore

Welcome to episode 301. I don't know about you, Mark, but we sure got a nice dose of spring this week in Ottawa. We got like low twenties yesterday. It was beautiful. What's it like out there?

Mark McGrath

Spring here comes in fits and spurts. So we get a beautiful day and you're like, finally, spring's right. We've got a big cherry blossom tree in our front yard and it starts blooming and you're like, aha. Finally. And then the next day it's four.

Degrees and pouring rain all day. You never know what the weather's going to be until like June, July, August. Pretty confident it's going to be nice the rest of the year. No idea. It's so funny.

Cameron Passmore

I'm from Quebec, moved to Ontario. Ben's from BC, moved to Quebec. And Mark, you're in BC. Born and raised. So, Ben, you're like, the average of.

Meir Statman

The two of us somehow been wearing. My masters hat this week. It's masters a week. Should be fun to watch. Also, eclipse week.

Benjamin Felix

Did you guys catch the eclipse? No, it was cloudy and rainy, and. I don't think BC got really a good glimpse of it. Anyway. All right, one of the most popular questions I think we've gotten over all the years.

Cameron Passmore

Ben, you're diving into it this week. Why don't you tee that one up? We're going to talk about the best time to claim your Canada pension plan CPP benefits. And if any non canadian listeners are rolling their eyes, that we talk about are broadly applicable. Not directly and not.

Benjamin Felix

The details don't necessarily translate. But I know for Social Security, for example, there are a lot of very close analogies. And I posted a YouTube video on this, and people from other countries have chimed in, saying, even though this is canadian, it's relevant to me in the UK or whatever. Don't be deterred by its canadian ness. Exactly.

Cameron Passmore

Also this week we have a conversation with our longtime friend and returning guest from episode 258, Professor Mayor Stapman, who just released his terrific new book, a wealth of well being, a holistic approach to behavioral finance. And of course, the three of us will just sit around and shot for the two people that remain in the after show. I did want to mention before we kick off the episode that someone mentioned to me recently that they went to speak with a different firm, not PWL. They wanted to hire a financial advisor, but they didn't come to us. The reason being that they didn't think that they had enough investable assets to work with PWL.

Benjamin Felix

And we don't have a minimum anymore. We eliminated that. I don't know. A year ago, Cameron more or less. We used to have minimum.

Everyone in the market thinks we still have a high minimum. We don't have minimum. We're willing to talk to anybody. It doesn't mean that we'll take everybody on as a client, but we're willing to have a conversation. And we've eliminated any concept of a hard minimum.

Like, we won't talk to you unless. You have a certain amount of money. So I just want to make sure listeners are aware of that because I still see it come up online fairly often. And someone told me that they thought the same thing recently. It's such a tough problem.

Mark McGrath

You want to help everybody, but economically, as a business, it's not always viable. Like you said, there's not a hard line in the sand. At the same time, there are certain relationships that we can't take on because it's not going to make sense long term. But I've always said I never say. No to a conversation.

So I think if anybody's listening and. It'S just PWL curious if you will then reach out. Yeah. We're not prepared to jam products that might compensate us just to make ends meet to provide that service. So it's for good reason all the way around.

Cameron Passmore

Cool. Okay with that, let's get to the episode.

All right. Welcome to episode 301. Ben, take it away. All right, so we're going to try and talk through when you should claim your Canada pension plan benefits. It's a meaty topic.

Meir Statman

Hopefully people are okay with it. It's meaty, but it's so great. Like I told you before we started recording, it's nice to get this all in one spot. The Canada pension plan benefit is one of the most valuable retirement assets for most Canadians. But the thing about it is that its value can change pretty materially depending on when the benefit is taken.

Benjamin Felix

And we'll dig more into what that means in a minute. This makes planning to get the most out of it a really valuable exercise. Now, the good news is that there's research at the intersection of financial planning and actuarial science that provides a lot of insight into how to optimize the CPP timing decision. I do think this is one of. The most consequential financial decisions that retirees in Canada or in other countries, as we mentioned in the introduction, will make the difference between a good choice and a bad choice, can measure in the hundreds of thousands of dollars on expectation, like hundreds of expected lifetime income.

That's one of the tricky things about this, is that you can make a good decision based on your expected lifespan, but people always bring up the case of if I die the day after I start my pension, I'm going to get nothing. We'll talk about that framing more later and why that framing can be problematic. But anyway, we're talking about maximizing expected lifetime income. And one other thing that I want to say, because this came up a bunch in the YouTube comments and on Reddit, is that this is not about deferring consumption. It's about funding consumption with other assets.

We'll dig into this more in a minute. I just want to make sure people understand it before we start digging into it. We're talking about funding. When we say deferring the CPP benefit, we're talking about funding consumption with other assets. So if you have rrsps or taxable investments or whatever funding consumption with that to allow you to defer your Canada pension plan benefit, which gives you a larger benefit later, the effect of that is that you get to spend more overall throughout your life.

The comment that I saw come up on YouTube and on Reddit was that I don't want to defer my consumption to later. I want to spend it now. That's wrong. That's not what we're talking about. We're not saying don't spend your money now.

We're saying spend your savings now to defer your Canada pension plan benefit to later so that it is larger, which allows you overall to spend more throughout your life. We're not saying spend less now and more later. Want to make sure we got that out of the way. So we'll start with some fundamentals. The CPP benefit, this is really important stuff.

And honestly, I didn't know this level of detail until relatively recently when I took on a project to model exactly how CPP works because I wanted to calculate the tax on the contributions. Anyway, that project gave me a deeper understanding of how all this stuff works, but I don't think that this is common knowledge. So the CPP benefit is calculated as a percentage of this thing called the maximum pensionable earnings average. The MPA is the average of the trailing five years of the YMpe, which is the yearly maximum pensionable earnings. Now, there are a lot more acronyms coming up.

Meir Statman

Sorry, we're with you. The other thing that happened recently is that CPP is going through these enhancements and the enhancements have introduced this thing called the Yamp. That's the additional maximum pensionable earnings. So, historically, before these enhancements, the maximum CPP benefit, what we would today call the base CPP, was 25% of the MPEA. With the enhancements, we're moving from 25% replacement rate on the MPEA to 33.33%.

Benjamin Felix

But of what is the question? So that's one of the things that's a bit tricky to explain. So the way the enhancements break down, there are two additional cpps. Because they had to make this as confusing as possible. They didn't just make one enhancement, they rolled out two separate enhancements that operate differently.

So first additional CPP, the maximum, once it's fully implemented, it'll be 8.33% of the MPEA. So that gives us 25% base CPP plus 8.33% 1st additional CPP. So now we're at 33.33% replacement of the MPEA. And then the second additional CPP, maximum benefit, once it's fully implemented, it is 33.33% of the MPEA adjusted difference between the Yampe and the yMPE. Let me explain what that means, though, because it matters.

I agree, it's ridiculously complicated. No, I think we got it. It's just so many acronyms. That's ridiculous. I was reading your notes yesterday, Ben, and I had to reread that section multiple times just to make sure I understood what you were talking about.

Mark McGrath

I'll let you finish, but I think big picture, the idea is that for a certain level of income and below, old CPP is meant to cover a quarter of that income. The enhancement is going to cover a. Third of that income up to a higher limit. Yeah. In very simple terms, what's happened with the enhancements is that they have increased the ceiling of income that will be replaced and they've increased the replacement rate.

Benjamin Felix

Functionally, how that happens is pretty complicated, but in very simple terms, that's what they're doing. Anyway, I was going to pre explain some of that to make sure it was super clear, but I don't know if it's necessary. I think that simplifying explanation, big picture is all that really matters. Now. The other thing is the additional CPP benefits for somebody retiring today are relatively immaterial.

They'll be there. Anybody that's made contributions in the last few years, they'll get some of the enhancements, but these won't be fully implemented until 2064 at 33.33% replacement rate. That's not going to be there until 2064. Somebody retiring today. Base CPP is going to be the bulk of what they're getting.

But the important point of talking about all that, about how the benefit is calculated, is that when you start CPP, the initial benefit is calculated as a percentage of the MPEA or the MPA, plus the additional MPA stuff that we just talked about. But it's based on that number. Now, those figures, the MPEA, which is based on the Y Mpe and the y m pe, is indexed to wages, to Canadian wages. You go back and look at wage growth, or the wage growth figure that Canada pension plan uses for indexing. It is outpaced inflation by about 1% per year on average since 1973, I.

Meir Statman

Think is what I have data going back to. So you're getting a percentage of this thing that's growing at wage growth. Now, once the benefit starts. So in the first year that you take the benefit, your amount is calculated based on the MPA, a percentage of the MPA. Once you start taking the CPP benefits, they are indexed to the consumer price index, the CPI, all items index.

Benjamin Felix

So those two different indexing indexing figures are important. The main point, though, CPP is initially calculated based on the MPA, which is indexed to wage growth. Once you start taking payments from Canada pension plan, your payments are indexed to consumer price inflation. I think you mentioned wage growth has. Traditionally been higher than CPI, is that right?

Correct. Yeah. Okay. So while you're working and contributing, your contributions, and the expected benefits are going up based on wage growth. When you retire, though, the indexation of the pension is a function of CPI, which we all know as inflation.

Meir Statman

Correct. That's one big piece, and that is background to explain the next big piece. Thinking about how timing of taking CPP can be optimized, we have to understand how it interacts with timing. Why does when you take the benefit matter? There are two channels that affect why it matters.

Benjamin Felix

One of the channels is statutory. It's written in the CPP legislation. A lot of people understand that piece, that if you take it before 65, there's a penalty if you take it after there's an increase. I think relatively, that's well understood. The one that is lesser known, I think, is that the effect of wage growth on the ultimate benefit.

I talk about the statutory one a little bit more detail for a second. The benefit can be claimed anytime between the ages of 60 and 70. And I actually was talking to the. Advisors on our team at PWL about this recently, people get a letter in the mail before age 60. And so there are some stories that people were talking about, about people just going and claiming the benefit, going and applying for the benefit because they got the letter in the mail at age 60, which, as we'll talk about, is probably not a deal for a lot of people.

Meir Statman

My mom did that. I'm her planner. She didn't even tell me she got the letter. She did it. I was like, what are you doing?

Mark McGrath

And you can go back, you can undo it. But to your point, I think the easy decision is just to take it because you get the letter in the mail and just sign it and off you go. You get your money, right? Yeah. Crazy.

Benjamin Felix

So you can take it anytime between 60 and 70. You get a letter before age 60. Saying, you can take this now, which. Most people probably should not do. As we'll talk about, there's a 0.6% reduction in the total benefit each month prior to age 65.

So that's a maximum reduction of 36% at age 60. And then there's a 0.7% increase for each month after age 65. So if you start the benefit after age 65, each month, you get a 0.7% increase. So that gives you a maximum increase of 42% for taking it at age 70 instead of age 65. Just as an example, if we took.

Age 65 as the baseline, and you're entitled to maximum base CPP at 25% of the MPEA, you can increase that percentage figure to as much as 35.5% of MPEA by delaying to age 70. And you could decrease it to as little as 16 5% of MPEA by claiming at age 60, big difference in the percentage of the MPEA that you get as a benefit. So that's one piece. And then the second piece is that interaction with wage growth. So remember, the MPA is based on the five year average y MPE, which changes with wages, which have historically outpaced inflation.

So in real terms, the piece of the pie that you're getting is growing over time. So you get the statutory increase, which gives you a bigger piece of the pie. But as long as wage growth exceeds CPI growth, you're also getting a larger pie. So you're getting a bigger piece of a bigger pie. That one's less impactful overall, but it still matters.

So if we take, again, a 65 year old today, as an example, they've got the max 25% of MPA. So today in 2024, that's roughly $16,000 annually in CPP benefits, if they defer to 70, they're going to get the statutory 42% increase that we talked about. And the MPA is going to increase, assuming 1% real wage growth. Under that assumption, the total increase in the lifetime benefit will be 49.2% higher at age 70 than at age 65. So 42% is statutory, 7.2% is just based on wage growth, assuming 1% wage growth, real wage growth over that period.

Cameron Passmore

That is not widely known. No, that piece is not. That's a real key right there. That's the difference between rough numbers, $16,000 taking it at 65 today, and $24,000 in real terms because we're using a real wage growth figure. So $24,000 adjusted for inflation, by deferring to age 70.

Meir Statman

Real money. Yeah, it is real money, if you. Think about a couple, too. I remember doing this for some young clients, modeling. The planning tool we use has, the one that I use has enhanced CPB built into it as well.

Mark McGrath

And looking at a young client, they were around 25. So as we mentioned earlier, the full benefit doesn't kick until 2064. So basically 40 years from now. But for them, delaying to age 70, it looks like they're going to get the maximum delaying to age 70. And then you include the old age security, which hopefully is still there as well.

Delay that to age 70. And for a couple, it was quite close to, in present value in today's dollars, it was quite close to $80,000 annualized before tax from age 70 onward. Crazy. So deferring, cool. We say it makes sense, but the implication, though, and we talked about this at the beginning, the implication is that you're spending other assets for those five years.

Benjamin Felix

You're saying you want to defer the benefit. That means you're spending other assets. Because, to reiterate, I know I already said this earlier, but I want to make sure it's clear because it came up so much in response to when I posted this on other channels. We're not talking about deferring your consumption. We're talking about spending now, just not from CPP.

And that allows you to spend more overall throughout your life because you have a larger CPP benefit in the future. But the implication is you're drawing from investments, which means your investment returns matter. So there was a paper from the Canadian Institute of Actuaries and the Society of actuaries that looked at this, and they say in their paper that the only things that really matter in making this decision or in deciding whether it makes sense to defer or not, the only variables that matter assuming that your assets are in an RRSP. If they're not in an RRSP, there are some tax reasons why you would do one thing or the other. But in the case of an RRSP or a RIF, a registered retirement income fund, the choice to delay or not delay CPP payments comes down to expectations about longevity and financial market returns.

They look at this, they model it a couple of different ways. They find that if the alternative investment, if the thing that you would have had invested, that you're instead spending down to bridge deferring CPP, if that was a risk free investment with a rate of return of 1% above inflation, anyone who expects to live past age 80 should defer CPP at age 70 rather than take it at age 65. And they note in this paper that only a fifth of female CPP recipients and a quarter of males die before age 80. Under current actuarial tables, people don't realize. That right as you get older, your life expectancy increases.

Mark McGrath

All things held constant. So I think for a 65 year. Old, it's been a while, but the. Life expectancy for a 65 year old is north of 20 years, I think. If I'm not mistaken.

Meir Statman

Sounds right, yeah, but how many times. Have you heard clients say, I'll never live that long? Every time I post about this on Twitter, somebody says, no, not going to make it that long. You just don't know. And we'll talk about this later.

Mark McGrath

But that's the risk that you're hedging against, is you might live longer than you think. Correct. And people think about only one side. Of that risk, not the other. They think about the risk of dying early, which ties into how this decision is often framed, which we'll come back to later.

Meir Statman

That was a risk free investment. They also look at a risky investment, and they look at a 4% rate of return with a 4% standard deviation, which is roughly in line with the assumptions PWL uses for a fixed income portfolio. Under those assumptions, a 65 year old male with high expected longevity would face a 73% probability of receiving less lifetime net income by claiming at age 65 instead of age 70. And then for women who tend to live longer, this paper finds an 81% chance of being worse off for having taken CPP at 65 instead of 70. And then they also look at a 6% expected return, which is roughly in line with what we would use for a 70% stock 30% bond portfolio.

Benjamin Felix

And in that case, they find a 57% chance of being worse off for men and 65% chance for women. So even if you have reasonably high return expectations for the portfolio, the probability. Still seems to favor delaying. Yep, I think so. If we take higher expected returns and.

Meir Statman

This comes back to what do you. Use for unexpected return assumption? Because I know theres one person whos pretty vocal about this on Twitter and elsewhere about taking CPP as early as possible, but theyre return assumption is also 10%. I think we talked about that recently, didn't we? We sure did.

Benjamin Felix

If you took 10% and stuck that into this model, yeah, it would probably start to look pretty good to take CPP early, but I don't think that's a reasonable assumption. Oh, we know the longevity piece is. Also super important where CPP is ultimately a hedge against longevity and a couple of other things. But longevity is one of the big ones. Oh, yeah.

The paper also looks at a case of high expected return and a low longevity. Even in that case, it's a 51% chance that a male ends up worse off and a 60% chance that a. Female ends up worse off. Wow, that one's surprising from having started. The benefit at 65 rather than 70.

And this paper is actually not looking at 60. So 60 being the earliest start date with the biggest penalty, this paper is looking at 65. So they're not actually modeling the penalty side of it, they're just looking at the bonus you get from deferring. So presumably all of this would look worse starting at age 60. So that paper concludes that for most Canadians who have sufficient savings in their RRSP or RIF account to bridge the gap, they've got a high probability of being better off in the long run by deferring to age 70.

Now, the thing is, nobody does this. There's data on this that the government. Posts, and it's updated as of 2023. And in 2023, a little more than 5% of Canadians started their CPP benefit at age 70. So if you look at, like, new.

CPP pensions that started in 2023, the vast majority of them started age 65 and age 60, very few at age 70. And that's been pretty consistent for quite a long time. That is just because of a lack of financial means, too. There are two main papers on CPP specifically. There's a bunch on Social Security that are in my notes here, but two on CPP specifically, one from the Canadian Institute of Actuaries that we just talked about, and one from FP Canada, which is the body that issues the CFP here in Canada.

And the FP Canada Paper does look at that they had data on. Basically asking is the explanation that people didn't have means. And they had data showing that most people who took CPP at age 60 had the financial means to bridge at least one year, but they didn't. So it doesn't seem like that's the explanation. Interesting.

Meir Statman

I didn't know that. So what is it? Mainly awareness. So there are a couple of potential explanations. One is that.

Benjamin Felix

One is that people just don't know. So this is pretty interesting. There's a 2018 survey done through the Government of Canada website and they found that only 36% of Canadians were aware they could defer to receive an increase. So that seems big. And that's not even talking about the wage indexing component to this, that's just talking about the statutory benefits.

People probably even don't know the distinction between wage growth and CPI indexing for. CPP would be my guess. I don't think most planners know about that. I only learned about that relatively recently. The impact of wage growth.

Meir Statman

No, I know, me too. When I dug into this. Really? I guess earlier this year because I started working on a project with our friend Aravind Sith and Parapilli. We wrote an article about this for Advisor CA, just about the after tax cost of contributing to CPP for a business owner.

Benjamin Felix

But to understand that, we really had to dig into line by line what goes into the CPP calculation. And if you do CPI indexing before and after the benefit starts, CPP looks a lot worse because the benefits much lower in real terms. But as soon as you add 1% real wage growth into the model, that part of CPP looks a lot better. I'm impressed with the paper you guys are going to put out. I think I'm more impressed that you nailed Arabin's last name right off the hop without making a mistake.

Mark McGrath

I've known Arabin for a long time. I still can't pronounce his last name. I had to practice it alone in. My office for a few days before I got it. I was going to say, yeah, I.

Cameron Passmore

Got it last time I met him. So that was good. I was proud of that. He said, it's pretty good. Okay.

Benjamin Felix

Awareness is one potential explanation that seems to be an important one. A lot of people just don't know that you can do this. Another one, potentially, is that the advice that does exist out there is misguided. This one I knew about because I read this FP Canada paper when it came out and it talks about this. I posted a YouTube video on this yesterday as of the day that we're recording, and I got some comments back from some of the people on our team at PWL that this framing was new to them.

Meir Statman

So I thought that was interesting. So hopefully people find this part interesting. One of the most common approaches that people use to look at this decision, at the CPP decision, is the break even analysis. So the idea is, if you take CPP at age 65, for example, instead of age 60, that means that you're giving up those five years between age 60 and 65, that you could have been getting CPP income. So by taking it at age 65 or age 70, on a more extreme case like we're talking about, probably makes sense most of the time.

Benjamin Felix

The later you take it, the more years you need to live for your higher benefit to make up for the years that you got no income from CPP. So break even analysis is really looking at how long do you have to live to make up for the lost years, is how they'd frame it of benefits. This is problematic for two reasons. One, and you guys both mentioned this earlier, people generally underestimate their own longevity. There's a paper from the Society of actuaries in the United States that looks at this an empirical fact.

People underestimate their own longevity. That's one problem. The other problem, and this is the one that I find really interesting, is that breakeven framing makes deferring the benefit seem like the risky option. It makes it seem like you're taking a gamble by taking it late instead of taking it early, when really it's probably the opposite, that the gamble is taking it earlier and then living long. That's important.

And there's really interesting empirical work on this one as well. Empirical work is on Social Security, but I think it's conceptually the same thing. In that paper, Americans presented with breakeven analysis for their Social Security decision are more likely to claim Social Security as early as possible. People think about it as, oh, I. Have to live to be this age in order to break even, and they think that age is not likely to be attained.

It's the combination of those two things. It's that it frames it as a gamble where you have to live long enough to make it worthwhile. So that's a gamble on its own. And then compound that with the fact that people underestimate their own longevity, and you can see why it's a problem. And if I make it that long.

Cameron Passmore

I'll be happy to be here, even. Though I may have less income. Yeah, you hear that one all the time too. Doing that type of analysis, break even analysis, I think it ignores or doesn't put enough emphasis on the benefits of CPP. And we talked about this in a past podcast episode, that CBP is a guaranteed inflation indexed annuity, which is pretty great.

Benjamin Felix

It protects against adverse scenarios. It's a hedge against bad market returns throughout your retirement, high inflation throughout your retirement, and a longer lifespan than you expected in retirement protects against all those things. So break even analysis really doesn't give it any credit for those things. That FP Canada paper, they suggest a. Different measure, which they call the lifetime loss.

So they basically say, take the present value of expected payments from your CPP life expectancy and compare those numbers. That's probably an oversimplification, but it's roughly that. And so this actually because you're looking at life expectancy, in that case, statistical life expectancy. It flips the framing to early claiming being a loss, because you do expect to lose on average from claiming early. And it also, because it looks out to life expectancy, it also captures more of the benefits of CPP.

Mark McGrath

I remember, I think it was Jason Watts Ce Drive podcast. I was listening to it a few years ago, and with apologies to the guests, I don't remember the guests that he had on, but this particular guest said that people should frame it as the default is 70, and taking it at any age earlier than 70 is a penalty. And that was the first time I'd heard that. It made a ton of sense to. Me at the time.

Meir Statman

I think that probably is a really good framing. Okay, so we talked about why do people take it early? They don't know any better. Breakeven analysis pushes them to take it earlier than they probably should. Another one, that FP Canada paper that I keep mentioning, it mentioned this as a possibility, but didn't have any empirical evidence to back that up.

Benjamin Felix

And so I know this was a little bit contentious in the financial planning community when it came out, because this. Paper is making a claim that financial. Advisors aren't doing a good job, but didn't have any evidence to back it up. Unfortunately for us financial planners, there is a recent paper from David Blanchett, who's a three time rational reminder guest. He's got a paper in the retirement management journal using Social Security, not CPP, but close enough.

He finds that households with financial advice advisors who are paid on commission tend to take Social Security earlier than those with hourly or fee based advisors. So the suggestion is that commissions are driving them to tell them to take it earlier. So they can buy a product or keep their money invested? Maybe. I don't know.

Interestingly, though, this paper also finds that financial advisors in general. So they also look at fee based advisors and hourly advisors slash accountants. I think they put them in the same bucket. If I remember correctly, the paper finds that they don't help at all. No advisor helps, but commission advisors make it worse.

It's not like if you look at advised versus unadvised households, advised households are doing better on average. That's not what they find. They just find that in the case of commission advisors, making it worse. Anyway. Interesting.

But it does support the idea that, at least in some cases, financial advisor compensation models are affecting the scope and quality of advice that the clients are getting. So something that we do have to cover is that it doesn't always make sense to defer the benefit. That'd be too easy. There are a few exceptions. Lower life expectancies.

You have a lower life expectancy, and that's not putting your finger in the air and saying, I think I have a lower life expectancy. It's if you have a real reason to believe that you have a shortened life expectancy, claiming early makes sense or can make sense, still run the numbers. Another one is, oh, if you don't have bridging funds, if you have no money to fund the gap from 60 to 70, then of course you take. It when you need it. Another one is guaranteed income supplement eligibility.

So Canadians with very low incomes in retirement may be eligible for the guaranteed income supplement. That has pretty aggressive clawbacks as your income starts to increase. And it's possible that deferring the CPP benefit could result in GIS clawbacks, which is effectively a very high tax rate, well over 50%. In some cases, it would help you. Qualify in the earlier years, but after.

Meir Statman

Age 70, it would impact it. Yeah, taking it early would be better. Is what you're saying, right? Yeah, I'm saying if you delay, like from 65 to 70, if you delay the CPP, because CPP income qualifies against. The test for GIS.

Right? Yeah, I get it. And it's similar to that. Old age security is another income tested benefit where if deferring CPP pushes you up into the clawback of old age security, that may be less than ideal overall. So that's another one to be careful with.

Another one that I don't have in my notes came up in the YouTube. Comments and is worth mentioning is survivor benefits. If you have a spouse who's passed away that you have a survivor benefit from the calculation for survivor benefits is for total benefits is fairly complex, but basically there's a limit on how much total survivor and regular CPP benefits you can get. And so it's possible that someone who defers and gets a higher CPP benefit will not be able to get all of that benefit anyway because of survivor. Benefits being part of the picture.

Benjamin Felix

So that's another case where careful consideration would have to be made on optimal timing. You wouldn't want to defer five years and then realize that you get nothing from the deferral because of the total benefit calculation. Any other one you guys can think. Of why somebody would take it early. I guess outside of the case where.

Mark McGrath

You retire early and you have no contributory years because the way that CPP is calculated, your contributory years are, I think it goes until age 65 as a default. Right. Or when you start taking it. So if you retire at say 58 and you delay it, those years where you have no income and you're not contributing count as zero contribution years for calculating the total CPP benefit. And I haven't looked at this specific math and it really depends.

But I can see a case where a very early retiree might be incentivized to take CPP early so that they're not counting additional zero contribution years by. Delaying it past 60. Someone mentioned that on Twitter and I think Rob Engen chimed in and said that what you lose from the additional low income years is more than offset by. But don't quote me or Rob Engen on that. I don't know.

Meir Statman

I just saw it in passing. Yeah, I haven't looked at it either. But it's something that has come up just casually in conversations before. You can go and look at that. Ben, get back to me.

Mark McGrath

You're good at the sun. It is another one worth looking at. I should look at that. We talked about the percentage of MPA that you can get as the maximum benefit. We didn't talk about how to get to the percentage that you actually get because not everybody gets the maximum.

Benjamin Felix

We're not going to go there right now. That's a whole episode in itself. It is so much more complicated than the average person thinks. Totally. Very confusing, especially with the enhancements and multiple different layers of indexation based on different calculations for inflation.

Mark McGrath

There's a few experts I think Doug run she I think he's largely retired. Now, but he is, as far as. I know, like the authority on this stuff. And just reading some of his content on this, like, hey, you could spend a lifetime just trying to figure this. Out and figure out how to optimize it.

Meir Statman

It's a discipline all on its own, as Doug has. Like, I think Doug worked for the government in the CPP department. He did spend his life there and that's one of the reasons he's so sharp at it. Not many people like that, though, I don't think. Jason Yee, actually, Jason Yee, he's a family financial planner.

He's also very good on CPP. He helped me out just reviewing the. Notes on this before I recorded a YouTube video. He's got some great videos on it too. Right now he's got one more coming.

Benjamin Felix

Yeah. Nice animated videos. Okay. There's one funky thing that happened in 2022, and I think we had Jordan Tarasov on rational Minder to talk about this at the time. In 2022, it would have actually been better to take CPP before age 70 for someone who was 69 in that year.

CPP, remember the benefits calculated based on the MPEA, which changes based on wage growth and is then indexed to CPI once the benefit starts. So the benefit of deferring has the two pieces that we talked about, the statutory increase and the wage growth, the real wage growth indexing piece in 2022. Weird times. As people remember, we had high inflation and low wage growth because of followed from the pandemic. So in that year, someone who was 69 would have actually been better off claiming in 2022 getting a year of CPP benefits, getting the CPI indexing as opposed to the wage indexing.

Meir Statman

And yeah, they would have been better. Off doing that than waiting until age 70 to claim. So that's just one example that shows that rules of thumb, even if we say people should generally claim it's 70, which is probably true even then, there. Are always these funny exceptions. Jordan was on episode 225, November of 22.

Benjamin Felix

Yeah, that was an interesting discussion. I remember. All right, so the CPP update decision. It is one of the most consequential financial planning decisions that most canadian retirees will make. The difference between optimal and suboptimal claiming can measure in the hundreds of thousands of expected lifetime dollars.

Someone challenged me on that in a YouTube comment. But it's true. If you look at someone claiming at 60 and it end at 70, and you look at the present value of future payments, at a normal life expectancy, it is easily in the hundreds of thousands of dollars. So generally deferring to age 70 is going to be the wisest move. But there are many exceptions that we talked about, objective exceptions.

There are also subjective exceptions like some of the people in the YouTube comments, and Mark, you probably get it on Twitter too. Some people think that there's a bunch of people saying, don't defer till 70. That's what the government wants you to do. And it's like, how is that an argument against deferring to 70? Well, and people confuse CPP and the government.

Mark McGrath

They think that when you pay into CPP, it's going into general tax revenue or something. It's not. But people just have this overarching distaste for big government. And sure, I can understand that, but it's not nefarious. There is an incentive to delay to 70, and it's in your own best interest, most likely, and the government's, because potentially that's going to alleviate their need to help you with other social programs and stuff.

So there are situations where what's good for you and what's good for the. Government can be the same thing. And the CPP, it operates at arm's length from the government. It's legislated, it's allowed to exist by legislation from the government. But CBP itself operates at arm's length, and CPP investments similarly.

Benjamin Felix

Crown corporation, arm's length. It's not the government. We model this. We have a couple of different financial planning softwares that we use. We use Navi plan and conquest planning, and we plug the numbers into that software and it lets us play with different start dates while taking into account taxes, variable investment returns, government benefits, all that kind of stuff.

And in that software, there are exceptions, just like we've talked about. But we pretty clearly see usually the benefits of deferring in terms of ending net worth after tax for someone who has normal life expectancy. Also, probability of success in retirement spending also tends to go up when we defer CPP. Now, just thinking about that, actually, our modeling is probably biased toward taking CPP because we do tend to stress test plans out to a longer life expectancy than normal, which I think is sensible thing to do. So we often, but not always, recommend people deferring.

Mark McGrath

If you think about it as a tail risk hedge, the things that you mentioned that it protects against, which are inflation, which is potentially the biggest risk that you face in retirement. And you've talked about this in your videos, and we talked about it, I think, a little bit when I did my segment on CPP, which was obviously much more brief and less detailed than what you just went through. But if you think about those risks, they can be the most impactful risk. And CPP is as far as I know, the only thing that you can buy. Yes, it's compulsory, but it's the only thing you can get that's really going to protect against inflation.

As you mentioned, it's basically the risk free asset. From that perspective. I think about it like insurance in a lot of ways. If you do live a long life, those risks get really serious. The sequence of returns risk.

Meir Statman

Yes. That's impactful at the beginning of retirement as well, but it's going to be felt at the end. Your portfolio is likely to deplete sooner. And so it's those last, let's call. It ten years, where all those risks can conspire against you.

Mark McGrath

And it's the most dangerous zone, I think, for running out of money. And CPP is the only thing that can really help set an income floor for people. So if I think about it as insurance, to me it makes a lot more sense. It's like my car insurance. I hope I'm never going to need it.

I'm glad that I have it, because if those risks do materialize, it could save me, right? Or it could save my partner or whoever. So I think if people just stop thinking about it as I could invest the money and do better myself, like maybe you can, maybe you can't. It's protecting against risks that you can't protect against yourself. I think people should be a lot.

Meir Statman

Happier with the product. I agree. Even in a normal scenario, with normal inflation, normal life expectancy, CBP is pretty good. It's pretty good. We looked at the IRRs on it.

And they're all right. It's not like investing in small cap value stocks, but it's not terrible. It's not lighting your money on fire by any means. And then if you live long, or if you have high inflation, or if you have bad stock market returns, then. It'S incredibly valuable and you don't have to do anything.

It just shows up. I was thinking about this. I don't know if it was last night, but it is essentially risk free. But if you think about your risky assets, like your portfolio, and people think about the reserve amount in CPP, which is, I think, close to 600 billion, I want to say like 543 billion, and people conflate the returns that the CPP board gets on those assets with CPP. But in reality, there's a person on Twitter named investors friend, and he and I were talking about this.

Mark McGrath

If you look at the actual aerial reports, if I've understood it correctly, money goes into CPP money then immediately goes out to pay retirees. So contributors are paying retirees in a large way immediately. And people are going to say, that's a Ponzi scheme. There's a lot of differences between Ponzi schemes, which are not transparent and are full of lies, and CPP, which is very transparent and you know what you're going to get. But the reality is it's a unique form of risk as far as I'm concerned.

You've got your risky assets, you've got stocks, you've got bonds, you've got real estate, you've got commodities. This is something you can't buy. It's a stream of income payments coming from the contributors directly. It's not correlated to anything else except for people contributing to the CPP. You can't get it anywhere else.

Benjamin Felix

There are a couple of different things in there. It's partially funded. So some of the payments that go out do come from investment returns. A lot of them for base CPP do come from other contributions. So in terms of an inflation hedge, that's powerful.

The question for sustainability then is will canadian wages continue to be strong enough to support those payments? Because we need to have wages to fund those payments. But they are, I can't remember when the date is. I saw it in the actuarial report. They are moving toward being fully funded at some point in the future.

One and two are designed to be fully funded, so the contributions for those ones when the payments are coming out, they're coming from investment returns and not from contributions. So it's pretty well designed and it's on a path to perpetual sustainability from investments. Right now it's not fully funded. The most recent actuarial assessment, though, said that it's in good shape for the next 75 years. It's funded on a studies to date basis for the next 75 years, pretty good shape.

The other one that comes up related to that market, people often say people who contributed early to CPP got a way better deal because they started out with low contributions. And then there was a reform in the nineties, I think, of the contribution amounts and benefits were also adjusted and the, we've had the recent enhancements anyway, contributions went up and so people who contributed early got the full benefits as if they'd contributed the same as everybody else, but they contributed much less. And so a lot of people say, well, CPP is a bad deal because those guys who contributed earlier got a way better return on their contributions. My response is that's true. They realized they had to change the contribution rates to make it sustainable and therefore people who contributed early did get.

Meir Statman

A really good deal, but that doesnt. Make it a bad deal for people who are contributing today relatively. And maybe you feel sad about that. And im sorry youre not sorry. Im not.

Mark McGrath

Yeah. Its true though. Like why are you comparing it to that? Its completely irrelevant to your decision to. Take it yourself, right?

Meir Statman

Yeah, I think so. Theres one other point I want to. Make, and this actually happened to me once with the client is we had intended to delay and then the market corrected heavily. The intention was to delay till 70, but the market corrected significantly and their portfolio was down a lot. And so we decided to take CPP at that point in order to stave off additional portfolio returns.

Mark McGrath

And in hindsight it wasn't as big of a deal. But that sequence of return risk basically materialized and by delaying they had accumulated a couple years of increases, but then had the option to take CPP then to stave off those portfolio withdrawals. I think it gives you a little bit more flexibility in very niche circumstances to be able to do things like that. And I believe if you're taking CPP, I always confuse CPP and OS, how far back you can go. I think CPP, if you take CPP, you can undo it and repay it within the first twelve months.

If you've elected to take CPP, you've got, I think, twelve months to undo it and pay it back. And with OAS it's six months. I may have those backwards listeners, I apologize. But in the case where it's like a COVID crash where things go down, you panic, you decide to take CPP and then the market recovers really swiftly. I think in theory you could go back and say, actually you know what, I am going to continue to delay it.

I'm going to repay those CPP payments. And then delay it to 70. Good conversation. So a couple months ago we got an email from our friend Professor Mayor Stottman that he has a new book coming out and he offered to us to come on to talk about it. So we did, and it was a great conversation that Ben and I had earlier this week.

Cameron Passmore

The book is called a wealth of well being, a holistic approach to behavioral finance. Mayor is the Glenn Klimick professor of finance at Santa Clara University and is, I think we all agree, one of the giants in the domain of behavioral finance and a really nice guy. He has a PhD from Columbia and his BA and MBA from the Hebrew University of Jerusalem. This is a vast book. It covers so many topics.

It's a fascinating read. It explores what does it mean? What does life well being mean, and how do all these different facets of your life impact your well being. And then we talked at the end. A lot about how the finance part of it underpins so many of those other parts.

So it was a really fascinating conversation. And also we talked a fair amount about risk. To go back to your comment market about how it's the risk that you don't think of that can really cause an impact like getting married, getting divorced, living a long time, these things that are beyond standard portfolio management type conversations. Ben, what else did you add to that? Anything?

Benjamin Felix

It was great to talk to Mary again. He is brilliant and he's thought about this, about how money and finance relates to life well being. He makes the comment that finances underpin all other domains of life well being, which I think is pretty cool and also pretty accurate. We had a wide ranging conversation with mayor. His book is textbook level serious writing.

Cameron Passmore

Serious writing. Okay, let's go to our conversation with Professor Mayor Stadman.

Professor Mayor Stapman, it's great to welcome you back to the rational minor podcast. I'm delighted to be with you. And Ben, it's so great to see you again. And this book is incredible and vast. We are just going to scrape the service of it today, but let's jump right into it.

How does life well being fit into the study of behavioral finance? So let me begin with a story. Some years ago, I was speaking to a large group of financial advisors about saving and spending and financial well being. And life well being. And after my talk, a number of advisors came over to tell me about the need to increase saving and reduce spending, about the danger of giving adult children money without asking them to pay it back.

Meir Statman

Stories about widows who purge after their husbands die. One advisor or woman stood aside and waited for the others to leave. And then she said, I started to cry when you said it is better to give with a warm hand than a cold one. It turned out that she lent her son some $27,000 for his tuition, and now that he graduated, she asked him to pay by the agreed schedule. Now, that woman didn't really need that money, but she thought that by paying by schedule, it will teach her son very important lessons about financial responsibility and increase his financial well being.

The son was brought at the beginning of his career and she said that he didn't even have money to buy his girlfriend an engagement ring. And of course, that relationship between her and her son deteriorated. And so it is a nice illustration of financial well being and life well being. That woman had high financial well being. Her son had low financial well being.

But financial well being is just one part of life well being. Other parts include family, mothers, fathers, children, and also marriage, of course, friendship, work, health, education, religion, and more. And so you can see the kind of trade offs we make. That is, by increasing financial well being, her financial well being, she really, one diminished his financial well being. And worse, she really created a diminishment of life well being in that domain of family, parents and children.

And so, the point that I am making in this book is that we have to expand our vision, our horizon, to see financial well being as one element within life well being. And this, in fact, goes to behavioral finance as I see it. And so we started with standard finance, where people are rational, computer like, rational, caring only about wealth or financial well being. Then we went to the first generation of behavioral finance, where we said, wait a minute, people are actually bumbling, irrational. They want to maximize wealth, but they are too stupid to do that.

And so they make all kinds of cognitive errors over confidence, excessive fear, and so on. Then I introduced the second generation of behavioral finance, where I said, people care not just about risk and return and wealth. They also care about those expressive and emotional benefits beyond the utilitarian benefits. So they care, for example, about social status. They care about, say, not realizing losses, because they don't want to suffer the regret that comes with realizing losses.

And now, in that third generation of behavioral finance, I expand the circle of finance. It's not a frontier. It is a circle. And that circle includes everything from standard finance to the third generation. But it is really broad, seeing people as whole persons and caring about their financial well being, but even more so about their life well being.

Benjamin Felix

You mentioned multiple domains of life well being. Can you talk about the role that finances play? Yes. So, financial well being is really important. And there are many books about life well being or happiness that tend to say what is really most important is marriage or friendship and so on.

Meir Statman

Yes, they are all important. But finances are important for two reasons. One, on their own, they are important. And second, they underlie everything else, all the other domains. And so let me talk for a moment about how they matter by themselves.

The more money you have, the higher your life well being. No ifs and buts. So even people who have wealth of a million are not as happy and not enjoying as much life well being as people who have 2 million. And it is not just their evaluation well being. In other words, the part that is the answer to if you think about your life as a whole, where will you put yourself?

At the top, the bottom, in the. Middle, and so on. But also the day to day emotions of happiness and sadness and anger and frustration. People who have more money, even if it is in the millions, are happier in this sense, this emotional well being or experienced well being. And so that really matters.

The other part is, of course, that financial well being. Finances underlie all of well being. So think about marriage, okay? Marriage is important. Marriage without money is just on the way to a divorce.

That is, you just cannot support a family without money. The kinds of arguments that come because of lack of money make life miserable. And people say, I'd rather divorce. You cannot support children without money. You cannot gain education without money.

You can not even enjoy religion without money, because if you're a member of a church or a synagogue, they expect you to pay. And without money, of course, it's embarrassing to go when you have nothing to put into the collection plate. And so it is really important to realize that finances are important on their own and underlying everything else. But finances alone are not sufficient for life well being. You can be very wealthy and very miserable.

God knows. We read stories about people whose wealth is in the billion, who are estranged from their children and who are on their fourth marriage. I have less money, but I'm still married to the woman I married more than 50 years ago. And my life well being, I dare say, is higher. That statement from the book that finances underlie all the other domains of life well being is striking.

Benjamin Felix

It's almost obvious when you say it. But very, very interesting point. Yeah, it is really very important. When I speak to financial advisors, I often say the biggest risks in life are not in the stock market. I say, if you want real risk, get married.

Meir Statman

And if you want more risk, have children. And so people laugh as you do now, because the point is obvious, and yet that point is usually lost when people, financial advisors, investors speak about finances and they forget that finances adjust the waste station to life well being. What a great line. So keep going on that merrill. What role do you see for financial advisors to help improve our clients life well being?

So it is really important, I think, for advisors to move from being financial advisors or wealth managers to be well being advisors. It is really important for financial advisors to move from how much can you withdraw in retirement? Blah, blah. What will the fed do to what's going on in your family? What about your children?

Are they in their twenties and now squeezed for money? Is it that you have all the money in the world, but you wouldn't give it because you're afraid of spoiling them. Is it the case that you would like to have the money to send the kid to the most expensive university, but the kid won't even go to community college? There are things that are really central to life that can be missed. One advisor a long time ago told me about a couple that came to him and they said, first you should know we have a disabled son.

And before you start planning for us, you should plan for that son such that he is taken care of long after we are gone. Now some clients, some prospects will come upfront and tell you what goes on in their families, their points of pain. Others will not. And so it is really important for advisors to probe gently. And you don't have to be a psychologist for that.

You just have to be a good friend. Good friends disclose their pains, and the people who listen to them then disclose their pains and then they can empathize with one another and help. And advisors can help clients with the financial aspects and more. And so it is really both important and does not come naturally to all advisors. One thing that I say, one woman who listened to me, an advisor, she said, isn't it easier for women to cross this line from finances to life than men?

And I said, that is generally true, but being able to cross the line from finances to life is a skill that can be learned. I said, here I am. I am shy by nature, but here I am on the stage speaking to hundreds of you. I've learned to overcome my shyness and be able to speak to a large audience, to interact with them. The same thing applies here, a self serving point.

If advisors have my book, share it with their clients, it might be a beginning of a conversation because they can ask, what did you like about it? What do you agree with and what do you disagree with? What do you think about the statement? It's better to give with a warm hand than a cold one. Do you agree?

They might bring up the fact that they don't have enough money. That is perfectly okay. You cannot give what you need for yourself. But they also might say things like, I don't want to spoil my children by giving them money. It will extinguish their ambition.

And then you can get into a conversation, and I say, I don't know if it's tongue in cheek or not. Lost kids, when their parents pass away, they choose another advisor. They move away from that old advisor who advised their parents for many reasons. But I think that just knowing as a kid that your advisor advised your parents to share the wealth with them when you really need it. When you are in your twenties and thirties, I think is a nice point for them to say, this advisor cares about me and perhaps I should retain him rather than switch.

Benjamin Felix

You talked earlier about how finances on their own are important to life well being. How important is someone's financial capital relative to the other people around them to their well being? Very important. So you ask yourself, why does a man or a woman with a billion dollar want $2 billion? It is more that they can spend in a lifetime.

Meir Statman

The answer is that people care about social status, and social status in many ways is determined by wealth. And so you will have a situation where my income and your income go up by the same percentage. Our ranking in terms of status stays the same. But if you get a smidgen more than me, then I feel that I am behind and I do need to do something. Now.

One thing that you can do, one thing that we all do that is very productive, is to realize that there's more than finances. That is either I'm richer than you or you are richer than me. But I can have a happy marriage and you can have a happy marriage and my marriage. We don't compare that and say, mine is about 20% better than your marriage. So people move to things that are not comparable and people compare themselves as much as they can to reference groups, to comparison groups that give them a sense that they are doing fine.

I worked with a person who is a money manager and who is worth billions. I am about a million or two short of a billion, but we worked really as colleagues. I did not waive my PhD. He did not waive his billions. We were in different domains with different rankings.

And so I did not feel that I lag him and he did not feel that he lags me. We respected each other. That is really what we do. For some people, it is their work, their position in work. Are they executives?

Are they just the run of the mill workers? For other peoples, it might be what they are doing for their church, what they are doing in volunteer work, the kind of satisfaction they get there. One, social status matters greatly to well being. Second, if you choose your comparison group wisely, you can really diminish the kinds of hurts where you feel behind and have a sense that im doing just fine. Theres really no need for me to run faster than I do.

Cameron Passmore

Interesting. How does the gap between what we have and what we aspire to have affect life? Well being so there is a very. Interesting and insightful finding that life well being, on average in developed countries tend to have a u shape that is like the letter u. That is, life well being goes down from early adulthood till about the mid fifties and then begins to go up.

Meir Statman

And you ask yourself why. One reason is really about the gap between situations and aspirations. So when you are young, your aspirations tend to be higher than your situation. You don't have much money, then you are still, say, in school. What you do is using that gap to motivate you.

And so you stay in your dorm room and study for the exam rather than go to a party, because you know that by acing that exam and getting into medical school or whatever it is, you are going to enjoy higher well being in the future. And so that gap can be a motivator. But there comes a point, surely for me in my seventies, where I say I don't care. That is, it's not that I have accomplished some huge things, but rather I have really diminished my aspirations such that they meet my situation. Look at that and I say, hey, I am married, I have kids, I have a job, people like me, I like them, and so on.

What is happening really is that there comes a point where they having aspirations that are so much higher than your situation is really self defeating because it makes you miserable without really motivating you to do better in the future. You gave an example of self control with a person, I think, studying for their exam. We know that in spending, a lack of self control can be a problem that's often referenced as the problem to solve. But can too much self control in spending also be a problem? Absolutely.

And so what we have really the way we get ourselves to save, I'm sure that it applies to the two of you. It applies to me, it applies to all people who are successful in life. It is that we have learned to, for example, put our money in separate mental accounts. So we have income and we have capital, and we move money from income to capital, for example with 401k. But then we use a self control rule that says spend income, but don't dip into capital.

This is wonderful in getting you to accumulate a lot in this capital mental account, but there really comes a point where your income seizes or goes down substantially as you retire. And now it is time to spend. But those habits of self control and don't dip into capital get to be really part of your life and they get to be part of who you think you are. And you think that virtuous people save they don't spend. When I talk with financial advisors who advise retired people, the problem is not that they overspend.

The problem is that you cannot even get them to spend enough on small things. My mother in law, she needed a sofa. The sofa she had was really falling apart. But she said, it is perfectly fine. I don't really need a new sofa.

Her kids went out. They bought a new sofa. They tossed out the old one. So she smiled and she said, you are spending your inheritance. Good.

The time to spend the inheritance is now. That is when people are all, yes, replace this shaggy carpet rug that you have. Replace that sofa. Buy the better tickets to the opera. Enjoy yourself.

Find out what is joyful for you. For some people, it is a cruise around the world. For me, if I was on a cruise around the world, I think after a few days I would jump overboard. It's not for me. But I spend on things that matter to me.

If I go long distances over oceans, say, from the United States to Israel, I buy business class tickets rather than hope for an upgrade, because sometimes upgrades don't come. And I'm just too old and too well off to be in coach in this long flight. That really is important. A friend of mine says, if you fly coach, your son in law, who will fly first class, so that is perhaps sufficient to get people to move and spend. How do finances affect dating and marriage?

So we like to think that the days when people cared about how much wealth and earnings and maid has been in the past, but they are not. And in some cultures, like in India, it is explicit. That is, in matrimonial advertisements in dating sites, they say things like, I'm looking for a man who is having a stable employment and high earnings and so on. You will see much less of it in a place like the United States. But still, the old stereotypes are real.

We have a lot of evidence that marriages where the wife earns more than the husband are less stable than marriages where the husband earns more. It is sad, perhaps, but that is life, and people deal with it in many ways. One is that husbands exaggerate how much they earn and wives diminish what they actually earn to keep the egos aligned. We have that struggle between the traditional roles where husband errands and wife takes care of the kids and the house and where we want to go, which is where we, husband and wife, are equally good at loading the dishwasher, and we share the raising of kids and cleaning the house equally. It is something to know.

It is something to fight against. If you are trying to avoid problems in your marriage, it is just simple things. That is, a wife who gets to pick her husband's socks every day at some point is going to say, it's not the socks. But I don't think that this man really respects me. And if he does not respect me, maybe I should not be his wife.

Benjamin Felix

I like the section on respect in marriage in the book. What role does work play in well being? Work, of course we need work. Unless we are born wealthy and our parents let us enjoy that wealth early on, we need to work. And so work can be a job, it can be a career, it can be a vocation.

Meir Statman

When it is a job, I do it because I need the money, I need the health insurance. But if I could, I would quit right now and perhaps I'm going to be retired on the job doing the minimum that I can. Whereas a vocation is really where your being is associated with what you do. For me, being a professor is a vocation. That is, I don't need it really for the income anymore, but I do it because a professor is who I am and a teacher and a scholar is who I am.

When I talk about injuries in the domains, some of us have an injury in that work domain in that we just don't have the skills to move up. We do a menial job, we do a service job that is low level. We are really not happy about it. We really wait for the weekend. You can then use other domains like family, where you have a lot of satisfaction to compensate for the less happy circumstances of your job.

But if you are lucky enough to have a vocation, one that pays reasonably well but really is who you are, that is wonderful. That really enhances well being by huge amount. Two more questions for you, mayor. What effect does education have on life well being? So education, beyond getting you better jobs and a higher income is also one where you develop curiosity.

The habits of learning that last long after college or graduate school kind of benefit in your social capital, that you develop a lot of friendships and contacts in college and graduate school that serves you later. The cultural capital where Bulgaria is, you know how to dress for an interview and so on. These are important. But let me talk about one aspect of education that is really important and in many ways sad. I live in Silicon Valley.

I am an immigrant myself. Of course, there are many immigrants around me from India and from China. They themselves tend to be people with high education. In fact, this is how they got to immigrate. Many of them really push their kids to get into an Ivy League or similar prestigious university.

And it works for many, but it makes many others really miserable. And the thing is that in terms of financial well being, graduated from a top university or just an okay university does not really matter much. On average, it matters a great deal in prestige and social status. You can put a sticker on your car and say, my son goes to Harvard, but it does not really do much in enhancing well being. It is really important, and people get to see that, to realize that college is just the beginning of adult life, not the end.

And by the way, since you are Canadians, you would appreciate the difference. You probably are quite aware of the difference. In the United States, the pyramid of prestige of university is very steep. You have the Ivy leagues at the top, you have community colleges at the bottom. Then you have everyone finding their place in between.

People find themselves going to their safety school, they're not really happy, but that's what they'll do. Whereas in Canada, that pyramid is pretty flat. That is, people choose universities not by their total ranking, but rather by what is it that they want to specialize in? Is it creative writing? Is it being a physician?

One canadian woman said, when you go to a physician, do you check where they got their MD? You don't. You assume that they have the medical knowledge necessary to treat you, and you expect them to have that bad side banner. You expect them to be kind to you, to ask you questions, to answer your questions and so on. And so it is really very important that we remember that life does not end with college.

It begins with college. I have lots of neighbors who are. Originally from India and I occasion have. Conversations with them and they get the point. They really change their behavior.

And so the son of a neighbor of ours is going to Purdue University. He's interested really in engineering. And Purdue is very well known as high quality in engineering. It does not rank as high as Ivy League. But that son and his parents know what they're trying to do to get a good beginning of life.

And this is where he goes. There's a paper from Neil Rois at Northwestern, a 2011 paper, I think, that looks at the top regrets that people have. And education is in the list of top regrets that people have. Why do you think that would be? Because education can be really difficult.

That is, you go to college, it is hard work. You find that even though you are okay in high school, in college competition is tougher. You feel that you are lagging behind and you ask yourself, what difference does it really make? And instead of making money by getting a job. Now I'm spending money.

And so people get discouraged and they drop out. And it is really very hard later on when you are in your forties and fifties to go back, you feel that the doors are now closed. Thankfully, not all the people who just go back to community college can pick up. And just going to community college gets you many of the benefits of a four year college, both in income and in that curiosity, those other benefits that you get from just being a student here. As we mentioned before, this issue of self control matters greatly.

And having a group of people around you, both professors and classmates, will encourage you to do your best and help you on your way is really very important. I remember my days at the hebrew university. I did not take calculus in high school, but I found a friend who did. Actually, pretty soon I found that his knowledge really ends at about the third lesson, and we were at the same level. But just having this assurance that I have next to me, somebody who knows calculus and who can guide me was quite reassuring, and I overcame, of course, this impediment of not have had that education before.

All right, our last question for you. Mayor, very interested in the answer to this one. How does religion affect well being for. Many people, if you ask them what brings meaning to life that is really beyond how do you assess your life, the evaluative well being to a meaning well being, they will say, religion, my relationship with the Lord and also my community in the church or the synagogue, because in addition to that connection to the deity, what you have is really a social group that is supportive. So one of the findings, for example, is that it is not praying alone that enhances well being.

It is praying in church or synagogue with others that is doing that, and then you get help, especially if it is a strict religion like Mormonism or orthodox Judaism. If something bad happens, God forbid, a baby dies, people who are members of a church are likely to get help, both in empathy and actual physical help. In jewish tradition, when someone dies, there is a shiva. People sit for seven days at home, and visitors come. And those visitors bring food with them, and they comfort the people who are grieving.

And the people who are grieving see that they are among friends, among family. It does not bring the dead back to life, but it really says which they know that death comes sometimes, not when people are in their nineties, sometimes when people are young. But we can overcome it together if we have family and friends. And so you can see this is another example where you might have an injury in one domain say a child, God forbid, dies, but then having surplus, in a way, in the friends and family domain, you can use that to fill in to compensate for the injuries. In the domain of family.

Some people can do that with a formal religion. Other people do it with creating their family elsewhere. When we celebrate Passover, we read the haggadah, but we skip the ones that are not to our taste. And we invite people who are not jewish. It is a joy to have them.

One of the traditions is that at the end of the Seder, the kids get gifts, supposedly for hiding the matzah and having them deliver it. And it is so endearing. I met a woman, the daughter of a colleague of mine friend, who was at a seder we had, oh, God knows, she was eight. She's now in her forties. I reminded her that she got a Barbie doll as a gift and her mother didn't care much for it because it is sexist and all of that.

But she said, oh, so your family gave it to me. Boy, this was my favorite gift. You see how you create those kinds of communities that go way beyond religion to become really part of religion, but really mostly family. All right, Mary, that was our last question. This has been a great conversation.

Benjamin Felix

Really enjoyed the book. Congratulations on having written it. Thank you so much. It is wonderful to speak with the two of you. Always great to see you.

Meir Statman

Thanks again, mayor. That's pretty cool. Good conversation and great to see mayor again. And last week, I thought Abby was great. Had a lot of good feedback on Abby's episode too.

Yeah, we did killer month this month. So far on content from you guys and a lot of pickup on it. The video did end up on bank. Advice and CPP and let alone the content on money scope, which is unreal. But these topics that are really hitting many people, like these are topics that so many people care about.

I'm just trying to keep up with Mark. I'll spend a month putting this crazy, detailed content together, and Mark puts out a tweet in like five minutes and. Gets way more views than me. Your resp one, Mark, you had 275,000 views. It's funny too, because I banged that tweet out while I was putting my son to bed, so my son and I have to snuggle to sleep every night.

Mark McGrath

He's six, but we never sleep trained him. I sleep with him until he falls asleep. I checked my resp balance the day before because I forgot if I had contributed this year. I was like, oh, yeah. And I noticed it had crossed $70,000 this would make a great tweet.

How did it get so big so fast? And so as he was falling asleep I just banged it on my phone and it did some serious numbers. And to your point Ben. You can spend a month curating what you think is the perfect piece of content. You put tons of thought into it and crickets.

But you bang something out in five minutes and it gets a ton of views and a ton of engagement. And it was a good little thread. Tons of great comments. Tons of questions sparked a bunch of conversations. My DM's with people had advisors reaching out to me that actually weren't aware of that strategy too.

Which is interesting. I had a bunch of people reached. Out to me with our advisors as well. Which is nice. It had some feedback.

Meir Statman

Ben. I think it's safe to say on the kind of content people want to hear us talk about. Just in general terms. I think we're going to have more investment. Probably a bit more technical stuff in general.

Cameron Passmore

Bit more canadian. A bit more planning. Bit fewer books. Fewer non financial guests kicking around the idea. And I would welcome any feedback kicking around the idea of having probably another.

I was talking to Angelica this week about that. A separate podcast just on the business of financial advice. Which is something I'm interested in. Perhaps targeting financial advisory community. So if anyone has feedback or ideas let me know.

Probably from obviously a canadian perspective that's something that really interests me. So some of those guests that are management leadership type content that we've done lately, those kinds of conversations would go on that podcast. I love it. I think it's great. You've got such a vast experience in this industry.

Mark McGrath

I think. And I know this stuff is of import to you. I think it's a great idea. You've learned so much Cameron in the last, I don't know five years from the people you've been talking to and just the circles you've been networking in and learning from. The knowledge you have right now is you're in the top 0.1% probably of people in our business in terms of practice management knowledge.

Cameron Passmore

So many cool people on practice management that I know would love to come on and have those kinds of conversations. You I'm saying. Yeah. No, I get that. I appreciate that feedback.

But that kind of stuff is not congruent with this podcast at all. Like I'm just scratching the surface with. Randall Stuttman for example. And these kinds of people. It's not congruent with what this podcast has been about.

So that's why I would package it up in that. And I love nerding out on this stuff. And there's so many fascinating people that we know that we've met over the years, that I met over the years. It would be so much fun to get that into its own feed. So noodling that, Mark, you're doing a.

Piece on seg funds. What's going on with that? Oh man. So I talked about segregated funds on a segment on the rational reminder and I was just looking for something to write about. And so I just went back.

Mark McGrath

I was like, oh, I've got some notes on segregated funds. I should put that into like a. Blog post, thinking a thousand words. So I started writing it. As I started writing it, I started teasing out more questions and more questions and it just became this beast and I just found all these rabbit holes to go down that I hadn't really stumbled upon when we did the segment.

On the rational reminder, I've got the first draft more or less done and I think I clocked it at 5000 words. And even in there, there's still some stuff that I didn't really cover. It's so complex. The information is not easily accessible. I had to talk to Jason Watt, who's a friend of ours, and he teaches the LLQP, which is the sort of entry level insurance course for people who want an insurance license.

And I had to pick his brain on some of this stuff because I literally could not find the information anywhere on the Internet, not through insurance company websites, not in the information folders for segregated funds, which is like 60 to 70 page regulatory documents for segregated funds. And I'm still confused about a few things. I sent my first draft to Ben. And a couple other people and I'm. Waiting for feedback to see what direction we go with it.

Meir Statman

But it's a beast. And I learned a lot about segregated funds. More than I would ever want to know about segregated funds is in that paper. So what will the output be? I don't know.

Mark McGrath

I've been talking to Ben about whether we turn it into maybe a white paper. I'm not as technical as Ben, so I'm sure if he reads it, he's going to come up with a lot of great questions that I haven't answered. And the trouble is there's just not a ton of data that I was able to find specifically about segregated funds outside of the size of the industry. Again, Jason Watts put together some really interesting data on the probability of the guarantee paying out and that type of thing. So I think he could get involved if he's got the time and energy to do it.

But because of its length, it's too long for a blog post. I think some kind of white paper or long form media piece makes sense. Maybe we do a longer video on it. I don't know. It just became this Frankenstein thing that.

Meir Statman

I started working on and took on. A life of its own, and I'm. Open to feedback on what to do with it. Speaking of life of its own, just got a note from Angelica that the money scope Ben just crossed 100,000 downloads on the audio. I presume so.

I say it every week. I'm sorry. I think it's fantastic. It's like the definitive, clearly spoken, straightforward, but technical on all things. For anybody, frankly, but especially corporations.

Cameron Passmore

Now that we're into episode twelve this. Week, 1112, you're getting into the deep. Weeds of investing inside corporations. Yep, it's getting pretty heavy. We recorded earlier today of the day that we're recording the episode on optimal compensation planning for people with corporations operations.

Meir Statman

That was a heavy. I don't even know a month of prep that Mark and I did, Mark Soth, because we keep finding things that it's like we haven't looked at this yet. We better model it. But modeling it takes a week. You have to understand the output of the modeling.

Benjamin Felix

This stuff is complicated, though. You think CPP is complicated? Try optimizing your compensation from a corporation where CPP is just an afterthought of that decision. I could see the fatigue on your face when we started recording the rational reminder because you had already recorded money scope today, and I was like, your brain is just going to melt out. Your ears at this point.

Meir Statman

Yeah, the two hour recording with Mark. Mark going to take away this first. Review recent review is guy giddy from the US. Brilliant. This is a great and thought provoking podcast on topics critical to living a productive, stable, and happy life.

Mark McGrath

Ben and Cameron are phenomenal hosts who ask great questions. Ben's intelligence is shocking. He explained topics in such a clear and concise way that one often wonders why he doesn't have a PhD in economics and finance. Good question. Ben tempted.

Meir Statman

Any ideas for that? I don't know, man. That'd be yes, Mark. You could get an honorary degree going on. He said.

Mark McGrath

He'd be a phenomenal professor educator. I appreciate all the varied guests. Most importantly, it is great that guests are invited that discuss their topics, and we as listeners can then decide whether or not we agree with said information. All in all, this is a great podcast and if there was a Nobel for podcasts. This would get it.

Cheers to all the great work that you guys and your support staff do. Next one JLS 3249 from Canada says, so good. Such a good podcast. The best I found on investments and finance in general. Thank you so much.

Benjamin Felix

I want to be gracious and take. The comment from Gagari, but when people. Say that my intelligence is shocking, I just read stuff that other people have done and then say it back on the podcast. That's what everybody does. Take the victory lap and like the.

People that we have on as guests who do the research, those are brilliant people that think of the questions to answer and then do the anyway, I'll leave it there. It's funny, before I joined PWL, Ben. You had said to me, why don't. You just come and join my team and do research? And I was like, I don't know how to do research.

Mark McGrath

And I'll never forget your response. I was like, dude, I don't know how to do research. And I was like, ben doesn't know how to do research. Like you don't want me on the team. Ben, come on.

I'll never forget that I had a good laugh. I don't know what I'm doing, man. Just doing my best here. Aaron from Germany says, I bought an iPhone just to rate the show. It is that good.

Benjamin Felix

Ben Cameron and now Mark as well. Hey, first review that we get to. Read, that includes Mark, I think. Yes, I've arrived. Do a fabulous job.

This is the podcast if you want to nerd out and have a constant companion on your investing journey. The level of coverage through a variety of topics is breathtaking. They always stay rational, hence the name, and are based on facts, studies, etcetera. The particular style of Ben portraying the topic with easy to understand concepts and messages is captivating. Afterwards, the proof with academia, modeling and bootstrap.

Oh, boot. Because we're canadian. Boot. Bootstrap simulation six 60 is in the word boot. Yeah.

Convinces and retains listeners such as myself, who are predominantly male with technical and or academic background. Deservedly. The R team is getting high profile guests and don't stop. On the technical side of investing, a lot is about behavior. How to tie living the good life together with investing as well.

Been following the show since the early days when YouTube episodes were audio only as well. That is a while ago nowadays mainly following the video versions, but I wanted to leverage this platform here for a review. This podcast will just keep on giving. Thanks from Germany. Very nice.

Cameron Passmore

Last one. Molag from Canada. New listener great content, but sometimes a combination of my Airpods and the sound editing recording makes most s and some t sounds extremely loud and piercing. Slap some EQ on. So we've passed this message on to both the audio production company that we work with in the background and also to Matt, our in house video producer.

So we'll be looking at that. I know a couple of episodes we had one particular individual on YouTube commented twice on my audio specifically. So I don't know if it's my audio that's causing people problems. I have no idea how to fix it. So I welcome feedback from anyone who knows what's going on and I'm just curious if anybody else has that problem.

Meir Statman

Or if it's just a couple of individuals on LinkedIn. I heard from Carolina last week from Monte Carlo saying that I often listen to your rational minder podcast. Amazing work. Very nice to hear from her. Speaking of Airpods, I told you guys this before we started recording, ordered some Airpods.

Cameron Passmore

I figured I'd get them at Costco and I gave an option to have Doordash. They don't obviously pay for any advertising. This is just my experience today. The delivery was here at the office in less than 45 minutes. It's crazy.

I've never even tried a service like that. I realize I'm late to the party, but pretty cool. This fall could be an exciting time. Mark, you've got the book coming out, the canadian edition of Dan Solin's book wealthier. This fall we're planning on a series of some sort of meetups, I don't know, book launch party or something because Dan is going to be in town this fall and then you're going to come to town as well.

So I'm not exactly sure the dates it's going to depend on publishing, etcetera, but we have that in our sites for the fall. Yeah, I have a deadline now for the book writing, which is good because without a deadline I'll just hum and haw. I'm going to Europe end of May for three weeks and just based on the publishing calendar as I know it, I think it means I've got to finish before I go. So I've basically got seven weeks to. Finish this up now we've gone public.

Meir Statman

I guess that's more pressure, right? Challenge accepted, but we'll get it done. Ben, you got to queue up. Next week's conversation with Mike Green. Oh, it was a great conversation.

Benjamin Felix

Mike Green has been one of the primary people arguing that index funds are breaking financial markets. And I admittedly had largely ignored him. I hadnt really dug into any of his arguments and just dismissed it as whatever and had actually done some content on how index funds are not affecting market efficiency, which is true, but its also not Mikes point, which I now understand. After having actually gone through his arguments to prepare for his episode. We invited him on because he wrote a scathing review of me as a person on his substack.

And so someone sent me that and I read it. I was like, wow, I've really annoyed this guy, maybe I should see what he's so annoyed about. And so I invited him on Rash reminder, I just said, listen, you clearly have something that's important that you want to share. Why don't you just come on our podcast, talk about it? And he agreed.

Meir Statman

And before we had him on, I. Really went and listened to him on all the other podcasts, on all he's done a lot a bunch of other podcasts that he's done. I read his substack posts and I get it now. I get what his point is. So I think by getting what his point is, we were able to ask some pretty good questions to really have a good conversation.

Benjamin Felix

And I think it was a great episode. One of the reasons I've always been skeptical of Mike is because a lot of the other shows that he's appeared on are a little bit more sensationalist. And that always was just a turn off. It's not the kind of content we want to do, but he was great. He is not a sensationalist, not even the slightest bit.

Cameron Passmore

He comes at this argument with deep care and compassion for his kids. It's almost like climate change type issue in his world. He was so insightful and really good. Nice guy. Yeah.

Meir Statman

Enjoyed that. We'll see what listeners think, but I think it's a really good episode that gives you a different perspective. I'm not sure it's one. You'll play at two x speed, just throw that out there. But you might want to slow it down.

He's quite bright. And then in two weeks, Scott Galloway will be here. He has a new book coming out later this month, the algebra of wealth. That was also a good conversation with Professor G guy. Good to get him on.

Cameron Passmore

Thanks to our friend Barry Ridholz for making the introduction, which, which is pretty cool. Anything else on your minds? Guys, I'll mention this. One of our rational reminder fans, he's a physician out of Ontario and I believe you've met him, Doctor Hassan, morally, he just published a book. I've got it actually right here on my desk.

Mark McGrath

I don't know if people can see that. It's called sleep well, take risks, and squish the peas. I haven't read it yet because he. Just sent me a copy of it. I've known Doctor Moraley for a while.

He's in pediatric emergency medicine. He's a researcher as well. But he sent me a copy, and I'm really excited to read it because the whole premise of the book is what we can learn from toddlers. And so as a dad who has a one and a six year old, a book written on this topic by an expert in the field I think is really interesting. And it's just a cool coincidence that he happens to be a fan of the show and he's showing up at our meetups and stuff.

So I'm going to try and get through that book in the next few weeks, and maybe I can talk about. It on a future episode. Yep, I've got a copy of the book, too. I'm going to try and read it also because I'm similarly interested for the. Same reasons as you.

Cameron Passmore

Maybe help you get those Twitter numbers up. Like Mark from his snuggle time, Ben. Has surpassed me on Twitter. I don't know what he's talking. He's got, like, 20,000 something followers.

Mark McGrath

I'm playing catch up with Ben now, and he's putting out, what, two videos a week? Come on, your machine. You were always playing catch up, but the rate of growth of your Twitter account was very concerning to me. I had to start tweeting more, but you're just too good at it. You just got to knock for, and.

Cameron Passmore

It'S just a pinch. Competitive. I'm not as competitive, but I did point out a thread to my wife that Ben wrote a little while ago, and it got like 500 and something likes and 180,000 views. When my resp thread surpassed yours, Ben, the first thing I did was tell took two you screenshots, and I was about to do something with them, and I was like, you know what? I'm just not gonna go there.

Mark McGrath

So I've got the screenshots if I need them. I've got receipts in case. That's pretty funny. All right. To the two listeners who stuck around this long to listen.

Cameron Passmore

Thanks for listening, and we'll see everybody next week. Thanks.

Episode 301 - Optimal Government Pension Claiming, and Life Well-Being w/ Prof. Meir Statman

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3: Behavioral Insights

4: Practical Advice

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