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Category Archives: Retirement Planning

Odette Morin

Retirement fulfillment and the fear of running out of money

Senior couple looking at bills, sitting at dining table. Image shot 2009. Exact date unknown.

In my practice, I see retirees concerned about the risk of taking too much out of savings and running out of money.  At the same time, retirees are young and active and want to enjoy life while they can. How do you balance the risk with the need to have a fulfilling retirement?

Retirement planners recommend, as a rule of thumb, that annual withdrawal rates from retirement nest eggs should not exceed 4 per cent.  By the time RRIF holders  reach 71, however, the federal government’s age-related formula dictates they must withdraw a minimum of 7.38 per cent of their RRIF, with the mandatory minimum withdrawal rate increasing each year.

It may give some retirees the impression that they can take that much out and oblige the holder to run tax-deferred assets down rapidly. We feel that the minimum drawdown from RRIFs and similar vehicles should start later and be smaller or even disappear entirely.   However, we have to follow the current rules.

What is the retiree to do to make sure they don’t deplete assets too fast?  It is imperative to have a solid retirement cash flow analysis performed and reviewed annually to establish the maximum annual withdrawal rate you can afford.  Experienced  financial planners, such as us, are used to preparing these analyses making sense of what assumptions to use.

If the RRIF Minimum Annual Payment (MAP) exceeds your personal maximum withdrawal rate, the smart thing to do is to take the surplus that you don’t need and promptly put it into a tax-free savings account (TFSA). Your TFSA account can be invested similarly to your RRSP and achieve similar rates of return on a totally tax-free basis.  That’s the most tax effective way of dealing with the excess RRIF payment. If you have already maximized your TFSA, reinvesting the excess RRIF MAP in a non-registered portfolio of tax efficient investment is the next step.  Just make sure you have sufficient TFSA contribution room.  There are hefty penalties if you over contribute.

The withdrawal rate is just one factor that must be accounted for in any retirement plan. Inflation taxation and the chance that out-of-pocket health-care costs might also drain savings must all be part of the plan. When planning for and during retirement, ensure that you review your cash flow analysis annually with a qualified Certified Financial Planner.  This is your best bet for a worry-free, comfortable and fulfilling retirement!

 

 

Terry Broaders

Should I Delay CPP ?

Beginning in 2012, anyone who paid into CPP and reached the age of 60 could choose to begin receiving CPP benefits regardless of employment status. Previously, in order to qualify for retirement benefits one had to cease employment. There are significant financial incentives for delaying CPP.   Under the new rules, the monthly penalty for taking the CPP early (before 65) will increase gradually from 0.5% in 2012 to 0.6% a month by 2016 and the monthly benefit for delaying CPP increased from 0.5% a month to 0.7 % a month in 2013. Taking CPP early at 60 will mean you will receive 36% less than if you take it at 65 and you’ll get 42% more if you start taking it at 70 instead of 65.The maximum CPP payment for 2014 is $1,038.33, or 12,459.96 a year.

Deciding when to take CPP benefits is best based on each individual’s circumstances, but there are a number of factors to consider.  One has to do with your marginal tax rate.  If you are in a high marginal tax rate from age 60 to 65 but will be in a significantly lower rate after age 65 it may be best to delay CPP beyond age 65.  Another consideration is your life expectancy and what is known as the cross over date. This is the age you need to attain to get the benefit of delaying receiving the benefits to get the larger amount. For example, if you delayed taking CPP at 65 and took the enhanced benefit at 70, the cross over age is 80.2 years.  You need to live beyond 80 to compensate for not taking any CPP benefits at age 65.  If you’re in good health and longevity is in your family, it may be a good idea to delay because you may have a better chance of reaching that cross over age. On the other hand, if you need the cash benefit or are in questionable health it may make sense to begin receiving reduced early benefits and take the after-tax proceeds and invest them in a Tax Free Savings Account.  Also keep in mind that if you are retired and are collecting your CPP then you have to take less withdrawals from your other investments, leaving your money there to grow.   

While generally speaking we suggest taking the CPP early and potentially reinvesting it completely or partially there is simply  no one answer that fits all.  We can help you analyze your specific  situation to determine what is best for your circumstances.

Terry Broaders

Weekly Update August 19 2014

 

We Had It All, Just Like Bogie and Bacall” -Bertie Higgins

TSX Ends Little Changed

North American markets came under pressure from a worsening in the Ukraine-Russia crisis. On Friday the S&P/TSX composite index climbed 13.06 points to 15,304.24. But the Dow Jones industrials closed down 50.67 points to 16,662.91, while the Nasdaq gained 11.93 points to 4,464.93 and the S&P 500 index slipped 0.12 of a point to 1,955.06. Markets backed off after NATO said that Russian military vehicles crossed into Ukraine during the night and the Ukrainian president said most of the force was quickly destroyed by his troops. Russia denied any incursion. The report persuaded traders to seek safety but the Canadian dollar was higher amid strong revised jobs data. The loonie rose 0.12 of a cent to 91.84 cents US as Statistics Canada said the economy added 42,000 positions last month. The agency said earlier this week that it had discovered an error in its jobs data originally released last Friday showing the economy had added a meagre 200 jobs.

 

CRA Cracks Down On Biz Owners “Zapping” Sales Records

The consequences are about to get pricey for businesses using technology to avoid paying all of their taxes. After an eight-month awareness campaign about electronic suppression of sales software, new monetary penalties and criminal offences under the Excise Tax will come into effect in September. Revenue Minister Kerry-Lynne Findlay said that small and medium-sized businesses are the economic drivers of Canada. She says the underground economy does give an unfair advantage to those who show a lack of respect for Canada’s tax laws. ESS software or “zapper” software selectively deletes or changes sales transactions in point-of sale-systems like cash registers and business accounting systems. That means there is no record of the original transaction and the business is able to under-report their revenue and avoid paying the full share of their GST, HST and income taxes.

 

Market Update as of August 15 2014

The TSX closed at 15304, up 108 points or 0.71% over the past week. YTD the TSX is up 12.35%.

The DOW closed at 16663, up 109 points or 0.66% over the past week. YTD the DOW is up 0.52%.

The S&P closed at 1955, up 23 points or 1.19% over the past week. YTD the S&P is up 5.79%.

The Nasdaq closed at 4465, up 94 points or 2.15% over the past week. YTD the Nasdaq is up 6.89%.

Gold closed at 1306, down -6.00 points or -0.46% over the past week. YTD gold is up 8.47%.

Oil closed at 97.02, down -0.57 points or -0.58% over the past week. YTD oil is down -1.61%.

The USD/CAD closed at 1.089552, down -0.0078 points or -0.71% over the past week. YTD the USD/CAD is up 2.48%.

 

Sources: Bloomberg; Investment Executive; advisor.ca

Odette Morin

The easy way to live on less so you can live on more.

retirement paycheque

Previous blogs addressed the fact that pension plans are underfunded and our Old Age Security is in jeopardy. Worse still, chances of winning a lottery are 1 in 13.9 million. So much for that back-up plan!

But there’s good news.

Most Canadians already make annual contributions to RRSPs. Plus, we earn a sufficient enough income to make those contributions while still maintaining a good lifestyle.

We’re accustomed to putting away money for food and shelter. So my suggestion is to add a bit more to that routine. It isn’t a dramatic shift. Yet, ultimately, you can end up with an impressive retirement paycheque.

Generally, you need about 70% to 85% of your current income to enjoy a comfortable future (conditional on life expectancy and whether your mortgage and debts are paid off). So, depending how far you are from retirement, saving just 10% – 15% of your income could help you reach your goals in time.

According to Stats Canada, the average Canadian household spends nearly $4,000 on recreation, not to mention about $1,500 on tobacco and alcohol. Let’s be honest, cutting back here and there is very doable.

Besides, imagine all the recreation you can enjoy when you have free time and big, fat retirement paycheque. Come in for a consultation and we’ll help you get there.

See Stats Canada details here

Odette Morin

New UK Pension Rules which will may affect your QROPS transfer

Major changes for UK pensions were announced in this week’s yesterday’s UK budget.  Here is the link to HMRC.

Our UK associate, Paul Bradley, prepared an outlined of the changes and what they mean for you:

1). The government has announced the retirement age, for accessing private pension savings without a tax charge, will rise from 55 to 57, to reflect increases to the state pension age, although not until 2028.

This is particularly relevant to people transferring pensions to Canada as their is a link between the UK and Canada and withdrawals are reported back to the UK.

If withdrawals are made which would not be allowed in the UK (I.e. Income before age 57 from 2028) AND the person making the withdrawals has been outside the UK less than 5 complete tax years there are UK tax penalties which could be applied.

2) “Capped drawdown limit increased to 150% of GAD”

It sounds like jargon, but in the UK the income you can draw from a pension is restricted by the Government. This simply means the limits are being lifted.

In this budget the Chancellor has relaxed the rules, but they remain more restricting than Canada.

Furthermore you would need to consider currency risk (the impact of a falling GBP vs the CAD) and the interplay of taxes between Canada and the UK; it’s all quite complicated!

2) The government has increased the size of pot that can be cashed in at retirement to £30,000 from the current £18,000.

The government currently allows people over 60 years old with total defined contribution pension savings worth less than £18,000 to take their entire pots as cash. This is known as trivial commutation.

The Treasury said: ‘From 27 March 2014, the government will allow people with defined contribution pension wealth more flexibility to access their savings by increasing the total pension wealth that people can have before they are no longer entitled to receive lump sums under trivial commutation rules to £30,000, subject to their pension scheme rules.’

This change is relevant to people who are over 60 with £30,000 or less in UK pensions (combined). If a pension is taken this way in the UK, 75% of the fund is subject to tax.

3. The government has abolished the 55% tax on pension withdrawals at retirement, meaning no one will have to buy an annuity.

From April 2015 people will be able to access pension savings as they wish at the point of retirement, subject to their marginal rate of income tax, rather than the current 55% charge for full withdrawal.

What you should do

If any of these changes are relevant to you, or your friends and family get in touch for a free consultation to help you make an informed choice.

We are the only advisors with expertise (Chartered Financial Planner) in the UK and expertise (CFP) in Canada.

 

uk-pension-qrops

Odette Morin