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Category Archives: Retirement Planning

Odette Morin

NEW lower RRIF minimum payment rules effective now: consider your options

RRIF

We are writing to advise all annuitants of Registered Retirement Income Fund (RRIF) held with us of changes to the required minimum annual withdrawal amounts as a result of regulations introduced in the Federal Budget released April 21, 2015.

Specifically, the budget introduced a reduction to the prescribed required minimum annual withdrawal factors for RRIF annuitants 71 to 94 years of age. Starting in 2016, this reduction will result in decreasing the amount that RRIF annuitants will be required to withdraw as a minimum amount during those age years.

This applies to RRIF accountholders who are setup to receive the minimum payment only. If you are setup to receive a fixed amount (ex. $500 a month), you will not be affected.

The table below provides a comparison of the new and old RRIF factors.

 

All RRIFs 2015+ Post-1992 RRIFs
prior to 2015
Age RRIF
Factor
RRIF
Factor
71 0.0528 0.0738
72 0.0540 0.0748
73 0.0553 0.0759
74 0.0567 0.0771
75 0.0582 0.0785
76 0.0598 0.0799
77 0.0617 0.0815
78 0.0636 0.0833
79 0.0658 0.0853
80 0.0682 0.0875
81 0.0708 0.0899
82 0.0738 0.0927
83 0.0771 0.0958
84 0.0808 0.0993
85 0.0851 0.1033
86 0.0899 0.1079
87 0.0955 0.1133
88 0.1021 0.1196
89 0.1099 0.1271
90 0.1192 0.1362
91 0.1306 0.1473
92 0.1449 0.1612
93 0.1634 0.1792
94 0.1879 0.2000
95+ 0.2000 0.2000

Generally speaking there is about a 2% decrease in required minimum withdrawals. For example, if you are 75 years old and you have a RRIF with a $100,000 balance, the old minimum amount $7,850 and the new minimum

is $5,820. In this example, you have $2,030 less in taxable income.

Since this change was introduced well after the start of the year but is effective for 2015, you have a few options for 2015:

  1. Minimum Amount - You can choose to take this year’s minimum payment based on the old calculations, in which case you do not need to do anything further (recommended action).
  2. Re-contribute - If you have already, or by the end of the year will have received the required minimum annual withdrawal amount based upon the old factors, you have the option of re-contributing the excess amount to your RRIF. The deadline to make a re-contribution is March 1st, 2016. You will be issued a T4 for the amount withdrawn and an offsetting contribution slip for the re-contribution for your 2015 tax filing (we do not recommended this action, enjoy the extra money for 2015!)
  3. Adjust Payments - You can choose to adjust any minimum payment(s) not yet paid to reflect the new lower calculation. In this case we will require formal updated instructions from you.

No action is required on your part unless your payment(s) are based upon the minimum required withdrawal and you wish to take advantage of the lower required minimum withdrawal for 2015, or wish to re-contribute the excess withdrawals for 2015.

Most RRIF accountholders who are setup to receive the minimum will likely welcome the decrease in payments.

Odette Morin

“But Odette, I will not live to age 90!”

Fauji Singh

When we prepare retirement plans, we run numbers to make sure that your money will last until at least age 90. Invariably, I get the “but Odette, I will not live to age 90”.

If you can’t imagine living to age 90, think again. Meet Fauja Singh, the 104 year old marathoner. He took up running at the age of 89 and up until last year, has ran a marathon every year.

There are plenty of these examples. The number of centenarians (people aged 100 and over) in Canada is rising. Statistic Canada says that group grew 25.7% between 2006 and 2011. It’s also been the fastest-growing segment for nearly 40 years.

Many of our clients in their late 80s and early 90s also live a very full and active life requiring just as much money as in their 60s and 70s.

In a financial planning perspective, we have to plan for the worst case scenario. Living beyond age 90 and running out of money is not something we want to experience. Depending on our children or the state is even worse.

When calculating sustainable drawdown rates for retirees, we need to plan for the retirement funds to last for life, whenever that age is. Too much money is never a problem, I often say, or “Too much is just enough” as my 92 year old mother says.

So, those numbers I calculate for you are not inflated. They are more realistic than you may think. Who knows, you may be the next Fauja Singh we see happily running into the 100s!

You can read more about Mr. Fauja Singh here.

 

Odette Morin

The Sweet Rewards of a Retirement Well Planned

Classic car

After decades of working every single day, the long-awaited arrival of retirement can understandably mean a chance to relax and enjoy the finer things in life.

It’s time to take that cruise you had promised yourself, enjoy more regular trips to the theatre, perhaps even buy a new classic car!

This is what clients of ours did recently and I could not be happier for them. These long-term clients have planned properly, saved enough for a very comfortable retirement and followed our advice along the way.

Too many pensioners spend far too much money during the early few years of retirement and end up facing a ‘life of frugality’ in their later years.

Buying a classic car or taking that month long cruise is not for everyone but when you have planned properly, started the process early and saved diligently, it sure is comforting to be able to afford a worry free retirement life and to occasionally splurge a little as well.

Odette Morin

The New RRIF withdrawal rules

Federal Finance Minister Joe Oliver tabled the 2015 federal budget on April 21, 2015. This commentary summarizes the changes in the new budget that affect retirement income and savings. Budget changes that do not relate to retirement income and savings have been covered extensively by many accounting and tax advisory firms and will not be covered in this commentary.

Main Change – Minimum Withdrawal Factors for Registered Retirement Income Funds (RRIFs)

The main retirement-related change introduced in Budget 2015 is to adjust the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94, as follows:

Age (at start of year) Existing Factor New Factor
% %
71 7.38 5.28
72 7.48 5.40
73 7.59 5.53
74 7.71 5.67
75 7.85 5.82
76 7.99 5.98
77 8.15 6.17
78 8.33 6.36
79 8.53 6.58
80 8.75 6.82
81 8.99 7.08
82 9.27 7.38
83 9.58 7.71
84 9.93 8.08
85 10.33 8.51
86 10.79 8.99
87 11.33 9.55
88 11.96 10.21
89 12.71 10.99
90 13.62 11.92
91 14.73 13.06
92 16.12 14.49
93 17.92 16.34
94 20.00 18.79
95 & over 20.00 20.00

 

The existing factors were determined on the basis of providing a regular stream of payments from age 71 to 100 assuming a 7% per annum nominal rate of return and indexing at 1% annually with factors capped at 20% for ages 94 and over. The new factors were determined assuming a 5% per annum nominal rate of return and indexing at 2% annually with factors capped at 20% for ages 95 and over.

Minimum withdrawal factors for ages 70 and under remain unchanged and continue to be determined by the formula 1 / (90 – age). Note that at the time of establishing the RRIF, individuals also have the option to base the minimum withdrawal amounts on the age of their spouse or common-law partner.

Similar rules will apply to those receiving annual payments from a defined contribution registered pension plan (RPP) or a Pooled Registered Pension Plan (PRPP).  These new factors will also apply to minimum payments from an Individual Pension Plan (IPP) after age 71 for members who are controlling shareholders or related persons.

The new RRIF rules have not been formally.  Stay tuned.  We will update you.

Odette Morin

2015 Federal Budget Highlights

Joe's Budget shoes

 

 

 

 

The Federal Government delivered its “New Balance” budget today offering lots of goodies for everyone. Here are the most important announcements affecting your financial planning:

  • No new tax cuts.
  • TFSA limit is being increased from $5500 to $10,000 per year effective immediately. This happens as soon as the budget is passed and approved. We will let you know as soon as we hear.
  • The RRIF (Registered Retirement Income Fund) MAP (Minimum Annual Payment) is being lowered. Under the current rules, a 71-year-old would have to withdraw 7.38 per cent of his or her RRIF in the first year, escalating all the way to 20 per cent by age 94. Under the new rules outlined in the budget, those limits have been ratcheted down to 5.28 per cent to start, and down to 18.79 per cent by 94. This truly is excellent news for retirees.
  • EI premiums to be reduced by 21% in 2017
  • EI compassion benefit (to take care of a sick family member) increased from 6 weeks to 6 months.
  • Small business tax reduced from 11% to 9% by 2019.
  • New government initiative to help Women owned businesses.
  • More financial help for Young entrepreneurs.
  • New retirement income benefit for veterans.
  • New home accessibility for seniors and people with disabilities. Starting this tax year, homeowners who spend up to $10,000 on renovations such as wheelchair ramps, walk-in bathtubs, non-slip flooring and grab bars can get a tax deduction for up to $1,500.
  • There is something for students too. Canada Student Grants eligibility will drop from 64 to 34 weeks.
  • The government is also changing the student loan program. Under current rules, any dollar over $100 a week that a student earns from a part-time job while studying reduces the loan amount they’re eligible for. The budget proposes eliminating that “penalty” from now on, which the government says would help 87,000 students a year.
  • 4 Billion surplus this year
  • Total overall debt $617Billion

More in tomorrow’s newspaper. Make sure to check our blog often. We will be commenting on these new government initiatives in the weeks ahead.

Sources: CBC news, CTV News, National Post, Globe & Mail

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!