Articles

Managing the Drawdown of your RRIF/RRSP

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Many of us have worked hard all of our lives to build up our retirement nest egg in our RRSP funds. We’ve been successful enough to build a RRSP nest egg in excess of $1million to see us through our retirement.

Now we are at the stage of flipping the RRSP into a RRIF and managing the drawdown of our funds, which requires a balance between CRA’s required minimum withdrawal, lifestyle needs, longevity, and tax efficiencies. Some things to consider include:

  1. You can flip your RRSP into a RRIF as early as 60 and as late as 71. Once you’ve changed it into a RRIF you must make the minimum withdrawals per CRA or face penalties. You can leave your funds as RRSPs during your early 60’s, still make withdrawals to meet your lifestyle needs, but not have to meet CRA imposed minimum standards.

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    At age 65, when you are eligible for a pension income tax credit, you may want to consider transferring a portion of your RRSP to a RRIF to take advantage of this credit.

  2. Historically we’ve been taught to leave our RRSP untouched as long as possible to maximize the benefit of the deferred tax bill. However, you are eligible for Old Age Security (OAS) payments after age 65, which are income tested.

    You might be better off to start your RRSP withdrawals in your 60’s so that when age 71 hits and you have an annual Required Minimum Distribution (RMD), you’ve reduced the total RRIF and subsequent annual RMD to the point that it is under the income threshold for OAS clawback. Alternatively, if your RMD is large enough that your OAS will be clawed back 100% for the balance of your life, you could trigger a one-time liquidation of a portion of the RRIF now, to get your RMD below the OAS clawback threshold.

    Finance professor Moshe Milevsky says Canada’s Required Minimum Distribution (RMD) rates from tax-sheltered accounts are higher than most countries, including the U.S. At age 75, Canada’s RMD is 7.85%, versus 4.37% for the U.S., 6.31% for the U.K., 6% for Australia and 3% for Ireland. Canada’s RMD is also highest at age 90: a whopping 13.62%, versus 8.77% for the U.S., 6.31% for the U.K., 11% for Australia and 3% for Ireland. (Financial Post)

    There are tax strategies that you can use to reduce the taxes on a one-time significant RRIF withdrawal.

  3. When the first spouse passes away, the RRIF/RRSP passes to the surviving spouse (assuming that is the beneficiary choice) without tax consequences. However, when the second spouse passes away the remaining RRIF/RRSP is dissolved and taxed at normal tax rates. In Ontario, the estate of an individual leaving a RRIF/RRSP greater than $509,000 to anyone other than their spouse will be subject to the maximum tax rate of 49.53%. Imagine an estate with a RRSP/RRIF of $1million – and half goes to Ottawa.

    There are tax and estate planning strategies to help manage this tax bill – either before you get to that stage or at the time of passing.

Most of us have a goal, while we are still employed, to build up our retirement nest egg to fund a comfortable lifestyle in our retirement. Once you have retired, you now need to manage the drawdown in a tax efficient manner. It’s not just a matter of calculating what your minimum RMD is each year.

If you work with a financial planner, discuss with them options you can put in place now on how to minimize your taxes and maximize the value of your estate. TriDelta Financial has expertise to assist you with tax strategies, which may save huge dollars. Contact us for a no obligation consultation.

Gail can be contacted by email at gail@tridelta.ca and by phone at (905) 399-2035.

Why you need a Personal Financial Plan

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Over 25+ years as an executive in the business world, I have witnessed the value of a good financial plan to a company’s success. Corporations with excellent financial organizations reach their financial goals, or understand the key reasons they were missed. They have metrics for measuring progress and address gaps as they occur. They predict cash overages/shortages and have plans for how to deal with them. And most importantly, the organization’s missions/values and strategies are embedded in their financial plans.

In the same way, a financial plan is a critical tool for you to achieve your financial goals; when done well it will reflect your personal goals and values. Do you want to leave funds for your children, do you want to support a local charity or association you participate in, do you want to travel regularly, do you want to live financially independent in the near future, do you want to have a high “sleep at night” factor in your investments? All of these goals should be embedded in your financial plan.

A basic financial plan can help you identify “your number” (how much you need to retire) to guide you in your retirement investing. A good financial plan will do more than that: It will time your cash-flows in order to minimize your taxes and maximize your government benefits. It will provide a range of sensitivities on age, investment performance, and inflation so you can make the decisions today to prepare yourself for a variety of possible scenarios for your future. It will provide investment allocations that will maximize your capital preservation while minimizing your risk.

At critical stages in your life you should do a financial plan – such as when approaching retirement, a change in your family situation, or if you are looking for a 2nd opinion on your investment portfolio. There are many sources of a good financial planner, whether through the internet, the FPSC website or through your own network. Search for someone you feel comfortable with, have a sense of trust and respect to prepare a financial plan that reflects your goals, your values and your risk profile.

Gail Cosman
Senior Wealth Advisor
TriDelta Financial

How Many Years Will I Spend in Retirement?

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As our life-expectancy increases, North Americans are spending more time in retirement than ever before.  An essential part of financial planning is to recognize how many years you will spend in retirement.

In 1921, the average life expectancy at birth for a Canadian male was 58.8 years. At that time the Ford Motor Co. had a mandatory retirement age of 65.

Clearly for many employees, this mandatory retirement age was just a notional concept.

It certainly made financial planning easier.

Today, many people retire (whether by choice or not) somewhere around 60 to 65.

Based on a United Kingdom study, for someone aged 62, a man has a 52-per-cent chance of living 20-plus years, and a 14-per-cent chance of living 30-plus years. For a woman, she has a 67-per-cent chance of living 20-plus years, and a 26-per-cent chance of living 30-plus years.

Based on these numbers, most Canadians today would want to plan for a retirement of 30 years, to be conservative.

In a related note, how many Canadians expect to actually have put in more than 40 years in the work force? Given how many people don’t even start careers until their mid-20s, that means that effectively, each working year must cover not just today’s expenses, but provide for nine months of retirement as well.

That is a daunting thought.

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The purpose of this little walk through Retirement 101 is not to scare people, but rather to encourage people to think differently about their future or current retirement.

Questions that need to be asked might include:

• If still working, do I need to think about ways I can work beyond my early 60s?

• If retired, am I going to be OK if I/we live into our 90s?

• Am I saving enough towards retirement?

• What is my world going to look like in 25 years?

To help with some of these questions, below are a few websites that provide some depth on the topic.

They include:

• How long will I live calculator – from University of Pennsylvania

• A great article and site with a variety of longevity charts, from a Cambridge mathematics professor

• How much money will I have at the end? This is a calculator my firm put together. It assumes that you live to a full life expectancy.

Not surprisingly, the world has changed an incredible amount since 1921. In fact, it feels like the rate of change is increasing. It is because of this rate of change that a 30-year retirement can bring a lot of unexpected situations. The more you understand your own situation, lifestyle, income, and longevity, the better prepared you will be.

Who knows? Maybe the Ford Motor Co. plant will be hiring 75-year-olds in 20 years.

[VIDEO] The Four Steps for a Successful Retirement Income Plan

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Thinking about how to secure yourself a retirement income stream? In this video, I discuss the four crucial steps to develop a retirement income.

In brief, the steps discussed in the video are:
1. Understand your pension and government income.
2. Understand your expenses.
3. Understand the tax implications
4. Plan for each year.

If you are interested in learning more about developing a retirement income stream, download our FREE Canadian Retirement Income Guide now!

Benefits of Using Life Insurance as a Retirement Tool

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Yesterday, we talked about the retirement strategy of using life insurance as a savings mechanism. Today,  we look at the benefits of using life insurance for retirement.

To recap: Basically, you take out a guaranteed life insurance policy on an older relative and name yourself the sole beneficiary. When this older relative passes away, whether it is in 10, 20 or 30 years, you are ideally approaching or in retirement and receive the guaranteed payout.

Now how does this  benefit you as a retirement instrument?

  • If you are making $200,000-plus a year, and you are maxing out your RRSP contribution and TFSA contribution, over time you are probably left with savings held in non-registered investments or in a second property. Both of these are being taxed and subject to the variability of the markets.
  • If you are middle aged and you have a parent in his or her 60s or 70s, and in decent health, he or she will certainly qualify for permanent life insurance. By funding this insurance with money that would otherwise be taxed in some way, and getting a payout around retirement, this meets the objective of retirement planning perfectly.
  • Many people respond: “Isn’t life insurance very expensive at that age?” The answer is that the rate of return can be very good. This return is not tied to any investments held within the insurance policy. It is based on the dollars put in over the years, held within the plan using a guaranteed minimum return, and the insurance payout at the end.life-insurance-for-retirement-savings
  • If you want more tax sheltering than you are allowed with RRSPs and TFSAs, an alternative is to pay for the life insurance on your parent. In some cases the return is so good and the other benefits are so strong, you would want to do this instead of some of your RRSP and TFSA contributions.
  • If you are self-employed, earning good money but not earning a salary, you simply don’t have much or any RRSP contribution room. This type of strategy is a great alternative. You get the best of both worlds in terms of tax efficient income, and you still can benefit from a tax sheltered retirement strategy – without any hard limit on contributions. An even better option for self-employed individuals is to buy the insurance policy within their company.
  • Remember that the named beneficiary of an insurance policy can be quite flexible. In some cases, parents are more comfortable with the process if they know that the grandchildren are also named as beneficiaries on the policy.
  • Among other benefits of this strategy, the insurance policy is creditor proof, and the death benefit is not considered family assets in the event of marriage breakdown (unlike the RRSP and TFSA).

Some might suggest that it seems odd to financially benefit from a relative’s death. While one can understand the point of view, it is really no different than anyone who is likely to receive an inheritance. It is simply helping your family to do smart financial planning.

Make sure to read the article that originally describes how this life-insurance strategy works.

Maxed out RRSP & TFSA? An Alternative Tax-Sheltered Retirement Strategy

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There is an alternative tax-sheltered retirement strategy that is a substitute for RRSPs or tax-free savings account. This strategy allows you to invest a set amount every year (that you can comfortably afford) and guarantees that you generally earn a return of around 8% after tax, annually. In your late working years or early retirement, you receive a tax free payout. The investment does not move up and down with the stock or real estate market.

Intrigued? Here is how it works:

•You have maxed out your RRSPs. This could be because your income is high and you have good savings, or you have a sizable pension contribution, or as a self-employed individual who receives dividends you have very little RRSP room to use, and your TFSA is maxed out.

•You have a parent or in-law, aunt or uncle, who is in reasonably good health for his or her age, and is somewhere between 60 and 80. Reasonably good health means no recent or current cancer, heart attacks or strokes or other major diseases.

•You take out a permanent insurance contract on this individual. With permanent insurance, if it is held until death, it is guaranteed to provide a payout. For example, if someone puts in $12,000 a year for 15 years, that totals $180,000. The insurance policy might pay out $360,000 in 15 years. This is different from a “term 10” or “term 20” insurance policy that covers only a fixed time period, and usually has a return of negative 100 per cent. Permanent insurance allows you to know the payout on the investment. The only unknown is when the payout will occur.

•To implement the strategy, you would search the market for the best permanent insurance solution given the age and health status of the individual. That will require an insurance broker who has access to the full market, focuses on estate planning and understands the strategy.

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To better understand this life insurance strategy, here is an example:

We have an imaginary investor, Joe, and he is 41. His yearly income is $200,000, and he has no more room in his RRSP or TFSA. He has $150,000 in non-registered investment assets (and these are being taxed).

Joe’s mother, Susan, is 70 and in decent health (except for a bad knee). Joe’s insurance broker has searched the market to find the best return for a permanent policy for a 70-year-old woman. Joe deposits $12,000 a year for 15 years and the policy is fully paid up – a unique feature of this particular product. This policy also has a return of premium. It essentially adds one dollar of payout for every dollar Joe puts in.

After one year, Joe has put in $12,000. If Susan passed away, the insurance payout would be $193,000, for a return of 1,508 per cent. Every year Joe puts in $12,000, the payout goes up $12,000. In year five, Joe would have put in $60,000 and the insurance payout would be worth $241,000. In 15 years, Joe has put in $180,000. In this case, the policy is now fully paid, and Joe doesn’t need to pay another dollar. The payout figure does not continue growing past this point.

As it turns out, Susan passes away shortly after, at age 85. Joe is now 56 years old. The insurance policy pays out $361,000 to the beneficiaries. In this case, Joe is the sole beneficiary.

If Joe had put the same $12,000 a year for 15 years into a non-registered GIC, to have the same after-tax return as this strategy (assuming Joe pays a 46 per cent marginal tax rate), he would have to find a GIC paying 15.35 per cent.

Not only did this strategy provide Joe with extra tax shelter, but it guaranteed he would at least double his money, tax free, whether Susan lived to age 71 or age 95.

Read Part II to learn about the benefits of using life insurance as a retirement savings tool.

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