Sustaining a blog for months and years is a remarkable achievement. This week we go back to basics and check in on what some of our favourite veteran bloggers are writing about.
If you haven’t heard, Tim Stobbs from Canadian Dream Free at 45 has exceeded his objectives and retired at age 37. You can read about his accomplishment in the Globe and Mail and discover how he spent the first week of financial independence here.
Boomer & Echo’s Robb Engen writes about why he doesn’t have bonds in his portfolio but you probably should. He acknowledges that bonds smooth out investment returns and make it easier for investors to stomach the stock market when it decides to go into roller coaster mode. But he explains that he already has several fixed income streams from a steady public sector job, a successful side business and a defined benefit pension plan so he can afford to take the risk and invest only in equities.
On My Own Advisor, Mark Seed discusses The Equifax Breach – And What You Can do About It. In September, Equifax announced a cybersecurity breach September 7, 2017 that affected about 143 million American consumers and approximately 100,000 Canadians. The information that may have been breached includes name, address, Social Insurance Number and, in limited cases, credit card numbers. To protect yourself going forward, check out Seed’s important list of “Dos” and Don’ts” in response to these events.
Industry veteran Jim Yih recently wrote a piece titled Is there such a thing as estate and inheritance tax in Canada? He clarifies that in Canada, there is no inheritance tax. If you are the beneficiary of money or assets through an estate, the good news is the estate pays all the tax before you inherit the money.
However, when someone passes away, the executor must file a final tax return as of the date of death. The tax return would include any income the deceased received since the beginning of the calendar year. Some examples of income include Canada Pension Plan (CPP), Old Age Security (OAS), retirement pensions, employment income, dividend income, RRSP and RRIF income received.
When the Canadian Personal Finance Blog’s Alan Whitton (aka Big Cajun Man) started investing, he was given a few simple rules that he says still ring true today. These Three Investment Credo from the Past are:
Don’t invest it if you can’t lose it.
Invest for the long term.
If you want safety, buy GICs.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
Written by Sheryl Smolkin
Sheryl Smolkin LLB., LLM is a retired pension lawyer and President of Sheryl Smolkin & Associates Ltd. For over a decade, she has enjoyed a successful encore career as a freelance writer specializing in retirement, employee benefits and workplace issues. Sheryl and her husband Joel are empty-nesters, residing in Toronto with their cockapoo Rufus.
I retired from my corporate job with a defined benefit pension before I turned 55 and I opted to begin receiving my CPP at age 60. And by starting my own business as a workplace journalist I also created another significant income stream.
In contrast, when my husband retired at age 65 he did not have a pension and he elected to defer receipt of CPP and OAS for a year. He also decided not to convert his RRSP into a RRIF until he is required to do so at age 71. Therefore, other than withdrawing funds from our unregistered investment account, he had no source of income. As a result, when it came to filing subsequent income tax returns, the disparity in our income made us ideal candidates to benefit from pension-income splitting which has been available since 2007.
The way it works is that if you are receiving income that qualifies for the pension income tax credit you’ll be able to allocate up to half of that income to your spouse or common-law partner (and vice versa) each year. You don’t actually have to write a cheque because pension income-splitting is merely a paper transaction done via your tax return.
The type of pension income that qualifies for the pension income tax credit of up to $2.000/year and that is eligible for pension splitting differs depending on whether you were 65 or older in the year.
If you were under 65 as of December 31, 2016, “qualifying pension income” includes life annuity payments out of a defined benefit or defined contribution pension plan and certain payments received as a result of the death of your spouse or common-law partner.
If you were 65 or older in 2016, other defined payments such as lifetime annuity payments out of your RRSP, DPSP or RRIF also qualify for the pension credit. Qualifying pension income doesn’t include CPP, OAS or GIS payments.
It is worthwhile noting that pension payments from SPP qualify for the pension income tax credit.
The extent to which pension income-splitting will be beneficial will depend on the marginal tax bracket of you and your spouse or common-law partner, as well as the amount of qualifying income that can be split. In many cases, the optimal allocation will be less than the allowable 50% maximum.
If you opt to pension split, a special election form (Form T1032) must be signed by the parties affected and filed with the CRA. If you file your return electronically, you should keep the election form on file in case the CRA asks for it. Another result of pension splitting is that the income tax withheld from your pension income will be reported on your spouse or common-law partner’s return, proportional to the amount of income being split.
Pension income splitting may also reduce the Old Age Security claw back while transferring income to your spouse who is taxed at a lower tax rate. In addition, your spouse can access the pension income credit of up to $2,000 for federal tax purposes and $1,000 for BC tax purposes, which would otherwise be unavailable without pension income.
The pension income splitting rules do not make spousal RRSPs obsolete, since spousal plans still have income splitting benefits for the years before you turn 65 or if you have not yet converted your RRSP to a RRIF or annuity. In addition, taking advantage of spousal RRSPs can increase your potential for withdrawals under the Home Buyers’ Plan and the Lifelong Learning Plan.
In 2014 and 2015 the Family Tax Cut credit provided a version of income splitting that allowed an individual to notionally transfer up to $50,000 of income to his or her lower-income spouse or partner, provided they have a child who was under 18 at the end of the year. The credit was capped at $2,000 annually. However, that form of income-splitting was abolished by the new Liberal government for 2016.
Other permitted forms of income splitting with family members are described here.
I have been writing about the Saskatchewan Pension Plan for six years and a member of the plan for just as long. I thought I knew everything there was to know about the plan, but every time I review the website I learn something new.
Here are 10 things about SPP that you may find interesting.
The 30 year old plan is the 25th largest defined contribution plan in Canada (Benefits Canada 2016).
The plan is funded by member contributions and investment earnings. As of December 31, 2016 there was $479.5 million in assets under management administered by a Board of Trustees, some of whom are also plan members.
If you are between age 18 and 71 and have available Registered Retirement Savings Plan room you are eligible to join the 33,000 other members who are saving for their future, whether or not you live or work in Saskatchewan.
With an annual maximum contribution of $2,500, the plan has several payment options designed to suit your budget.
You can also transfer up to $10,000 per calendar year into your SPP account from your existing RRSP or Registered Retirement income Fund (RRIF).
You have two investment options for your funds. The default fund is the Balanced Fund (BF) which is a low to moderate risk/return investment option. Approximately 55% of the fund is invested in equities, 35% in fixed income investments and 10% in a real estate pooled fund.
The Short-term Fund (STF) is a low risk/low return investment option. Its primary purpose is to preserve capital. It is suitable for members who are near retirement and have reached their retirement savings goal, or members who wish to have a cash equivalent component in their investment portfolio.
You may retire from SPP between the ages of 55 and 71 regardless of your employment status. You must apply for SPP retirement benefits; the package to make this application is available by calling SPP.
If you name your spouse as beneficiary of your account, Canada Revenue Agency allows death benefits to be transferred, tax-deferred, directly to his or her SPP account or to an RRSP, RRIF, or guaranteed Life Annuity Contract (LAC).
In addition to spousal rollover of SPP death benefits, rollovers to an RRSP or Registered Disability Savings Plan for a financially dependent infirm child or grandchild are permitted.
For more information about SPP see the website or call the office at 1-800-667-7153.
In the first two months of every year financial institutions across the country advertise heavily encouraging every Canadian to open a registered retirement savings plan and make a maximum contribution.
And if you haven’t made all of your permissible RRSP contributions in earlier years you are an even more attractive target because chances are you have thousands of dollars of additional unused RRSP contribution room.
But in spite of the fact that I have been preaching the retirement savings gospel for decades, I agree with other pundits that there may be some circumstances in which it doesn’t make sense for you to top up your RRSP. For example:
Low marginal tax rate: If you have a low marginal tax rate, you may be better off saving in a tax-free savings account or other non-registered savings and wait until you are earning more money to use up your RRSP savings room (which can be carried forward). Of course you could make the RRSP contribution in a year of low earnings and wait until a future year when you are more affluent to take the tax deduction.
High interest debt: If you are carrying high interest credit card or other debt, your priority should be to pay off that debt as soon as possible to avoid further interest compounding. Then put controls in place to avoid getting into further debt. Once you have retired the debt, the additional cash flow can be used to make tax deductible RRSP contributions.
Short -term goals: If you have high priority short-term objectives such as saving a down-payment for a house, funding your education or taking a family vacation, a TFSA is a more flexible savings vehicle. Your TFSA contributions accumulate tax-free. All or part of the balance can be withdrawn without tax consequences. And contribution room in the amount you withdraw will be restored the following year.
Higher retirement income: RRSP contributions are most tax effective if you make them at a time when you are in a higher tax bracket but you have a reasonable expectation that your income in retirement will be lower when you must convert your RRSP account into a RRIF and begin withdrawing funds. However, you may live frugally and build a business in your prime working years. As a result, by the time you retire your income from money in the business, registered and un-registered funds is higher than prior to age 65.
Great DB pension plan: Contrary to what you may have read, the defined benefit pension plan is not completely dead in Canada. For example, a small number of employees of private companies, federal public servants and some provincial employees will have generous monthly pensions when they retire. In these circumstances having a large taxable income in an RRSP maybe a great idea if RRIF withdrawals push your annual income over the threshold and as a result your Old Age Security is clawed back ($74,789 in 2017).
Business owner: Unlike employees, incorporated business owners can control their compensation. If corporate income is not needed for personal living expenses, for example, it can be retained in a corporation to defer income taxes. The tax cost of withdrawing dividends (in retirement) could be significantly lower than the tax cost of withdrawing RRSP or RRIF dollars, which are be fully taxable.
Nevertheless, for all but a small number of people who fall into the categories above, an RRSP is a splendid idea. And consider using some of your RRSP contribution room to contribute to the Saskatchewan Pension Plan (up to $2,500/year) or transferring in up to $10,000/year to the SPP from your RRSP. Your money will be professionally managed and at retirement you can purchase an annuity that will pay you for life.
After several weeks of “theme” issues it’s time to check in with some of our favourite bloggers to find out what’s on their mind.
On Boomer and Echo, Marie Engen asks the perennial question RRIF Or Annuity? Which One Is Right For You? She suggests combining both so an annuity covers your basic retirement expenses together with with your CPP, OAS, and any other pension income you may be receiving to give you a guaranteed income stream for life. This allows your RRIF to provide you with investment growth opportunities and easier access to your money for your more enjoyable lifestyle expenses.
Tax Freedom Day 2016 happened June 7th this year. Retire Happy’s Jim Yih says it’s another reason to celebrate summer. He explains where all of your taxes go because once you realize the severity of tax on your lifestyle, it is your job to investigate legitimate ways to reduce your tax bill. “I’ve often said that good tax planning is the foundation to any financial, investment or estate decision,” Yih concludes.
Bridget Eastgaard lives in Calgary where due to the drop in oil prices the rental market is very soft. On her blog Money After Graduation she shares One Simple Shortcut To Put More Money In Your Budget. Her research revealed a similar unit renting for $250 less in her building plus a half-dozen comparable apartments renting nearby for less. She succeeded in lowering her rent by 20%, saving hundreds of dollar a month that will be redirected to accumulating a down payment on a house.
And the Big Cajun Man Alan Whitten reminds readers to keep an eye on their bank account to make sure automatic withdrawals are being processed properly on an ongoing basis. When he checked on his son’s RESP recently, he found that TD Bank mysteriously stopped depositing in November of 2015. There has been a problem ticket opened on this issue, and someone will be getting back to him.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.
While most (94%) Canadians aged 55 to 75 ‘agree’ that they would ‘like to have guaranteed income for life’ when they retire, a new Ipsos poll* conducted on behalf of RBC Insurance finds that just two in ten (22%) Canadians agree that ‘Canadian public pension plans (such as CPP/QPP/OAS) will provide enough retirement income’ for them. In fact, most (78%) disagree that these pension plans will suffice.
It’s no surprise then that six in ten ‘agree’ that they’re ‘worried about outliving their retirement savings’, while four in ten ‘disagree’ that they’re worried. Women (66%) are considerably more likely than men (50%) to be worried about outliving their savings, as are those aged 55 to 64 (62%) compared to those aged 65 to 75 (52%).
Atlantic Canadians (67%) are most worried about outliving their retirement savings, followed by those in Ontario (63%), Alberta (60%), Quebec (59%), Saskatchewan and Manitoba (58%) and finally British Columbia (41%).
One way of supplementing retirement income is through the use of an annuity, but many Canadians aged 55 to 75 appear in the dark about what an annuity is and how it might help them. In fact, six in ten say ‘that they ‘don’t know much about annuities’, while four in ten disagree that they lack knowledge in this area.
Women (71%) are significantly more likely than men (51%) to say they don’t know much about annuities, as are those aged 55 to 64 (66%) compared to those aged 65 to 75 (55%). Albertans (75%) are most likely to admit they don’t know much about annuities, followed by those living in Saskatchewan and Manitoba (71%).
Responses to this quiz also confirm that many Canadians lack fundamental knowledge about annuities. Just 55% of Canadians were able to answer more than half of the questions correctly, and only 6% got all six questions right. British Columbians (62%) were most likely to pass the test, followed by those in Quebec (57%), Ontario (54%), Atlantic Canada (53%), Alberta (52%) and finally Saskatchewan and Manitoba (49%).
Just four in ten believe that it is true that they need a licensed insurance advisor to buy an annuity. In contrast, six in ten believe this is false – when in fact, it is true.
Seven in ten correctly believe it’s true that there are potential tax savings to investing in annuities, while 29% incorrectly believe this to be false.
Half incorrectly believe it’s true that annuities last for a specific period of time, while the other half believes this is false, which is the correct answer.
Seven in ten correctly believe it’s true that annuities can provide guaranteed income for life, while three in ten incorrectly believe this to be false.
Half think it’s true that annuities are not a good investment during low interest rate environments, while the other half correctly believes this to be false.
Three quarters correctly believe it’s true that they can invest in an annuity using their RRSP and/or RRIF savings, while 27% incorrectly think this is false.
Despite the majority being uneasy about their retirement savings, just one in three agrees that they are exploring or considering annuities as part of their retirement plan, while most (65%) are not. One quarter say they have an annuity.
Members of the Saskatchewan Pension Plan can opt at retirement to receive an annuity payable for life. Life only, refund and joint survivor annuities are available.
*These are some of the findings of an Ipsos poll conducted between August 7 to 14, 2015 on behalf of RBC Insurance. For this survey, a sample of 1,000 Canadians aged 55 to 75 from Ipsos’ Canadian online panel was interviewed online.
A new report from the C.D. Howe Institute says that the lower mandatory draw downs from RRIFs and similar vehicles introduced in the 2015 budget are better than the old rules but this file should nevertheless remain open. If real yields on the types of securities a prudent retiree should hold do not rebound considerably, and if life expectancy continues to rise, authors William B.P. Robson and Alexandre Laurin say the risk of outliving tax-deferred savings will continue to be material.
By the time new withdrawal limits were announced this year, the draw down rules established in 1992 were badly outdated. Lower yields on safe investments and longer lives had put many Canadians at risk of outliving their savings. The new smaller minimums reduce that risk.
With real investment returns of 3%, as assumed in the budget illustrations, C.D. Howe projections suggest relatively constant minimum RRIF draw downs up to age 94, and a lower risk of living to see a badly depleted RRIF account balance. However, real returns on safe investments are currently negative. Re-running the projections with zero real returns suggests that most seniors still face a material risk of outliving their tax-deferred savings.
The motive for forcing holders of RRIFs and other similarly treated tax-deferred assets to draw down their savings is to accelerate the government’s receipt of tax revenue, and likewise bring revenue from income-tested programs such as Old Age Security (OAS) and the Guaranteed Income Supplement (GIS) forward. These payments will occur eventually – notably on the death of the account holder or her/his spouse or partner – so they amount to an implicit asset on governments’ balance sheets. The draw downs do not affect their present value; they simply make them happen sooner.
The minimum withdrawals are not a serious problem for those who, perhaps because they do not expect to live long, want to draw their tax-deferred savings down fast. Others, willing and able to work and replenish their savings after age 71, will get by. Couples can gear their withdrawals to the younger spouse’s age. High-income seniors whose incremental withdrawals do not trigger OAS and GIS clawbacks will find the burden of paying ordinary income taxes on them tolerable. Higher TFSA limits will also let more seniors reinvest unspent withdrawals in them, avoiding repeated taxation.
For others, however, forced draw downs make no sense: those whose withdrawals – reinvested in TFSAs or not – trigger claw backs; those daunted by tax planning and investing outside RRIFs; those unable to work longer; and those facing sizeable late-in-life expenses such as long-term care. The more future seniors have ample assets to finance such needs as health and long-term care, as well as the enjoyments of retirement, the better off Canada will be.
Therefore, the report says the 2015 changes should be a down payment on further liberalization. In the alternative, if more regular adjustments to keep the withdrawals aligned with returns and longevity are impractical, it is suggested that eliminating minimum withdrawals entirely may be the best way to help retirees enjoy the lifelong security they are striving to achieve.
Robson and Laurin conclude that government impatience for revenue should not force holders of RRIFs and similar tax-deferred vehicles to deplete their nest-eggs prematurely. While the 2015 budget’s changes are a step in the right direction, they say retirees need further changes to these rules if they are to enjoy the post-retirement security they are striving to achieve.
Today I’m interviewing actuary Karen Hall for savewithspp.com. Prior to her recent retirement, she was a vice president at the consulting firm Aon Hewitt, based in Vancouver. In addition to enjoying her retirement, she is continuing to explore cost effective and easy ways to create a steady income out of defined contribution (DC) pension savings.
Karen has 35 years of professional experience in the areas of pension actuarial consulting, flexible benefits consulting, senior management and HR leadership. She is also the author of the book, Risk Management Strategies for an Aging Workforce available on Amazon. Thanks so much for joining me today, Karen.
Q: Most Canadians in the private sector today have defined contribution pension plans. Tell me how a DC plan works.
A: Well, Sheryl, defined contribution means the contributions going in are defined or fixed. The member and her employer each contribute to the plan. The member often chooses how the money is invested from a number of investment options provided by the plan. Then, when the member comes to retire, she has a lump sum amount saved.
Q: On retirement, the conversion of DC assets into retirement income is for the most part left up to retirees. Why is that a problem?
A: If you buy an annuity you don’t get much in income for the amount you saved. The only other alternative is doing it yourself, that is, choosing investments, deciding how much to withdraw and figuring out how to make the money last for your lifetime. If you rely on advisers for any of this, you’re typically paying a substantial fee of at least 2% of your assets every year. The average person is just not equipped to make these decisions. I find it complicated enough and I’ve been living and breathing pensions for 35 years.
Q: Frequently, insurance companies or other DC or Group RRSP carriers, have group registered retirement income funds that retiring members of client group retirement plans can move their money into at retirement. Do these plans resolve some of these issues of high retail fees and poor financial literacy that you identified in our last question?
A: I don’t think they do. It would depend, of course, on the deal. But, often the fees are still quite high, near 2%, and the individual is still making all of the decisions I just mentioned.
Q: So how common are Group RRIF’s established for retirees of just one employer and what are the pros and cons of these types of arrangements?
A: Based on my experience, they aren’t that common. I can see why plan sponsor companies don’t want the ongoing administration. But I do think it would be great if the retiree could basically just stay in the plan and get the same investment options and fee deals as when they were active.
What I do see more often is where the insurance company that is the record keeper for the plan will have options for the member to transfer into their individual RRIF products, perhaps with a modest reduction in fees as compared to a retail purchase.
Q: How much clout do individual DC plan sponsors have in negotiating fees for their former members in rollover plans or single organization Group RRIF’s?
A: Well, as with everything, it depends on the size of the employer and on how much the employer wants to push for such a service. I do know of large employers who have negotiated such services.
Q: How should investment options be structured in rollover plans and single company Group RRIFs to maximize value from a DC plan in the decumulation phase?
A: In my view, the same options as when the member was active should generally be fine. The plan could add a target date type option for accounts and payments. But I think the typical choice of a range of balance funds and funds with conservative to moderate risk. You are going to live a fair number of years in retirement, so your time horizon isn’t that short.
Q: Saskatchewan and several other provinces, plus federal pension legislation, now allow payment of a variable pension from a DC plan – that means a stream of income that tries to simulate a defined benefit pension. Could you briefly explain to me how it works?
A: Well, it does depend on the plan and the legislation how they set it up, but very generally such an arrangement would allow the plan to provide payments to retirees. Like you said, it would simulate a defined benefit type of pension. There would generally be monthly payments and the amount of each payment would vary depending on plan experience.
For example, one client I know determines the amount of the monthly payment once a year. The amount is leveled for the year, so it’s paid every month at a level amount, but then it gets recalculated every January and depends on how well the fund did in the previous year. Generally – hopefully – it usually goes up or slightly or stays about the same. However, if it was a really bad year like 2008, the monthly pensions would likely be reduced.
Q: And how do they draw down funds in terms of various funds or investments the members are invested in or cash or whatever is actually sitting in the member’s account?
A: Well, in this particular one, when you retire and choose a variable pension, you have a lump sum amount and that lump sum amount gets translated into a number of units in the fund. Then, the fund pays a pension based on a dollar amount per unit, so the dollar amount per unit times the number of units you have, that’s what you get.
And what’s happening in this one is they’re insuring the mortality, so you don’t actually see your lump sum getting drawn down, you’re guaranteed to get that amount however long you live, and then the mortality is spread amongst the group.
Q: Oh, that’s really interesting. So it’s not just a matter of investments being sold and your money being distributed once a year, like if you had your own individual RRIF.
A: Right. So the plans can offer an individual RRIF and in those circumstances you’d see your money getting drawn down. But these variable pension ideas are to do with pooling the mortality risk.
Q: So to what extent have employers taken advantage of their ability to pay variable pensions to enhance the value of their DC plans to plan members in this all important decumulation phase?
A: As far as I know, not many have done so. Well, I know the one I gave in my example, but I don’t know of any other examples.
Q: And why do you think that’s the case?
A: Well, I think that it’s just new, right? CAP Guideline Number 8 says that plan sponsors should help members transition, but it’s new and sponsors are still considering their options. They are watching to see what others will do.
Q: Is there a real cost or a potential liability to employers that take on this responsibility?
A: That’s the big issue. For example, if you don’t have a big enough group, it’s hard to pool the mortality risk. The other thing is I’m not sure members are clamoring for variable pensions. Plan sponsors will pay attention when it affects active members and their appreciation of the benefit. I know there are plans that are interested in designing this and we’ll probably see how it develops in the next few years .
Q: Do you think it will be more of interest to public sector or private sector?
A: I think the public sector will have more ability to implement these and I think that union groups without a defined benefit plan might be interested.
Q: How important is effective employer communications in adding value to DC benefits for retirees in the decumulation phase?
A: Some employers are doing more to help members understand their options and prepare for retirement in the decumulation phase. For example, they provide one to three day retirement preparation seminars that can help considerably. I do still think, however, that individuals are not equipped to make many of these decisions. And you can put design features into DC plans that would help members better with the decision making.
Q: Could you give me an example of one or two of those?
A: Auto enrollment, auto escalation, and the design feature that we were just talking about — variable pensions — that would assist members with decision making in the decumulation phase would help.
Q: What role can annuity purchases play using all or part of the money in the plan members, DC account or RRIF to enhance the orderly draw down funds after retirement?
A: Annuities are expensive when the person is first retiring. However, I would definitely consider purchasing an annuity after about my mid 70’s. At that point, the insurance element becomes more interesting and significant because you don’t know if you’re going to live a few more years or a couple of more decades.
And the financial impact of living 2 or 20 years more is huge. The security that an annuity can give becomes much more worthwhile. So one strategy could be to separate your savings into two buckets: A: the amount you will need at age 80 saved via the annuity and B: the RRIF or the amount you’re going to spend between now and age 80. This is a bit easier to deal with, because the time frame’s better defined.
Q: That’s interesting. So do you have any other comments or suggestions that people are approaching retirement with a DC pensions or group/individual RRSPs to think about?
A: Well, focusing on just the DC pension is helpful, but I do think it’s also an incomplete solution. If the person has properly saved for retirement, he/she doesn’t have just one DC or Group RRSP account.
Even if they combine savings from previous employers, the spouse probably has registered savings, both spouses might have their own tax-free savings account and they probably have non-registered money too.
All these sources of income must be coordinated so the individual can meet their retirement and personal financial goal. Either the person has to educate themselves to manage on their own or they need help in finding an appropriately qualified financial adviser to assist them.
Right now in Canada, the price of such assistance is, in my view, unreasonably high. I also feel that many financial advisers do not have much experience with effective decumulation of retirement savings. Individuals have to look hard to find the right person.
Well, thank you very much. I really appreciate that you spoke to us today, Karen.
You are very welcome. It’s a pleasure, Sheryl. Thank you for asking me.
This is the edited transcript of an interview conducted by telephone in July 2015.
By now you may be aware that there are changes to the Registered Retirement Income Fund (RRIF) withdrawal rules in the 2015 federal budget. But you may be wondering what difference it will make to you.
The basic purpose of the tax deferral provided on savings in registered pension plans (RPPs) and registered retirement savings plans (RRSPs) is to encourage and assist you to accumulate savings over your working career in order to meet your retirement income needs.
Consistent with this purpose, savings in Saskatchewan Pension Plan and RRSPs must be converted into a retirement income vehicle by age 71. In particular, unless you purchase an annuity, an RRSP must be converted to a RRIF by the end of the year in which you reach 71 years of age and a minimum amount must be withdrawn from the RRIF annually beginning the year after it is established (alternatively, the RRSP savings may be used to purchase an annuity). This treatment ensures that the tax-deferred RRSP/RRIF savings serve their intended retirement income purpose.
A formula is used to determine the required minimum amount a person must withdraw each year from a RRIF. The formula is based on a percentage factor multiplied by the value of the assets in the RRIF. The percentage factors (the RRIF factors) are based on a particular rate of return and indexing assumption.
Until this year, a senior was required to withdraw 7.38% of their RRIF in the year they are age 71 at the start of the year. The RRIF factor increased each year until age 94 when the percentage that seniors were required to withdraw annually was capped at 20%.
The existing RRIF factors were in place since 1992. The 2015 Federal Budget adjusts the RRIF minimum withdrawal factors that apply in respect of ages 71 to 94 to better reflect more recent long-term historical real rates of return and expected inflation. As a result, the new RRIF factors will be substantially lower than the existing factors.
The new RRIF factors will range from 5.28% at age 71 to 18.79% at age 94. The percentage that you will be required to withdraw from your RRIF will remain capped at 20% at age 95 and above. Table 1 below shows the existing and proposed new RRIF factors.
By permitting more capital preservation, the new factors will help reduce the risk that you will outlive your savings, while ensuring that the tax deferral provided on RRSP/RRIF savings continues to serve a retirement income purpose.
As illustrated in Table 2 below, the new RRIF factors will permit close to 50% more capital to be preserved to age 90, compared to the existing factors (Table 1 above).
TABLE 2: CAPITAL PRESERVED UNDER THE RRIF FACTORS
Age at January 1
Under existing RRIF factors
Under new RRIF factors
Difference (% more remaining)
1 For an individual 71 years of age at the start of 2015 with $100,000 in RRIF capital making the required minimum RRIF withdrawal each year.
2 Age 71 capital preserved at older ages is expressed in terms of the real (or constant) dollar value of the capital (i.e., the value of the capital adjusted for inflation after age 71). The calculations assume a 5% nominal rate of return on RRIF assets and 2% inflation.
By reducing your RRIF withdrawals, you can retain more assets in your RRIF—assets that will continue to accumulate on a tax-deferred basis to support your future retirement income needs should you live to an advanced age. In addition, if you do not need your minimum RRIF withdrawal for income purposes, you can save the after-tax amount for future needs — for example, in a Tax-Free Savings Account (TFSA), if you have available TFSA contribution room.
Of course, if you need more money sooner, you can withdraw it from your RRIF and pay the tax owing. Any money that you withdraw from a RRIF will increase your income for the purposes of calculating the Old Age Security clawback and eligibility for the Guaranteed Income Supplement.
Prime Minister Harper’s 2015 pre-election budget included several goodies for both people who are saving for retirement and seniors in the deccumulation phase. As you probably know by now, annual TFSA contributions have been increased from from $5,500 to $10,000/year and seniors will be permitted to withdraw money more slowly from their RRIFs so their savings will last longer.
If you are already a senior, you will be happy to know that Rob Carrick at the Globe and Mail characterized seniors as the runaway winners in the Budget. You got more elbow room to manage withdrawals from your RRIFs and a new tax credit to make your homes more accessible. Older Canadians are also major beneficiaries of the new $10,000 annual contribution limit for tax-free savings accounts and there is some financial help for people who look after gravely ill relatives
One of the sources of controversy after the budget was passed is whether it is safe to go ahead and top up your TFSA for 2016 before the budget is actually passed by Parliament. My take was that this is a majority government and there is no way the budget provisions will not become law. Jonathan Chevreau quoted me in Experts: go ahead and make that extra $4,500 TFSA contribution now: I just did.
“This proposed measure is subject to parliamentary approval. Consistent with its standard practice, the CRA is administering this measure on the basis of the budget announcement. Financial institutions may immediately allow existing and new account holders to contribute up to the proposed maximum.”
In a Maclean’s article, Stop pretending the TFSA expansion won’t be felt until 2080 Kevin Milligan notes that the most important feature of TFSAs is that room accumulates through time, starting at age 18. The annual limit started at $5,000 in 2009, moved to $5,500 in 2013, and the budget has now moved the limit to $10,000 from 2015 forward.
This means that 10 years from now in 2025, every Canadian who is age 34 or older will have full possible contribution room of $141,000. For a couple, that would be $282,000. The net result he believes is that very few people in the future will have any need to pay much tax on investment income as TFSAs will provide almost total coverage of assets.
Finally, Gordon Pape says in his Toronto Star column: RRIF withdrawal changes – it’s about time. His preference would have been for Ottawa to eliminate the minimum withdrawals entirely. After all, everything in an RRIF will eventually be taxed when the plan holder or the surviving spouse dies. The feds will get their share sooner or later — they always do. But he will take what he can get!
We will discuss the RRIF changes in more detail in a future blog on savewithspp.com.
Do you follow blogs with terrific ideas for saving money that haven’t been mentioned in our weekly “Best from the blogosphere?” Share the information with us on http://wp.me/P1YR2T-JR and your name will be entered in a quarterly draw for a gift card.