Tag Archives: OAS

2015 Changes to RRIF Withdrawal Schedule Not Enough, says C.D. Howe

By Sheryl Smolkin

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By the time new withdrawal limits were announced this year, the draw down rules established in 1992 were badly outdated.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.

Also read:
What the new RRIF withdrawal rules will mean for you

RRIF rules need updating: C.D. Howe

Mar 23: Best from the blogosphere

 

By Sheryl Smolkin

Spring is definitely in the air and every day the piles of snow and patches of ice in my neighbourhood get smaller. This week we report on a potpourri of interesting blogs and articles from some of our favourite bloggers.

We usually catch Robb Engen on Boomer and Echo, but he also regularly writes for his blog  RewardsCanada. This week he posted an interesting article about why it is so hard to cancel a credit card. Credit card companies advertise great bonuses on points when you sign up with them but they are counting on inertia to retain you as a client once the deal is in the bag. If you are smart enough to want out, they make you jump through hoops before you can cancel.

On StupidCents, Tom Drake’s mission is to help you “turn wasted sense into common cents.” Recently guest blogger Michelle offered some ideas on how to save money on your wedding. She suggests you can barter many services in exchange for free wedding products. It can also help to chose something other than a diamond and buy a pre-owned wedding dress. In a previous blog she suggested that you get married off season and not on a weekend.

If you think you have to keep your income low in your 64th year because the OAS clawback is based on your income in the previous year, take a look at Understanding the OAS Clawback by Doug Runchey on RetireHappy. He says there is a provision in the Income Tax Act that allows the clawback to be based on your income for the current calendar year, if your income in the current calendar year will be substantially lower than it was in the previous calendar year.

In Thanks for the $2000 CRA on the Canadian Personal Finance blog, Alan Whitton aka the Big Cajun Man concludes that he and his wife are not eligible for income-splitting because his wife earns too much, but in any event he says this would not be enough to buy his vote because “As usual, the program is half-baked (much like the TFSA and other ideas), and I am not a one issue voter.

And finally, on get smarter about money, Globe and Mail columnist Rob Carrick writes about the gift of a debt-free education he and his wife are giving their two sons. There is no family fortune so they will not be living on Easy Street, but they will be able to graduate debt free from a four-year undergraduate program of their choice. He says if you can’t help your kids graduate debt-free, the next best thing is to help limit their debt. In today’s challenging world for young adults, that’s a great early inheritance.

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.

Another Look At Life Annuities (Part 2)

By Sheryl Smolkin

If you are considering purchasing a life annuity using funds in your registered (RRSP, RRIF, LIRA, RPP) or unregistered accounts (Savings Accounts, GIC, TFSA, etc) you will need to consider what features to select and how your decision will impact the level of benefits you receive.

For example, a life annuity may be:

  • A single life annuity based only on the age of one annuitant.
  • A joint and survivor annuity that pays a portion of the benefit (i.e. 60%) until the death of the surviving spouse.
  • A single or joint and survivor annuity that guarantees payments for a specific period (i.e. 10 years).
  • A deferred annuity that does not start paying monthly benefits in the same year the annuity is purchased.

Other more specialized annuities include term certain or fixed term annuities, guaranteed annuities with cash back features, impaired and child inheritance annuities. You can read about them here.

To give you an idea how the nature of an annuity can impact your monthly benefits, I got a series of quotes from the RetirementAdvisor.ca Standard Annuity Calculator on October 28, 2014 which I summarized in the table below. In all cases it is assumed that a lump sum of $100,000 was used to purchase an annuity and when invested by the insurance company, the lump sum earned 4%.

While these quotes assume the primary annuitant is female and the second annuitant is male, when a male and female of the same age purchase individual life annuities, the male will receive a slightly higher periodic payment than the female because the male’s life expectancy is shorter.

Table 1: Annuity Purchase quotes

Single life Joint Single Life, COLA Joint, COLA Single, 10 yr, COLA
Gender of primary annuitant F F F F F
Age purchased 65 65 65 65 65
Age payouts begin 65 65 65 65 65
Gender of joint annuitant M M
Age when annuity purchased 65 65
Cost of living increases (COLA) X X X
10 yr. guaranteed payments X
% Payable to 2nd annuitant when 1st dies 60% 60%
MONTHLY BENEFIT $637 $592 $522 $481 $503
Joint, 10 yr, COLA Single, 10 yr, COLA Age 71 start Joint, 10 yr, COLA Age 71 start Single, 10 yr, COLA Age 80 start Joint, 10 yr, COLA Age 80 start
Gender of primary annuitant F F F F F
Age purchased 65 65 65 65 65
Age payouts begin 65 71 71 80 80
Gender of joint annuitant M M M
Age when annuity purchased 65 65 65
Cost of living increases (COLA) X X X X X
10 yr. guaranteed payments X X X X X
% Payable to 2nd annuitant when 1st dies 60% 60% 60%
MONTHLY BENEFIT $473 $762 $719 $1,401 $1,355

Source: RetirementAdvisor.ca calculator as of October 28, 2014. Assumption: $100,000 lump sum purchase earns 4%.

It is apparent that the stripped down single life annuity pays a higher monthly amount ($637) than single or joint annuities with various combinations of guarantee periods and COLAs.

Benefit payments also increase significantly if the annuity payouts are deferred to age 71 ($762, single; $719, joint) even with a 10 year guarantee and COLAs. The payments are even higher payment if an annuity with the same features is deferred to age 80 ($1,401 single; $1,355 joint).

Furthermore, annuity payouts also vary as between insurance companies. For example, you can find current quotes from a series of insurance companies for single life annuities on a premium of $100,000 based on a guaranteed period of 5 years for both males and females on the Morningstar Canada website.

Receiving monthly annuity benefits in retirement can give you peace of mind. However, the monthly benefit you can purchase for any given lump sum varies considerable depending on the type of annuity you select, the age when you purchase the annuity, the age you begin collecting benefits and the interest rate assumptions.

Your financial advisor or an annuity broker can get quotes tailored to your situation that will help you to get the features you need for the best possible price.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

 

Another Look At Life Annuities (Part 1)

By Sheryl Smolkin

Receiving a regular paycheque makes it easy to budget. The amount that appears in your bank account every month is what you have available to spend on necessary and discretionary items.

But once you retire and have to figure out how to make your lump sum savings last for the rest of your life, budgeting isn’t as easy. How much can you afford to spend? What if your investments earn less than you expected when you set up a withdrawal plan?

One way to add financial certainty is to buy a life annuity with all or a part of your retirement savings. A life annuity is purchased from an insurance company for a lump sum amount and it guarantees that you will receive a set monthly amount for life (unless the annuity is indexed).

While payments from a basic life annuity typically end when you die, at an additional cost you can add provisions like a guarantee period (i.e. payments will be made for a minimum of 10 years even if you die) or a joint and survivor feature that will continue to pay out until the death of the last spouse.

Annuities are purchased from licensed life insurance agents representing insurance companies. Life insurance agents are compensated by commissions that are factored into the cost of the annuity.

Life annuities have got a bad rap in recent years because with lower interest rates they are more expensive to purchase. Also, many people do not like the idea that they lose control of their money and that upon the death of the last annuitant or the expiry of the guaranteed payment period, the principal will not revert to their estate.

However, the upside of an annuity purchase is that if you live beyond the age that it is assumed you will live to when the original annuity purchase is made, your return on investment could be much higher than if you invested the money yourself.

If you purchase an annuity with funds from a registered plan (i.e. SPP, RRSP, DC pension plan) you must begin receiving payments by the end of the year you turn 71. Because all of the money in your account has been tax-sheltered, the full amount you receive monthly will be taxed at your incremental rate.

In contrast, you can purchase an immediate or deferred annuity from a non-registered account. For example, at age 65 you could opt to manage a portion of your money for the next 15 years, but use a lump sum to purchase a life annuity beginning at age 80. Your monthly payments will be higher than if the annuity started at age 65. Furthermore, only a portion of the benefit representing investment earnings after the purchase will be taxed.

You can use the RetirementAdvisor.ca Standard Annuity Calculator (or other similar online calculators) to model either the size of the lump sum it will take to generate a specific monthly benefit or the amount of the monthly benefit a specific lump sum will generate.

Monthly benefits you receive from the Canada Pension Plan, Old Age Security or a defined benefit pension plan are in effect, life annuities. Depending on your expected expenses and the amount of savings you have available, you may decide you do not need additional annuity income.

In the conclusion to his 2013 book “Life Annuities: An Optimal Product for Retirement Income”[1], Moshe Milevsky, Associate Professor of Finance at York University’s Schulich School of Business notes the following:

“Behavioural evidence is growing that retirees (and seniors) who are receiving a life annuity income are happier and more content with their financial condition in retirement than those receiving equivalent levels of income from other (fully liquid) sources, such as dividends, interest, and systematic withdrawal plans. Indeed, with growing concerns about dementia and Alzheimer’s disease in an aging population, automating the retiree’s income stream at the highest possible level—which is partly what a pension life annuity is all about—will become exceedingly important and valuable.”

If you have rejected an annuity purchase in the past or if you have never seriously considered investing in a retirement annuity, it may be time to take another look.

You can also use your SPP balance to purchase a life annuity directly from the plan. For more information about SPP annuities, take a look at Understanding SPP annuities. Because you purchase the annuity directly from SPP, there are no commissions or referral fees and you can be sure you are getting competitive rates.

[1] This book can be downloaded in pdf and ebook format at no cost.

Nov 24: Best from the blogosphere

By Sheryl Smolkin

Do you typically buy a fistful of gift cards for holiday gifts? Just in time to save you a bundle, Boomer & Echo’s Rob Engen writes about How To Hack Gift Cards For Big Discounts. He suggests buying gift cards with your cash back credit card, the RedFlagDeals forum dedicated to buying and selling gift cards and purchasing discounted gift cards at Costco. Who knew?

On Retire Happy, government benefits expert Doug Runchey explains that Receiving a partial OAS pension affects the amount of GIS a pensioner will receive in two ways:

  1. A pensioner receiving partial OAS will receive more GIS than someone receiving a full OAS pension, to make up for their lesser amount of OAS.
  2. A pensioner receiving partial OAS will receive GIS up to a higher income, compared to someone receiving a full OAS pension.

Jonathan Chevreau on Findependence Day Hub profiles a 28 year old Winnipeg-based investor named Saxon Funk who has a firm plan for achieving financial independence through various passive streams of income. But his real play for findependence comes through real estate. He was attracted to real estate when he discovered he could buy properties at 10% down, and he caught the Winnipeg real estate cycle at just the right time.

Do you know How Your Daily Commute Affects Your Finances? Dan Wesley from Our Big Fat Wallet reports that the average time Torontonians spend commuting is 80 minutes – the longest time in the world. In contrast, Saskatchewan Jobs says the average commute time in the province’s two largest cities is only 20 minutes. Another reason to count your blessings!

And if unexpected, frequent required changes to eyeglasses for family members is putting stress on your budget, you may be interested in How I saved over 50% buying eye glasses online, my recent blog on Retirement Redux.

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.

How to save for retirement (Part 3)

By Sheryl Smolkin

28Aug-nestegg

See Part 1 and Part 2.

In the first two parts of this series on how to save money for retirement we focused on how to get started and some of the registered and unregistered savings plans available to Canadians.

This final segment looks at some other ways (in no particular order) you can both grow and preserve your retirement savings. And making sure your children are educated to effectively manage their finances is a big part of this discussion.

  1. Keep fees low: You ignore investment fees at your peril, says Toronto Star personal finance editor Adam Mayers in a recent article. The simple chart below illustrates what happens if you invest $6,000 a year for 40 years in a registered retirement savings plan. It assumes your RRSP earns a little over 5% a year and ignores taxes.
    1. In a utopian fee-free world, your money is worth $785,000 in 40 years.
    2. In a 1-per-cent fee world, you’ll have $606,000 (23% less).
    3. In a 2-per-cent fee world, you’ll have $435,000 (45% less).
    4. Annual fees in the Saskatchewan Pension Plan (SPP) average 1%.fees
  2. Understand your risk tolerance: You should have a realistic understanding of your ability and willingness to stomach large swings in the value of your investments. Investors who take on too much risk may panic and sell at the wrong time. Other factors affecting your risk tolerance are the time horizon that you have to invest, future earning capacity, and the presence of other assets such as a home, pension, government benefits or an inheritance. In general, you can take greater risk with investable assets when you have other, more stable sources of funds available.
  3. Develop an asset allocation plan: Once you understand your risk tolerance, you can develop an asset allocation strategy that determines what portion of your retirement account will be held in equities (stocks) and fixed income (bonds, cash). The investment allocation in the SPP balanced fund is illustrated below.
  4. Rebalance: The asset allocation in your portfolio will change over time as dividends are paid into the account and the value of the securities you hold goes up or down. Rebalancing helps you reap the full rewards of diversification. Trimming back on a winner allows you to buy a laggard, protect your gains, and position your portfolio to benefit from a change in the market’s favorites.Balanced-Fund-Web
  5. Auto-pilot solutions: Balanced funds including the SPP balanced fund are automatically rebalanced. In your RRSP or company pension plan Target Date Funds (TDFs) are another way to ensure your investments reflect your changing risk profile. Developed by the financial industry to automatically rebalance as you get closer to retirement. TDFs are typically identified by the year you will need to access the money in five year age bands, i.e. 2025, 2030 etc. They are available in most individual registered retired savings plans and in your employer-sponsored group RRSP or pension. However, all TDFs are not alike so consider the investment fees as compared to the expected return before jumping in.
  6. Educate yourself: Personal finance blogs contain a wealth of information about everything from frugal living to tax issues to how to save and invest your money. You can find out about some of them by listening to our podcast series of interviews on savewithspp.com or reading the weekly Best from the Blogosphere posts. Some posts are better than others so caveat emptor. But blogs like Retirehappy and Boomer & Echo have huge archives so you can find answers to virtually any virtually personal finance question.
  7. Choose your retirement date carefully: We are living longer so your money has to last longer. And starting in April 2023, the age of eligibility will gradually increase: from 65 to 67 for the Old Age Security (OAS) pension. Even if you are among the minority who have a defined benefit pension, retiring early means you will get a reduced amount. Whether you keep working because you need the money or you love your job, you will have a more affluent retirement if you work full or part-time until age 65 or longer.
  8. Develop other income streams: One of the things that stayed with me after reading Jonathan Chevreau’s book Findependence Day is the importance of having multiple income streams in retirement. So even if you are saving at work or in an individual RRSP, don’t put all your eggs in one basket. While you may not want to work at your current job indefinitely, you may be able to use your skills or hobbies to do something different after retirement. For example before I retired I was a pension and benefits lawyer. Now I augment my retirement income by writing about workplace issues.
  9. Start RESPs for your kids: The following two Globe and Mail articles by financial columnist Rob Carrick brought home to me the impact that your children’s debt and failure to launch can have on your retirement.
    1. Carrick on money: Will millennials ruin parents’ retirement dreams?
    2. Parents of Gen Y kids face their own financial squeeze

Registered educational savings plans allow you to accumulate money for your children’s education tax free and receive government grants that add to your savings. When the money is paid out, your child pays taxes, typically at a lower rate. Saving for your kids’ education now so they can minimize student loans down the road is one of the best investments you can make in your future ability to retire sooner rather than later.

  1. Raise financially literate children: And last but not least, educate your children about money so they grow into financially responsible adults. Every event from the first allowance you give your kids to buying Christmas gifts to planning for college is a teachable moment. Someday your offspring may be managing your money and ensuring you are properly taken care of. That’s when all of your great parenting skills will definitely come home to roost!

BOOK REVIEW: THE REAL RETIREMENT Why you could be better off than you think

By Sheryl Smolkin

7Aug-The+Real+Retirement

The Real Retirement by Morneau Shepell Chief Actuary Fred Vettese and Bill Morneau, Executive Chairman of Morneau Shepell was released and extensively reviewed by the media in 2013.

However, I decided to circle back to this book over a year later because it is much more optimistic than many of the personal finance books I have reviewed since January.

Most financial writers seem to be trying to guilt readers into forgoing consumption during their working lives in order to accumulate sufficient RRSP savings to generate 70% of pre-retirement income.

In contrast, Vettese and Morneau present well-reasoned arguments to illustrate that income replacement of 50% or even less post-retirement will result in a “neutral retirement income” (NRIT), i.e. similar patterns of consumption for retirees.

Initially, they note that there are three phases of retirement:

Phase 1: From retirement age to the mid or late 70s or even later if you are healthy you are most likely to travel to exotic locations and pursue expensive hobbies. Therefore your income requirements will be highest in this phase.

Phase 2: In the second phase of retirement you may have diminished physical or mental capabilities. If so, you will travel less and cut back on strenuous activities. Therefore you will spend less money.

Phase 3: In the last years of your life you may be more physically or mentally impaired. You may need to be in a nursing home, or if you are wealthy enough, in an upscale retirement home with nursing care.

As a result, planning to spend more in the first decade of retirement will not necessarily mean that you will run out of money before you run out of time.

I thought it was particularly interesting that when considering available resources that can generate retirement income for Canadians, unlike many other personal financial writers, the authors also factor in the value of “Pillar 4 assets” including real estate, business equity and non-registered savings.

They use the following population breakdown in their calculations:

Income Quartile Average total income (couple)
Quartile 1 $29,000
Quartile 2 $53,000
Quartile 3 $78,000
Quartile 4 $110,000
Quartile 5 $204,000

The bottom quartile is dropped out because it is assumed that government benefits such as CPP, OAS and the GIS will provide better than average income replacement.

For the most part, Quartile 5 is also excluded since a couple with an income of over $200,000 has typically saved in RRSPs and has other Pillar 4 assets that can augment retirement ravings.

Vettese presents an example of a couple in Quartile 3 with $78,000 in annual income at age 65 and assumes they saved 6.5% annually in an RRSP from age 30 until retirement, Once their RRSP balance is converted to a RRIF at age 65, including government benefits they will have an income after retirement of $48,600/year.

Although retirement income for this couple is just 62% of their pre-retirement income, they no longer make RRSP and CPP contributions; have EI deductions and other employment costs; and pay a mortgage or child-raising costs. Their income taxes are also much lower.

The net result is that they have $14,000 more in disposable income to spend post-retirement! Although each family’s financial situation differs, the authors conclude that an NRIT which equalizes consumption before and after retirement generally only requires about 50% of pre-retirement income.

A calculations using a couple in Quartile 4 ($116,000 before retirement) reveals that the NRIT is just 44%. Furthermore, they can achieve their NRIT with 35 years of RRSP contributions equal to 3.5% of household income. And in general the higher the income level, the lower the NRIT.

This book is an interesting read because it presents a different perspective on the perennial questions, “How much will I need in retirement?” and “How much do I have to save to accumulate the amount I will require?”

While Vettese and Morneau suggest the answers to these questions may be “less than you think,” it doesn’t mean you don’t have to save at all. And all of the scenarios assume you retire free of mortgage and other debt. They also presume a drop in employment expenses and taxes payable that may not apply in your situation.

But if you thought the only thing you have to look forward to is Freedom 75, reading this book will cheer you up. Retiring at age 65 may in fact be a perfectly reasonable objective and you might even be able to afford a nice annual vacation or two while you are still well enough to travel.

The Real Retirement can be purchased online from Chapters for $15.64.

Fred Vettese
Fred Vettese
Bill Morneau
Bill Morneau