Tag Archives: Registered Retirement Income Fund

Aug 11: Best from the blogosphere

By Sheryl Smolkin

185936832 blog

I’m on a mission to find new retirement bloggers to feature in this space who have interesting insight for SPP members of all ages who are planning to retire in the near or distant future.

I discovered Your retirement income blueprint today. This week’s blog Donor-directed taxes – You decide who gets your money! Is fascinating. If at age 71 you don’t need your mandatory RRIF withdrawals to live on, melt down your registered account and the tax liability through a donor-directed charitable giving fund and direct your tax dollars to causes you care about. The net result may also reduce your income to a level where you can avoid the OAS clawback.

GetSmartAboutMoney.ca tackles the perennial question How much you need to save for retirement? It also includes 7 tips for last minute savers including some tough love. The author suggests if you have to choose between saving for retirement and your children’s education, put money in your RRSP first. Let your children get jobs or borrow to help pay for their education. Later, you may be able to help them pay off their student loans, which carry lower interest rates.

On My Own Advisor, Mark tells Gary’s story about how he and his wife retired comfortably on less than $1 million in invested assets which seems to be the big, scary number these days. They bought a 35’ 5th wheel and a truck to tow it a they spend winters in Myrtle Beach and come back to Canada in the summers. They also can afford occasional cruises to warmer climates.

The Blunt Bean Counter Mark Goodfield is posting “the best of previous blogs” while he concentrates on improving his golf game this summer. In One Big Happy Family – Until We Discuss the Will he tackles the taboo subject of whether you should discuss your will with your family.

And Retired Syd who writes Retirement: A full time job, just finished up a five-week visit to Manhattan on her annual home-exchange vacation. She saw the city with the fresh eyes of a tourist, as she guided friends around. The notes she receives from readers help her to also view her retirement (six years and counting) in a new and more appreciative way.

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.

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

Mar 3: Best from the blogosphere

By Sheryl Smolkin

185936832 blog

If you haven’t started to think about filing your 2013 income tax return, this week is as good a time as any. You’ve made your 2013 Saskatchewan Pension Plan and RRSP contributions and T4s are in the mail.

Last April, on Million Dollar Journey, the Frugal Trader wrote a great blog to help readers prepare for filing their 2012 income taxes. It is equally relevant this year – a great checklist to get all your paperwork in order before you sit down to complete your return.

If this is the first year your home was your principal place of business, you’ll want to read what Canadian Finance Blog’s Tom Drake has to say about how you can reduce your taxes with business-use-of-home expenses.

On a similar note, in Canadian Living, blogger Krystal Yee offers income tax tips for freelancers so those of you in that category you can get all of the deductions that you qualify for. She also warns the self-employed to put money away for taxes on a regular basis so there are no surprises at the end of the year.

Media-savvy accountant and author Evelyn Jacks writes about claiming employment expenses. Even employees may claim certain specific expenses, depending on whether their employer will verify that this was a necessary condition of employment. Allowable expenses may include travel costs, the cost of using an automobile to earn income, supplies used up in the course of employment, the cost of an assistant, and home office costs.

Retire Happy blogger Jim Yih reminds us to take advantage of the Pension Income Tax Credit. He says if you are age 65 and do not receive a pension (other than a government benefit) you should open a Registered Retirement Income Fund and transfer $12,000 from your RRSP. If you draw down $2,000/year until age 71 you will be entitled to the pension tax credit and effectively receive the money tax-free. An unused pension tax credit can also be transferred to your spouse.

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.