Tag Archives: retirement

Random thoughts – keeping you on your toes

Retirement Musings

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I retired today from my paid work with the University of Alberta.  After 43 continuous years in the workplace (post University) I am no longer “working for the man” (A sixties expression that has hung with me).

However, lots of unpaid work beckons me, actually looks like my spouse has been compiling the post retirement “to-do” list for the last 43 years.  That could take awhile to finish.

Attitude

As the baby boomer generation begins to retire, around the globe, we see a lot of studies and associated recommendations for how to succeed in retirement.

I am not really looking to achieve any specific aim or result so for me retirement does not have any success or failure criteria.  It is just another moment in time to be happy, enjoy and bask in the pleasure of life, albeit a different context.

I found my own attitude to retirement attitude is clearly stated on a quote from Mr. Rogers of children’s TV fame,  “Often when you think you’re at the end of something, you’re at the beginning of something else.” – Mr. Rogers

Leverage the Opportunity

Most importantly, retirement is best viewed as an opportunity.  It is a new beginning in which you can choose to partake of even greater happiness and pleasure from life.

Human life is a gift (I know this is a very trite statement).  The key to having the best possible retirement experience is to continue to explore all the opportunities the gift of life offers us.

Sadly, for many of my loyal readers as I move into retirement I do plan to keep posting to this blog, although perhaps not daily, so you will still need to put up with my very random musings (if you so choose),

 

 

Random thoughts – keeping you on your toes

Looking Forward to the Future

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After about 43 years of continuous employment for various organizations, (albeit well paid), I plan to retire from my current employment in 2 weeks.

After having the majority of my waking hours focused on achieving Corporate goals (marching to someone’s else’s tune) what I do or don’t do is about to become very much my own choice.

My Choice

With retirement from regular employment, regardless of whether it was self-employment or for somebody else, the imperative of earning money through your own labors is gone (or should be if you planned appropriately).

The passage of time is inevitable, focusing on enjoying every minute is a choice. In the case of retirement the focus is very much personal choice, which of course is one of the reasons retirement is prized.

Doing nothing could be what you choose or perhaps you have some definite goals relative to things you want to accomplish.   Deciding does not mean you cannot change the approach later but consciously choosing something is key to being satisfied.

Either way (whether the plan is to be idle or active), knowing what your plan is, being clear on what you choose is a critical success factor to enjoying retirement.

Freedom

The key and beauty of being retired is you have the power or right to act, speak, or think as desired without hindrance or restraint.  This is of course not an absolute, but rather a general principal.

One caveat, to be most effective and embrace the freedom you achieve from leaving employment a fiscal foundation is needed (some form of retirement income or nest egg).

With that in place (hopefully through pre-planning before you retire) the choice of freedom is yours.

 

Random thoughts – keeping you on your toes

Does personal financial planning make sense

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For any activity I am considering engaging in, the first question I ask is about value.  Value is a measure which considers both the associated effort and benefit.

Let’s say you are planning to spend days researching the best route to drive to work.  This entails determining what the route options are, than trying them out, timing them, maybe trying and comparing them during your leisure hours.   The extra trips have a gas cost associated with them.  In the end you may find the difference in travel time and gas costs between the four routes you found is a maximum time saving of less than 5 minutes.  Also the difference in gas cost negligible and the stress in rush hour is about the same for each route.   I would classify this route planning exercise as low value, the effort to develop the plan is not justified by the benefit.

Unfortunately sometimes it’s much easier to gauge value with hindsight than foresight (just an observation at this point).

This value discussion is relevant mainly because financial planning  is usually considered by most to be high effort and hard to do (often people hire others to do it for them).  While the effort is perceived to be hard the benefits are long term and usually not immediately tangible.    This thinking often leads to the conclusion that the exercise is of lower value,  not worth doing now, maybe later.

Money and Lifestyles

Financial planning is an ongoing exercise covering a lifetime or at least to retirement.   Plans that are developed should be flexible and need to change with your circumstances,  The objective is to enable your personal lifestyle to meet your expectations.

The Price of Entry

Data!  Building a financial plan, monitoring and updating it are 100% dependent on the historical data.  First and most important answer the question, what are you spending your money on?  Spending and saving objectives are the predictive part of the plan and frankly just gazing into a crystal ball to make predictions generally does not work.

The planning exercise starts with capturing and documenting your spending patterns over a reasonable period (at least one year).

You can use this historic spending to help predict future spending.  This includes saving plans and investing returns.   Then keep tracking ongoing to see how you are mapping to your predictions.

If your predictions are not going to achieve your goals short and long term using the past spending patterns and personal lifestyle behavior analysis to determine how you can achieve what you seek.

The bottom line

In future posts I will be exploring financial planning activities in more specific detail.  Basically a simple “how-to” primer is to come.   The purpose of this post was set the basic principles plant the idea that the planning effort might well be worth it – i.e,  high value overall.

Random thoughts – keeping you on your toes

Income Products for When You Re-tire

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No surprise, this post continues the theme I started two days ago about the basic tools and practices to reduce or even eliminate financial stress in retirement.

The first post and part of my second on this topic focused on pensions.  These are an obvious source of income and any citizen or legal resident who has lived in Canada at least 10 years and resides in Canada post retirement will get at least one pension (OAS). So,  a start to meet your post retirement income needs.  As noted you may be eligible for other pensions as well.  This being said pension income might not be enough.

After pensions (most of yesterday’s post) comes savings which can be either or both; registered (tax deferred) or unregistered (after tax).

Which brings us to today’s blog about financial products to turn the  saving into income to complement the pension income stream.  Of course income collection from the savings can be directly from the investments (no specific financial product) and I will talk about that a bit as well.

I was not planning on this being a four part series but I can see I won’t be finishing up until tomorrow with a summary of everything.   Then back to random musings.

Retirement Income Financial Products

Retirement Income Fund (RIF)

The RIF is used to maintain the deferment of tax on a registered product while taking a regular income over time.   The lump sum of a registered product can be transferred to a RIF without payment of tax.  This is you can transfer the funds from a RRSP; however, once the money is transferred annual withdrawals must start.  The minimum withdrawal amount varies with age from 2.86% at age 55 to  20% at 95 plus.    (There are charts showing the various rates by age.)

While you can start a RIF as early as age 55 you must collapse the RRSP by December 31st of the year you turn 71, so in a sense if you are going to have a RIF it is sort of a must have at 72.

By December 31st of the year you turn 71, you can move the balance to a RIF or withdraw all the funds to non-registered accounts (there are penalties for not doing  at least one of these) .

If you don’t move the outstanding balance at that time to a RIF than you will be subject to a withholding tax on the full amount at the time of withdrawal. (The withholding tax rate varies depending on the amount withdrawn.)  The actual amount of taxed owed is adjusted when you submit your annual tax return and the some of the withholding tax could be refunded (or you may need to pay more).  Remember marginal tax rates are linked to the amount of income so collapsing all at once can have negative tax implications.

If you transfer the balance to a RIF and choose to withdraw at the minimum rate no tax is withheld at time of payment and you just pay the tax when you submit your annual income tax return (if any is due).  If you select a withdrawal rate from the RIF higher then the minimum, tax will be withheld from the withdrawals at a rate based on the amount withdrawn.

So in essence a RIF provides you a fixed income amount until you run out of money in the account or die and the balance is transferred to your estate.  (This is a bit more complicated when talking about how your spouse get these funds after you die potentially still tax sheltered but I am not going to get into that here).

I should note depending on how you set the RIF withdrawal rate and how much investment income the RIF is earning you could preserve the capital and depending on your rate of return on investment even grow it.

To clarify the about point about rate of return,  your investment options in a RIF  basically mirrors the RRSP options and in fact you can transfer your RRSP assets in kind so however you had the funds invested in the RRSP can be mimicked in the RIF.  That is initially anyway, but of course overtime some investments might need to be collapsed to meet the minimum withdrawal amounts.   (Although withdrawals can be made in kind too so you don’t have to sell anything but you do need to figure out the associated tax and pay that).

 

Life Annuities

These are a life insurance product.  They can be purchased with registered savings or unregistered savings.

Basically you pay a lump sum and based on forecast future rates of return and how long you will live the insurance company will pay you an annual income till you die (guaranteed).   So what the economy is like when you purchase the annuity, your sex and how old you are determine the monthly payout.   Also there are variations on the annuity products which include single and joint options as well as guaranteed minimum payout periods.

A simple example based on today’s rate for a 65 year old male is a $6000/ yr payment for each $100,000 purchase increment.

In this case you would have to live 16 years just to get your original purchase price back.  If you lived 20 years you would make $20,000,  which is a simple rate of return of 1% a year.   The longer you live the higher the return.

When registered funds were used for the purchase, the monthly payment from the annuity is fully taxed ultimately at your regular marginal tax rate (subject to withholding at time of payment and adjusted on your annual income tax return – just like your employment income was handled).

For annuities purchased with non registered or after tax saving there is a tax on the amount of interest income assessed to be earned on the original purchase amount (e.g.  the 1% in the above example – this rate of return is guessed at based on your normal life expectancy at the time of purchase) but the basic return of the purchase amount over time is tax free (because tax has already been paid on it).

The value of annuities is the income is guaranteed (like a pension) until you die.  The insurance company is basically assuming the investment and longevity risks.  In the case of RIF income when the savings are gone the income stops.  The longer you live the more likely this becomes.

Of course with a RIF you might have some money left for your estate.  Not so with an annuity unless of course you chose one with a guaranteed minimum payout period (these pay out at lower rates though)

Income Direct from Investments

You can choose not to purchase a RIF or an annuity and just withdraw the income from your savings as earned.  For example if you save $500,000 and have a 10% rate of return you could withdraw $50,000 a year in income without eroding your capital.  The investment income would be taxable of course.

AND NEXT

All three of these income vehicles have pro’s and con’s and if you can swing it a combination of all of them (i.e.,  pension, RIF, Annuity and self managed investments) is best (lowest risk, highest return) but more on that in my summary blog tomorrow.

 

Random thoughts – keeping you on your toes

Getting ready to Re-tire (continued)

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This post continues the theme I started yesterday about the basic tools and practices to reduce or even eliminate financial stress in retirement.

The basic income source (pensions, which I wrote a post about yesterday) can be supplemented by  retirement saving options both taxable and tax free and potentially government allowances.

Today I will cover the last pension type (I did not get to yesterday) and retirement saving options both taxable and tax free.

In future posts I will talk about how these savings can be used to create income funds and/or purchase annuities, resulting in additional income streams to those of your pensions.

Pension Continued/ Allowances

Old Age Security (OAS) Pension

OAS has wide eligibility and requires neither that you have worked nor contributed.  Associated with this pension are a couple of government allowances with more restrictive conditions.

If you are living in Canada and a citizen or legal resident who has resided in Canada for at least 10 years since age 18, at age 65 you are eligible to receive the Canadian Old Age Security Pension.

To get the full pension amount, which is currently paid monthly to a total of about $6,800 a year, you need to have resided in Canada for 40 years; otherwise it is reduced based on the number of years you resided since age 18.   (The eligible age changes to 67 in 2023).  You can also defer OAS up to 5 years and get a higher payout based on long you deferred the start after you reached age 65.

Note: If your annual income exceeds $72,000 the OAS payment is clawed back in increments up to annual taxable income of just over $118,000 when it is %100 clawed back.

 Guaranteed Income Supplement (GIS) and Allowance

At age 65, if your single or joint income is lower than prescribed thresholds  and you are receiving OAS you are eligible for an additional supplementary amount (GIS).

If your spouse is receiving OAS and GIS then you are eligible to receive the “Allowance”.

Check out Service Canada website for the prescribed income thresholds, amount paid, etc. Service Canada OAS, GIS Allowance Info Page

Retirement Saving Options

Registered Retirement Savings Plan (RRSP)

The Government of Canada encourages residents to supplement pension income with savings.

The encouragement is in the form of a refund of tax paid on the amount saved in the year it is saved.  In the year the savings are withdrawn, tax is collected.

For example, if you save $10,000 in a year when your marginal tax rate for all your income is 30% the government will refund you the $3000 tax paid on the $10,000.   If you withdraw those $10,000 in savings 20 years later when your income and marginal tax rate is lower overall, say 25%, you would only pay tax of $2500.

So, the incentive is that you get “present value” from a tax refund (20 years of investment opportunity) and potentially reduce the tax on the saved amount when you withdraw it (the theory is your income is lower in retirement than while working).

Additionally, all capital gains, interest and dividend income earned on the registered savings is tax free until withdrawn.

There are tons of rules covering registered retirement savings plans in Canada.  These include things like; how much can be put in a registered retirement savings plan, withholding tax for lump sum withdrawals, penalties for over contributions, documentation and filing requirements, spousal plans and so on.  If you want more info on these things, the Government of Canada web site is a great source or if you are not so much a self serve person there is always a financial services professional, accountant or such.   I might do a future post about it but would need to be on request.

Regular Retirement Savings

Saving money to supplement your pension income probably should start with an RRSP  ( because of the great incentives noted).  However, given the restrictions to how much you can allocate to an RRSP additionally saving some amount of after tax money as part of your retirement nest egg can make sense as well.

The things to consider are what are my post retirement income sources and about how much will they be?  Based on this analysis you can get an idea how much savings is desirable to supplement your government, company pensions and registered plan savings.

Example:

Here is a hypothetical case assuming someone with both a defined benefit pension and from a second employer a defined contribution pension used to buy an annuity and RRSP savings of $120,000 :

CPP                                                             – $12,800                           OAS                                                            –  $6,800                                   Defined Benefit Pension                –  $30,000                             Annuity                                                    –   $6,000                          RIF (from RRSP)                                   –  $6000                                    Total  –  $61,600

If $61,600 before taxes is going to provide enough income you are done (this of course is dependent on estimated expenses).

If you want more income after tax savings come into play.  In the above example if the target income was $75,000 the $13,400 shortfall per year could be covered by purchase of a $200,000 annuity (individual, no guarantee, at today’s rates) or savings of say $500,000 savings assuming an annual return of 3% (probably a realistic assumption).  

If additional after tax savings is needed to get the retirement income target you seek  the next question of course becomes how to invest it to minimize risk and maximize return.  You guessed it, the subject of future posts.

A final note about retirement savings:

You can always withdraw your money from your RRSP or other retirement savings to spend on things you need at any point in time (e.g., a vacation, car, etc).

In the case of an RRSP though this requires paying withholding tax where applicable  (I should also note there are special rules about using your RRSP funds to make a down-payment on a house without triggering tax).   And of course, early withdrawals reduce savings and the money won’t be available for something else later should you need it (e.g., cosmetic surgery to make you look better as you age).

That being said, I do want to end this topic with a lead in to my next post which will be about options to get a regular income streams from your RRSP or non registered savings through fixed income vehicles (i.e, registered income funds or life annuities).

Random thoughts – keeping you on your toes

Not about your car – Re-tire info

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Over the past couple of years I have had conversations with a number of folks younger than myself, about the basic financial tools Canadians can use to ensure their retirement does not include money worries.

I am invariably surprised at how little they know about the topic.  The point being, the best time to have an understanding and awareness of funding your retirement is well before you get there.  It’s kinda like the boy scout motto, “be prepared”.

Today’s blog is a simple (but comprehensive) primer about pensions.

In a future blogs (probably tomorrow and the next day to keep the momentum) I will review retirement saving options both taxable and tax free, government allowances, income funds, annuities and of course throughout all the blogs, tax implications associated with these things.

All of this is leading to death which ends the taxes, for you anyway but maybe not for your beneficiaries (that will be the topic of even another blog. )

Let’s Start with Pensions

 Canada Pension Plan (CPP

Everyone with earned income in Canada contributes to the Canadian Pension Plan (CPP).  Employer’s contribute on your behalf too.  The money you contribute to CPP is not taxed and the earnings from investment on the CPP capital is not taxed.  You can elect to receive an annual income from CPP starting at age 60 – 64 (reduced) or age 65 (full) or 70 (enhanced).  The amount paid depends on your contributions from employment income over the years.  The current maximum is about $12,700 year. (not including the post retirement benefit if you start after 65)

Employers Pension Plan

Many  employers in Canada offer benefits above and beyond  your basic compensation, like medical/ dental insurance, special time off options and pensions, among other things.  When your employer offers a pension plan these come in two flavors (described below) and each is somewhat unique in the details but the basic concepts are the same.  I also describe with each type what happens if you leave the company (and thus the plan) before retirement.

Defined Benefit

In this plan you contribute and your employer contributes monthly, both tax free (usually a % of your salary).  The investment of the funds and the return on investment is managed by the plan’s administrator (a paid third party -e.g.,  like Sunlife).  All earnings of the fund are tax free.

The pension society oversees the operation of the plan and determines the pension payout and this is usually based on your years of service and annual income when you retire (or average of several years near retirement).  The risk that the pension fund won’t have received enough contributions or earned enough money from interest, dividends or capital gains is on the employer and they need to make up any shortfalls in the pension fund over-time.   That is the benefit is fixed, good for the employee.  (Of course if the company goes bankrupt and the pension fund is not fully funded, that is part of the bankruptcy, like Nortel,  it is not good)

If you quit the company before retirement you have two options:

1) Have the money contributed by you and your employer and associated earnings on that money (interest and dividends) deposited to a Locked In Retirement Account (LIRA)  You can manage your LIRA’s investments but cannot withdraw any money until age 65.  You have to start taking annual withdrawals after age 72 at the latest.  Money earned in the LIRA is tax free.  Withdrawals, when they start are taxed as income and can be in the form of a life annuity or a retirement income fund (RIF) which will be explained in future blogs.

2)Elect to receive the pension due to you based on years of service and salary when you leave the company.  This pension would not start though until the normal age of retirement (e.g 65) or if you choose early retirement age with a penalty (e.g. 60)  or later than the normal retirement age (e.g, 70) but usually no benefit to doing this, except as it relates to your taxable income overall at the time the pension starts.

(Note: you need to have been in the plan at least two years to be vested.  Otherwise you get what you contributed but not what the employer contributed.  Also the take a pension option does not apply.

Defined Contribution

In this plan you contribute and your employer contributes monthly, both tax free (usually a % of your salary).  The investment of the funds is directed by you.  The plan is usually administered by a third party (e.g., Sunlife)  All earnings of the fund are tax free.

Since you oversee the operation of the plan and determine how it is invested, the amount of money available to create an income when you retire is determined by you.  (If you invest badly and lose money, oops)  Basically  the risk that the pension fund won’t have received enough contributions or earned enough money from interest, dividends or capital gains to pay what you need, is all on you.

When you retire how the money is paid to you as income is also decided by you – either an annual % usually paid monthly until the income is gone or through purchase of a life annuity (both of these options will be explained more fully in the next blog.

If you quit the company before retirement you have two options:

1) Have the money contributed by you and your employer and associated earnings on that money (interest and dividends) deposited to a Locked In Retirement Account (LIRA).  Some of the money can go to an Registered Retirement Savings Plan (RRSP).  This is based on provincial rules as to how much can be unlocked (so varies) and also your spouse (if you have one) must give a waiver.

You can manage your LIRA’s investments but cannot add or withdraw any money (beyond capital gains, dividends and interest being reinvested) until age 65 (i.e., it is locked).  You have to start taking annual withdrawals after age 72 at the latest and these are through a Locked In Retirement Income fund (LRIF) explained in  a future blog. Money earned in the LIRA is tax free.  Withdrawals from the LRIF, when they start are taxed as income.

If you did choose to put some of the money in an RRSP you can withdraw it any time (but pay tax when you do) or transfer it to a Retirement Income Fund when ready to do so (not a locked income fund).

2)Elect to take the cash and pay the full tax.  In this case though most Provinces (again this varies) require the spouse (if you have one) to give a waiver saying collapsing the retirement account is okay.

(Notes: You need to have been in the plan at least two years to be vested.  Otherwise you get what you contributed but not what the employer contributed.  Also the take a pension option does not apply.

That’s all for today, more than enough I am sure.  Check in the future blogs to get the rest of the story.