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Should you have a savings plan that's similar to having your own Defined Benefit Pension Plan?

As the Canadian postal workers union  (CUPE)  continues to negotiate with Canada Post over their contract and in particular t he issue of ph...

Thursday, 12 December 2013

Will You Be Happy When You Retire

There are always some risks in life but if you have a decent defined benefit pension plan through work, or otherwise have done the math and know that you can guarantee that you have enough money to self-fund your own retirement for the rest of your life, your financial pillar is probably reasonably well taken care of and you'll be happy when you retire or at least won't have financial worries.

If you don't have a defined benefit pension plan and you don't have the financial capacity to self fund your retirement for your entire life you are probably going to run out of money at some random point in retirement.

Here's a basic reason why. Let's say you have $100,000 saved for retirement. You've invested in a basket of balanced low or medium risk mutual funds in a contribution pension plan at work or some RRSP funds at the bank.  You decide to retire at age 65. You convert your plan to a Registered Retirement Income Fund (RRIF) and take out  4% right away.  Then the stock market has a correction. Market corrections can't be forecast but you expect that if you're retired for a couple of decades or more it's bound to happen sometime, maybe even a few times.

You had $96,000 left in your savings after your first withdrawal but the correction made it worth $80,000. So the next year, at age 66 you need to take out 4.17% of $80,000 leaving you with $76,664. You must take out a minimum amount from your RRIF every year and that minimum increases until you're 94 where it max's out at 20% of it's value per year.

To keep this example going, your savings don't grow the next year because it's a flat market. So now at age 67 you need to take out 4.35% leaving you with $73,329.

Age:  Starting Balance                         Savings Balance
65       $100,000                 - 4%          = $96,000
           $96,000                   - 16.7%     = $80,000 (sample market correction)
66       $80,000                   - 4.17%     = $76,664
67       $76,664                   - 4.35%     = $73,329

This is essentially what happened to most retirees with RRSP's and RRIF's in 2008 and 2009.  In many cases the losses were much worse. With this example you can see that in the first three withdrawals during retirement your savings would already be down 26.7%. Unfortunately the market has historically not been able to catch up to losses like these so at some point in retirement you're going to either spend less than you need to or run short on money sooner than you'd like. It's a treacherous spiral and anyone caught in this trap won't be happy when they retire.

A good rule of thumb is that if the value of your assets can sustain you in the lifestyle you want to at least age 100 you're probably going to be ok.  New mortality tables indicate that our median lifespans are increasing so the younger you are, the longer you're likely to need to plan for.

If in your case you can't self fund and sustain your lifestyle in retirement to at least age 100 you would be very wise to move some of your savings into pooled income solutions.  Pooled income solutions will give you a guaranteed income for life so you'll never run out of money. They are only offered by insurance companies and typically include Annuities and Variable Annuities.

When you use savings for an Annuity that are not in RRSP's or RRIF's they are extremely tax friendly so your take home income will be need much less upfront money than if you decide to take income from a bond or GIC (which are taxed at the very highest rate).  Often an annuity is used to bump up retirement income using only a portion of your savings because once you buy the annuity you no longer have access to that money. You would decide what makes the most sense in your circumstances.

At retirement, Annuities normally also give you a much higher income than other guaranteed income products. If you outlive what you paid for your annuity, your income continues for the rest of your life anyway. You'll be happy. If you don't outlive your money your beneficiaries will get what's left over. It's a very good deal.

Variable Annuities are another solution that's very popular with people who don't have defined benefit plans. These are also described as self directed defined benefit pension plans and can be excellent solutions both during savings years and at retirement because you'll know up-front the guaranteed minimum income you'll receive for life. Variable annuities also give you the upside potential of mutual funds so over time your guaranteed income for life can ratchet upwards and  be contractually locked in for life. Joint accounts can be set up and you always have access to your money at any time, a great feature that's bound to make you happy.

Almost everyone will tell you that retirement isn't all about money. There's family, friends, activities, travel and everything else we'd like to get more involved with. Pooled Income Solutions give you a guaranteed financial foundation so no matter how stormy the weather gets, you know that the lights will always be on and there's always going to be food on the table. It's sure to give you invaluable comfort and peace of mind.

In my experience, for most people, moving some of your savings into guaranteed for life pooled income solutions is the perfect step you can take today to be on the road to be happy when you retire.

Wednesday, 19 June 2013

What happens when I die?

What happens when I die?
Often the conversation I have with my clients leads to the inevitable question, “What happens when I die?”
If you are like many of our clients, you assume that upon your death, all of your money will automatically go to your spouse, kids, place of worship and charities.
In our experience, the wills and personal finances of most people are not properly set up to realize these goals.
Often, I can make a few simple changes to allow your bequest wishes to be much more valuable and effective, while making the handling of estate matters much simpler for your executor.
In this article I’ll explain a few examples of things that normally occur when someone dies that create some common problems and impediments, and how you can easily solve them.
Problem 1: You don’t have a will.
As in most places in North America, dying in Ontario without a will essentially means that your assets will flow in pre-set proportions to people and creditors the government deems to be ‘next in line’. If you want your entire estate to go to your spouse and kids, this will happen though maybe not in the proportions you imagine and only provided your debts don’t outweigh your assets. However, when a provincial trustee must step in to administer your estate, they deduct very high fees and probate taxes, which reduces the value of your estate and can also result in all kinds of other unforeseeable problems.  For example, your family home may need to be sold to pay these taxes and fees. Also, your estate is likely to be frozen and inaccessible for at least one year – or even many years depending on the complexity of your case. These common outcomes cause significant financial and emotional hardships on surviving family members who continue to rely on the proceeds of your estate.
If you are living common-law and die without a will, it’s extremely important to know that your rights as a married couple end immediately on your death. Your partner may be put in a position where they may not be able to claim any of your estate.
Solution 1: In almost all cases, directing your wishes through a will is a very inexpensive way to prevent many unwanted outcomes. Even though I am not a lawyer, this is very nearly always the first thing I recommend to my clients.
Problem 2: Heirs and creditors can challenge your will and reduce the size of inheritances and charitable gifts.
Even if you have a will, there are still many circumstances that can reduce the value of your estate, and obstruct your bequest intentions.  There are simple ways to set up your bequests to allow you to be completely sure that your bequest wishes are followed.
Let’s say you have set aside money to go specific beneficiaries including your children, grandchildren and a few charities. You have specified who will get what in your will.
However, probate taxes and fees, legal fees, and funds going to creditors will cut into your inheritances. Because money can do strange things to people, your children may challenge your choice of beneficiaries and even your charitable donations. Also, if you’ve not listed your charities by their formal legal name, charities of a similar name may each lay claim your donation. These common problems can tie up your estate for years.
You can make many simple and free changes that will make your estate much more valuable, and free from any contentious tug-of-wars over your money.
Solution 2: Another way to eliminate any challenges is to give your community-based legacy gifts through charitable Community Foundations. Many offer you the attractive option of making a charitable contribution now and deciding later which causes will get your money, and how much each will receive. You can make as many tax-deductible donations through Foundations such as these as you like, and they will then follow your wishes and efficiently dispense your funds upon your death.
Solution 3: If you are sure you won’t need the money you’ve set aside, consider giving it to your beneficiaries while you’re alive. This will reduce the size of your estate and therefore probate taxes and fees. When your beneficiaries are charities, gifts made while you are alive produce tax credits that you can use to your reduce current taxes – and unused credits can be carried forward for as much as five years. Lower taxes now will allow you to give more to all of your beneficiaries.
Solution 4: If you have income that is more than you spend, consider making significant ongoing contributions to your favourite charities. The charitable tax credits can significantly help to offset your current taxes.
Solution 5: If there is a chance you may need the money you’ve set aside as you grow older, or you want control over changing your beneficiaries in the future, or you want to completely avoid probate taxes, fees and delays, consider moving your funds from bank savings accounts, mutual funds or money market funds into identical products offered by insurance companies. By doing so, you can directly assign beneficiaries and easily change them at any time, without incurring any costs as you would to change your will. Then when you die, these funds will pass to your beneficiaries outside of your estate. Your beneficiaries will receive the funds within three to four weeks of the insurance company receiving your death certificate.
In addition, some insurance companies will provide a 100% guarantee on your principal so you’ll know for sure that your investments and subsequently your bequests won’t be negatively affected by market fluctuations.
Even better, leaving your bequests in this way removes this money from your estate (just as if you gave it away during your lifetime), which will lower your estate’s probate taxes and fees on remaining assets in your estate. Lower taxes means you will leave even more to your beneficiaries!
Solution 6: Purchasing a life insurance policy with money that’s already set side for beneficiaries is a simple way to significantly multiply what you’ll bequest to these beneficiaries. You simply use the money that's set aside to pay your life insurance premiums. In particular, if you want to leave money to charities, it is often to your advantage to pay your policy off in one lump sum or over a few years.
As it is with any insurance product, your bequests will go to your beneficiaries tax free and outside of the estate. They will flow quickly and directly to your beneficiaries, usually within three to four weeks of the insurance company receiving your death certificate. No hold-ups, no taxes, no hassles.
These are some simple options available to you that will allow you to have complete control over what happens when you die. If you'd like to discuss how you can easily create a more valuable estate that reflects your personal circumstances, please feel free to contact me anytime.
Next: Including your favourite charities as your beneficiaries is not only a good thing to do but can help significantly reduce the taxes owing on your estate.

Wednesday, 1 May 2013

Financing My Retirement - Part 5 - Annuities

Here's a continued look at some guaranteed retirement income strategies and ways of making the most out of your nest egg whether you're selling your home or using other savings for your retirement income.

In part four we looked at some guaranteed solutions that allow investors to stay in control, decrease taxes, increase income and leave more to heirs. This  continues the theme:

For many people their home is the largest part of their nest egg, in fact all through life, many people see the value of their home as the one thing that will be able to provide enough money to support them in their later years. If you are planning to sell your house to use your nest egg for retirement income,  and/ or are looking for guaranteed safe ways to increase your income, annuities should be the first thing you consider.

Here are a few reasons why:

1. Low Interest Rates: Traditional expectations were that interest earned on the value of a home and other saved assets would be enough to live on for life. The principal would then pass on to one's beneficiaries. Unfortunately, for many of us low interest rates don't provide enough of an income to support a decent retirement.

2. Negative returns in the market can wipe out your nest egg:  There is a fair amount of research on the effect of negative markets on savings that require regular withdrawals. My favourite source on this topic is Dr. Moshe Milevsky Ph.D. Professor of Finance at the Schulich School of Business at York University.  He and his team have a large body of excellent research that quantifies the severe and rapid financial devastation that can result from a negative sequence of returns in your retirement years. If you'd like to learn more about  the technical aspects of this topic I'd definitely recommend you check his website. Also, his book Pensionize Your Nest Egg  is an important piece that details some practical methods of ensuring lifetime income.

3. Psychology: The reality is that the majority of people are more afraid of running out of money in their lifetime than of dying. Financial planners and those planning or who are already retired need to rely on products and strategies that give lifetime income guarantees. This primary need, once fulfilled, lets everyone sleep comfortably at night.

4. Pensions: Traditional defined benefit pensions used to provide guaranteed income for life but fewer and fewer people have access to pensions of this kind and many people who have them want to enhance their guaranteed income.  Most people now have defined contribution plans which are at risk in the market.

So what are the available options to replace that?
1. There are variable annuities which I talked about briefly in part 4 of this series
2. There are annuities which also guarantee income for life.

An overview of annuities and their many benefits can be found here.  In general, annuities provide you with the best, tax friendly way of generating income for life that is available today. Your annuity income is determined by a number of factors including your age and the prevailing interest rates. In general, the older you are, the higher the income you can expect. Your after-tax income will generally be much higher than what you get from other typical guaranteed fixed income products such as government bonds, term deposits or GIC's  and in fact, most of the income from an annuity is tax free so that income tested benefits such as Old Age Security or the Guaranteed Income Supplement are less likely to be impacted, if at all.

A sample annuity:  at March 2015, a 65 year old male could expect an income of $15,194.86*  from a $250,000 annuity every year, guaranteed for life. The taxable portion of this income would be a mere $1,712.87.

* (Please note that these rates are like fresh bread, becoming stale very quickly, so contacting a licensed insurance broker will get you up to date numbers when you need them). 

Our same 65 year old may also wish that some or all of his capital be replenished on his passing so that everything goes to his beneficiaries. Buying a $250,000 GIC or term deposit today is an often used solution that might do the trick however, it will get him a fully taxable income of only $6,150 per year. This low income level would be fully taxable and as such this may not be the best solution.

Combining an Annuity with life insurance: To replenish his capital, (also known as an estate preservation strategy), our 65 year old would be much better off to do the following. The first is to purchase a life insurance policy for the amount he wishes to replenish. The benefit goes to his beneficiaries tax free, fast and outside of the estate so there are no probate taxes, fees or delays. He then buys an annuity to pay for the life insurance premium payments.  Interestingly, premium costs on a $250,000 of life insurance policy would cost him $7,122.50/ year which is more than offset by the $15,194.86 income he gets from a $250,000 annuity.

By combining the two ideas, the annuity payments will give him an income which is the difference between the cost of the premiums and the income from the annuity. In this example he gets an  income of $8,072.36 per $250,000 after paying the life insurance premiums.  This income is still higher than he would get with a GIC or government bond but more importantly because most of it is tax free he has much more money in his pocket each year. Of course, when he passes away his beneficiaries also get the full value of his estate through the insurance policy.  It's simple for the executor of the estate and, there are no probate taxes, fees or unnecessary delays for the beneficiaries.

Some of the reasons I like the use of annuities for retirement income and using some simple strategies where they are appropriate include :

1. Annuity after-tax income is higher than other guaranteed alternatives
2. Annuities can be set up as joint plans for couples 
3. Annuities are often the best guaranteed solution available for core retirement income needs
4. Annuities can be used to help to ensure meaningful and lasting legacies.
5. Annuity income normally won't interfere with income-tested government benefits such as Old age   Security or the Guaranteed Income Supplement.

Annuities can be used as an excellent guaranteed income strategy to satisfy anyone's core income needs.  There are many additional alternatives for improved income that can be explored once the guaranteed income foundation that meets your needs has been put in place.

And as always, if you have questions or would like to learn more, please feel free to drop me a line anytime.


Wednesday, 13 February 2013

Financing retirement - Part four - strategies for enhanced financial outcomes

Financing retirement - Part four
Strategies for enhanced financial outcomes

Solving some typical client concerns, needs and issues with some guaranteed solutions that allow you to stay in control, decrease taxes, increase income and leave more to heirs.

In part three we examined some of the issues that should be considered when you are developing your retirement plan.

This blog will help answer some typical financial concerns and estate planning needs, like:
1.   How do I investment my money in a risk-free way that offers me income guaranteed to last a lifetime?
2.   I don’t have enough savings to fund my retirement years. Is there a way to invest what I have that will increase my income without putting my money risk?
3.   Is there a way to both live off my existing assets and leave behind as much as possible for my beneficiaries and charities?
4.   How do I invest my money in a way that increases my net income and reduces my taxes?
5.   I am collecting Old Age Security. How do I invest my money in a way that doesn’t generate income that will generate a reduction of my OAS payments?
6.   After I pass away, how do I make sure my assets flow directly and quickly to my spouse/partner (including married and common-law spouses and partners in opposite or same sex relationships)?

Most people looking for a safe and secure way to invest their money go to their bank or trust company and buy GICs. However, if you worry about having enough savings to live out your retirement years, or worry about leaving money to heirs and charities, often GICs aren’t the best solution. Here’s why:

1.   GIC interest rates are very low and generate little income, even if you have a large amount invested in them.
2.   When you die, your GIC will be inaccessible to your beneficiaries for a long time. For example in Ontario, a GIC like this will be subject to lawyer’s fees and probate taxes with the process taking about a year or so before the GIC can be released to beneficiaries in the will.
3.   If this is a couple, a joint account may make sense otherwise on the passing of one spouse the GIC will be frozen and inaccessible to the survivor until letters of probate and a death certificate is brought to the bank, trust or investment dealer.  The process usually takes about a year before it's complete in Ontario.

There are alternative solutions that are just as safe and can provide a better income, lower taxes, less risk of tax claw-backs and more efficient flow-through of assets to beneficiaries.

Here’s an answer that will illustrate answers to all of the concerns addressed above.

A couple Bob and Wendy who are both 65 years old have about $100,000 in savings, plus $500,000 in proceeds from recently selling their home. This is all they have to live off for the rest of their lives. Their dreams are to live long, comfortable lives and have a generous sum left over that can go to their two children and their favourite charity. They explore three different ways to achieve their goals, and end up choosing the third.

Investment strategy #1:
Investing their money in GICs purchased from a bank, credit union or trust.

Bob and Wendy like the idea of safely investing their savings, but in doing some number crunching, they worry that if they live two or three decades more (as some relatives have), and if their healthcare costs escalate in later years, that income from low-interest GICs may not be enough.

In addition, all the interest made by their GICs is taxable, and if interest increases, their income may generate a claw-back of their Old Age Security.

They see that purchasing GICs jointly would be better; if their GICs were in a single name, on the passing of one spouse the funds are frozen and inaccessible to the survivor until the issuer of the GICs receive not only a death certificate but also letters of probate, which take about one year to generate in Ontario.

Bob and Wendy aren't too thrilled when they discover that the outcome of leaving GIC residue to their children through their will means that probate taxes and legal fees will delay the process for a year or more and also unnecessarily erode the value of their GICs.

Investment strategy #2:
Investing their money in GICs purchased from an insurance company.

Insurance company GICs (also called Guaranteed Investment Accounts or GIA's) have distinct advantages over bank GICs:

1.   Interest rates offered by insurance companies are often higher than offered by banks. Currently, even insurance company rates are low, but an independent insurance broker shows the couple that shopping around for the best rates will yield more income.
2.   Insurance company GICs can be assigned a beneficiary, which will receive the full proceeds of the GIC within about 10 days that the issuing insurance company receives a death certificate.

3. This investment is not subject to probate taxes, and no lawyer is required for the transfer to be made.
4.   Bob and Wendy can also lower their taxes because up to $2,000 of income from insurance company GIC is also eligible to claim the pension income tax credit, which is 15% in federal tax credits, plus applicable provincial credits.

Although this investment solution meets most of this couple’s goals, they chose to go with the following third option, which offers guaranteed ways to increase their income without risk, save taxes, and possibly leave more to their children.

Their choice: Investment strategy #3:
Investing their money in variable annuities purchased from an insurance company.

A variable annuity is often used as a guaranteed savings tool because it converts to a guaranteed income-for-life on retirement. This kind of annuity also allows the invested income to remain accessible should there be an urgent need for immediate income.

Bob and Wendy learn that their non-registered invested in variable annuities would offer a floor rate of return that will never go down as long as they live. The initial rate of return is based on their age, and may rise as they get older. Typical rates of return for ages 55-80 currently range from 3-6% of deposits or market value, which ever is higher.

The couple’s registered savings (their RRSP in their case) can purchase variable annuities, which give them income that is based on the escalating annual minimums set by the federal government, and also offers them a guaranteed lifetime base amount that will never go lower.

What’s even better, Bob and Wendy are delighted that any residual value from variable annuities will flow directly to their children and their charities within weeks of the issuing insurance company receiving a death certificate. And, the proceeds bypass legal fees, probate taxes, and time delays associated with many other types of investment methods.

*  *  *

Everyone's needs and situations are different and it's important to explore the outcomes that are important to you and your family with your advisor so you can make decisions that will reflect your needs the best.

As always, please feel free to drop me a line if you have any questions or would like to learn more.

Next: More guaranteed solutions to help you to  transition from retirement to retirement home - including annuities and combining annuities with insurance for a rock solid plan for life!

Sunday, 6 January 2013

Transitioning from retirement to retirement home

Financing my retirement - Part three
Transitioning from retirement to retirement home
Do you have plans to downscale and move into retirement home, and use the proceeds from the sale of your home as your nest egg?
If so, here are some ideas on how to maintain control over your funds, make the most of them, and even set some aside to act as a meaningful legacy.
Most people often consider retirement planning in three separate stages:
1)    Putting aside savings during working years;
2)    Planning the transition from working life to retirement;
3)    Simplifying life by moving from a larger home to a retirement home.
Saving during working years can be tough for people who are self-employed, or who don’t have pension plans that will result in a tidy pension. If you use mutual funds as your saving plan, your savings are at risk due to the unknown timing of the ups and downs of the stock market. Also low interest rates are great for borrowers but terrible for savers, since the low rates are not keeping up with the rising cost of living. If you’re still working, you do have the advantage of time and may be able to wait for markets to recover or interest rates to rise.
But if you are nearing retirement, time isn’t on your side. Fluctuating markets become a major concern when you need to access your money to fund your retirement and your retirement needs. And when you are selling your home to fund your retirement, freed-up cash may look like a lot initially, but retirement living can be expensive and it’s all too easy to burn through funds if they’re in low-interest or risky investment vehicles.
You’ve also got to consider that you may well need funds set aside for increasing healthcare costs. When you are emotional about changes in the health of yourself or your spouse, this is a poor time to make important financial decisions.
Planning in advance will allow you to maintain control over your hard-earned savings, and breathe easier about financing your future.
An understanding, impartial retirement planning professional can help you with your plan. He or she should engage in discussions between you and your loved ones about your vision for your retirement, and how you want to be remembered through legacy planning. Involving your family in your plans can alleviate future tensions or misunderstandings.
By choosing an independent broker to help you with your plan, you will have access to a wealth of financial planning options that aren’t offered through bank products. You should investigate no-risk financial solutions that allow you to stay in control of your assets while providing you with guaranteed income to live comfortably.
Here are some of the key points to discuss when creating your plan.
1)    How much is enough to carry you through your retirement years? What are your lifestyle expectations and what will they cost? What are your current needs and what should you be keeping aside to cover possible future needs?
2)    What are the best investment options to allow the proceeds of the sale of property to fund your retirement? No-risk options that will guarantee your desired lifestyle and well-being for life should be considered first. Typically these options will include such things as annuities and other guaranteed insurance products; they also are attractive since they generally offer a higher guaranteed rate of return.
3)    Do you wish to set aside funds to help support your children or your favourite charitable causes? By switching some of your savings into similar products offered by insurance companies, you will be able to assign beneficiaries to receive any left-over funds. On your passing, the transfer to your beneficiaries occurs outside of your estate and therefore is not subject to probate fees and taxes, and legal expenses, ensuring your beneficiaries receive more. The transfer will also occur in a few weeks, compared to delays of four years or more with non-insurance and bank products.
4)   Do you currently have a disability? Are you taking advantage of all available tax breaks to help ease the costs of retirement living?
5)    Have you assigned someone you trust to be your power of attorney? If you become incapacitated, it can be critical to have a friend or family member in your corner to help make critical life decisions and assist in the management of your finances.
6)    Do you have a valid, up-to-date will? Do you really want the government to be your primary beneficiary if you die without a will? You can remain in control of your assets, even after you pass away, by making decisions now that will allow you to leave behind a memorable and meaningful legacy that will touch lives for years to come.
I am happy to answer any questions you have. Drop me a line at jack@bequestinsurance.ca.
Up next: How you can stay in control of your finances when going from home to retirement home