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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!