All posts by Jonathan Chevreau

Retired Money: The LIRA-to-LIF deadline and more on the RRSP-to-RRIF deadline

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My latest MoneySense Retired Money column is the second part of an in-depth-look at the deadline those with RRSPs don’t want to miss once they turn 71. Part 1 appeared in March and can be found here.

The full new column can be found by clicking on the highlighted headline here: RRSP to RRIF, and LIRA to LIF: How it all gets done.

For convenience, here are some highlights:

The first column looked at the necessity of winding up RRSPs by the end of the year you  turn 71: a topic that becomes increasingly compelling as the deadline approaches. This followup column looks at two related topics: the similar deadline of LIRA-to-LIF conversions and the alternative of full or partial annuitization.

LIRAs are Locked-in Retirement Accounts and analogous to RRSPs, albeit with different rules. They usually originate from some employer pension to which you once contributed in a former job. To protect you from yourself you can’t extract funds in your younger years unless you qualify for a few needs-based exceptions. LIFs are Life Income Funds, in effect the annuities LIRAs are obliged to become, also at the end of your 71st year.

The full MoneySense column looks at our personal experience in converting my wife’s LIRA to a LIF, aided by Rona Birenbaum, founder of Caring for Clients. Note that the timing of the conversion is NOT affected by having a younger spouse: that only affects the annual minimum withdrawal calculus.

In my case, having turned 71 early this April, I have until the end of this year (2024) to convert my RRSP to a RRIF. The first required minimum withdrawal must occur in 2025: by the end of 2025 I must have withdrawn the annual minimum.

You can choose RRIF payment frequencies: usually monthly, quarterly, semi annually or once a year: you just have to specify which date. I imagine we’ll go monthly.

Currently, our retirement accounts are held at the discount brokerage unit of a Canadian bank, although we use a second discount broker for some non-registered holdings. While the LIRA will be the basis of an annuity provided by an insurer selected by Caring for Clients, most of our RRSPs will likely become RRIFs, probably by November of this year.  Our hope is that we will keep largely the same investments as are being held now and administer them ourselves, with an eye to maintaining enough cash to meet our monthly withdrawal targets.

Self-directed RRIFs

The new vehicle will bear a familiar name for those with self-directed RRSPs: it’s a Self-directed RRIF. At our bank, it was a simple matter of entering the RRSP and finding the link to convert it to a self-directed RRIF. Once there, you tick boxes on when you want the money, withdrawal frequency and (optionally) choose a tax withholding rate. You can also specify that your withdrawals will be based on your spouse’s age, assuming they are younger.

You can of course also go through a similar process with any financial institution’s full-service brokerage or investment advisor, ideally with at least one face-to-face meeting.  One thing Birenbaum says retirees often miss is specifying tax withholding, since there is no minimum withholding tax period required on the minimum withdrawal. I imagine we will ask to have 30% tax taken out at the time of each withdrawal: which is what we do with existing pension income. It’s on the high side to make up for the fact we also have taxable investment income (mostly dividends) that is NOT taxed at source.

             “I find the majority of retirees like having that withholding tax held at source so they don’t have to deal with installments and owing the CRA.” You can of course have more than 30% withheld.

            With a LIRA, you need to get the account liquid before the money is sent to the insurance company to annuitize. This means keeping tabs on the maturity dates of GICs or other fixed income.

            The paperwork is minimal: we provided a recent LIRA statement, then had an online meeting with one of Birenbaum’s insurance-licensed advisors to go through the application, then sign a transfer form to move the cash to the insurance company for a deferred annuity. The transfer takes a few weeks, with the actual annuity rate determined when the insurance company actually receives the money: registered transfers are recalculated at the point of purchase. There is a form T2033, which is an RRSP-to-RRIF transfer form that moves the money from the bank to the insurance company.

Having a mix of RRIF and annuities

Semi-retired actuary and author Fred Vettese says he has endorsed retirees buying a life annuity ever since the first edition of his book “Retirement Income for Life” back in 2018. “If you buy one, it should be a joint-and-survivor type, meaning it pays out a benefit to the survivor for life.” Continue Reading…

NIA on Canada’s 3-pillar Model of Retirement Income

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The National Institute of Ageing is today releasing the next instalment [“the final Step 1”] of its series of papers on the Canada Pension Plan (CPP/QPP) and the Canadian retirement income system. The link invites readers to click on a download button for a full PDF of the report.

Recall that Findependence Hub’s introductory blog on this was published on April 11th here, and subsequently in my Retired Money column at MoneySense.ca on April 23: How to double your CPP Income. It also summarized in this second Hub blog on April 24th.

Below is a screenshot from the new paper: my comments follow below the graphic, which the NIA defines as a “redefined visual of the Canadian retirement income system.”

 

Recall that the entire series of papers is titled 7 Steps Toward Better CPP/QPP Claiming Decisions: Shifting the paradigm on how we help Canadians.  Step #1 is titled (Re)Introducing the Retirement Income System: A New Framework Tailored to the Retiree’s Perspective.

The accompanying text includes this overview:

“Canada’s retirement income system has traditionally been presented to the public as three pillars, consisting of government-sponsored retirement income programs (CPP/ QPP, OAS and GIS), workplace pension plans and personal savings. However, this traditional framing is a missed opportunity to help workers mentally transition into retirement, encouraging them to shift their attention toward the adequacy of their financial resources to successfully and sustainably finance their entire retirement.”

The paper goes on to point out that here is some irony involved in how the traditional “three pillar” framework of the retirement income system is presented: it does so from the perspective of providers (i.e., government, employers and the financial services industry), rather than those it is intended to inform.

“When viewed from the end user’s perspective, pensions are not a financial pillar of the retirement income system. They are the income foundation on which other financial resources rest.”

By viewing pensions as “a foundation rather than a pillar,” the NIA continues,  “the resulting framework provides a structure that is more focused on spending, with an ‘income’ foundation that securely and sustainably replaces employment income. Private assets accumulated on an individual or collective basis — including tax-deferred savings such as registered retirement savings plans (RRSPs), registered retirement income funds (RRIFs), and defined contribution (DC) pension plans — are ‘spending buckets’ on top of this foundation, providing flexibility to support non-routine spending throughout different retirement stages.” Continue Reading…

Inflation is getting to retirees and some pre-retirees, Fidelity survey finds

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2024 Fidelity Retirement Report (CNW Group/Fidelity Investments Canada ULC)

More than four in five (82%) Canadian retirees say inflation is having a negative financial impact on them in retirement, according to a just-released report from Fidelity Investments Canada ULC.

The 2024 Fidelity Retirement Report also found that 43% of pre-retirees say the rising cost of living is delaying when they think they will retire. In addition, 59% of retirees report helping their non-student adult children in retirement: both with day-to-day expenses as well as big-ticket items like home purchases, weddings and even education savings for their grandchildren.

“It comes as no surprise that retirees are feeling the bite of inflation. Other macroeconomic issues such as a slowing economy, rising rates and volatile markets are also common factors that have negatively affected retirees financially,” says the report, “Pre-retirees are also feeling the pinch. We find that compared with last year, a larger share of pre-retirees are considering delaying their retirement in response to the rising cost of living.”

As you can see from the graphic below, the percentage of pre-retirees who plan to retire later than originally expected rose from 37% in the 2023 survey to 47% in the new 2024 edition.

While less than a third of those already in retirement have worked in some capacity once they have left full-time work, most pre-retirees anticipate that they will work at least part-time once they’re retired, according to the report.

While Fidelity cites rising inflation as one reason for this trend, it also says “most pre-retirees would like extra money for recreational purposes.” Further, the report says, “We also find that there isn’t a clear relationship between those working in retirement and their level of household income, suggesting that in general, many Canadians may be working or anticipating working to maintain a higher material standard of living, rather than just to keep up with the rising cost of essentials.”

 

Continue Reading…

Retired Money: How to double CPP benefits while also hedging against inflation and longevity

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My latest MoneySense Retired Money looks in more detail at the National Institute of Ageing’s recent series of papers on CPP (and OAS). As the Hub reported on April 11th, few Canadians are aware that delaying CPP benefits to age 70 can more than double (2.2 times actually) eventual monthly benefits compared to taking it early at age 60. That blog reproduced a chart from the NIA that showed just how much money Canadians are leaving on the table by NOT deferring benefits as long as possible.

The other major chart from the NIA paper is reproduced above, showing just how important most retirees view the guaranteed inflation-indexed income that CPP and OAS provide. As the new column points out, for many retirees — especially those who worked most of their careers in the private sector and don’t enjoy a Defined Benefit employer pension — CPP and OAS are the closest thing they’ll have to a guaranteed-for-life inflation-indexed annuity.

The new MoneySense column focuses on how delayed CPP benefits not only generate higher absolute amounts of income  but also carry with it the important related benefits of more longevity insurance and inflation protection.

You can find the full column by clicking on this highlighted headline: How to double your CPP income.

It features input from several well-known retirement experts, including noted finance professor and author Dr. Moshe Milvevsky, retired Mercer actuary Malcolm Hamilton, author and semi-retired actuary Fred Vettese, TriDelta Senior Financial Planner Matthew Ardrey and the lead author of the NIA report, Bonnie Jean MacDonald.

Delaying CPP is “the best annuity-buying strategy you can implement.”

Milevsky sums it up well, when he says “delaying CPP is the best ‘annuity-buying strategy’ you can implement. Everything else is just Plan B.” Audrey makes a similar point: CPP is “an annuity and an indexed annuity at that … This helps protect the purchasing power of this income stream through retirement. Many people wish they had an indexed DB [defined benefit] pension and in fact we all do. It is the CPP.”

You’ll probably see much more press on this topic as the NIA is releasing a paper each month between May and December. May 8th will be general education on the Canadian retirement income system while July 17th will explain the mechanics of delaying CPP (and QPP) benefits.

Federal Budget 2024 features $53 billion new spending over 5 years; rise in capital gains inclusion rate for wealthy

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Prime Minister Justin Trudeau’s 8th federal budget features $52.9 billion in new spending over five years, according to the CBC.

You can find the 430-page budget — titled Fairness for Every Generation — at the Department of Finance website here.

Released at 4 pm Tuesday, the wealthiest 0.13% of Canadians will be hit with a higher capital gains inclusion rate: as of June 25, the inclusion rate will rise to 66% for capital gains  in excess of $250,000 a year, and this will also apply to corporations.

You can find details at the Globe & Mail’s coverage here. (may only be viewable by subscribers.) For those who can’t access, it says:

“The budget doesn’t make any changes to income tax rates, nor does it include an explicit wealth tax. Instead, the tax hikes are focused on capital gains … as of June 25, the inclusion rate on capital gains realized annually above $250,000 by individuals – and on all capital gains realized by corporations and trusts – will rise from one-half to two-thirds.­”

The lifetime capital-gains exemption for Canadians will rise from $1-million to $1.25-million, the Globe says, and “The total capital-gains exemption from the sale of a principal residence will not change.” Speaking on CBC, G&M columnist Andrew Coyne called it an “underwhelming” document.

Coyne’s G&M column on the budget bore the scathing headline A government with no priorities, no anchors, and when it comes to growth, no clue. Subscribers can read it here.

A typical passage from his piece:

“…. there is not a single measure in the budget aimed at boosting investment generally – as opposed to the usual slew of measures aimed at diverting investment

into the government’s favoured sectors: artificial intelligence, ‘clean’ technologies, and so on.”

Jamie Golombek’s take on Taxes

Here is  what CIBC Wealth’s tax guru, Jamie Golombek, had to say in the Financial Post.

The federal budget released on Tuesday did not contain a general tax rate increase for the wealthy, but the government did announce that the capital gains inclusion rate will be going up and it amended the draft alternative minimum tax rules in response to concerns of the charitable sector .

On the rise in the capital gains inclusion rate, Golombek says “the $250,000 threshold will apply to capital gains realized by an individual, net of any capital losses either in the current year or carried forward from prior years  .. Capital losses carried forward from prior years will continue to be deductible against taxable capital gains in the current year by adjusting their value to reflect the inclusion rate of the capital gains being offset. This effectively means that a capital loss realized at the current 50 per cent allowable rate will be fully available to offset an equivalent capital gain realized after the rate change.”

MoneySense’s Jason Heath

Fee-only financial planner Jason Heath penned this insightful analysis for MoneySense. He covers everything from the higher capital gains inclusion rate to impact on entrepreneurs, housing, renters and much more.

Rob Carrick’s Personal Finance report card

G&M personal finance columnist Rob Carrick created a personal finance Budget report card here. He gave Taxes a C-minus grade, Housing a B, Junk Fees a C and Open Banking a D, and Saving for postsecondary education an A.

On the other side, the Finance department says an Improving economy means higher tax revenue: $20 billion in new revenue in five years. The $40 billion deficit is projected to stay more or less pat till 2025/2026, after which it starts to inch down.

$46 billion next year on payments on the Debt

Here’s initial coverage of the budget from National Post. There, it reports that Ottawa will spend $480 billion next year, including $46 billion in payments on the national debt. Among the highlights mentioned:

“Among the new spending is more money for home building, including tax measures that allow first time buyers to take more money out of their RRSP for a down payment and to delay when they start repaying the money.There is also $1.1 billion for interest-free student loans and grants, more funding for the Liberal daycare program and for the first phases of national pharmacare that will cover insulin and contraceptives. There is also funding for a new disability benefit and money for artificial intelligence research.”

Mix of Bad Economics and Bad Politics

Also in the National Post, Philip Cross dubbed the budget “a continuation of the Trudeau government’s orgy of spending financed by debt and higher taxes.”

Sample passage:

“Besides being bad economics, the government’s massive spending is bad politics because it antagonizes most provinces without any obvious electoral return from its spending.” Continue Reading…