All posts by Jonathan Chevreau

Retired Money: How TFSAs can give seniors more tax-free retirement funds

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If you’re a senior, the holy grail in retirement is to have as much tax-free retirement funds as possible.

My latest MoneySense Retired Money column looks at this goal: Click on the highlighted text to access the full piece:  How Seniors can use TFSAs to have more in retirement.

This site has always been a strong proponent of Tax-free Savings Accounts (TFSAs) for young people. Starting at age 18, TFSAs are great vehicles for accumulating short-term savings for goals like saving a down payment for a home, buying a new car, or even going on to post-graduate studies or starting a business. And unlike RRSPs, the $5500 annual contribution room for TFSAs does not require having earned income the previous year. So as of next week, with the arrival of 2018, it’s highly advisable to add another $5,500 to your TFSAs. But not just if you’re young!

The MoneySense column makes the point that TFSAs are equally desirable for seniors in retirement, or for those in semi-retirement who are preparing for full retirement.

Why? First, unlike the RRIFs that many RRSPs become, and which generate taxable income, TFSAs generate no taxable income: neither on the withdrawals nor the investment income (whether dividends, capital gains or interest). In addition, TFSAs do not trigger clawbacks of means-tested government retirement income programs like Old Age Security or the Guaranteed Income Supplement.

But there’s another big benefit TFSAs confer on seniors and retirees: ongoing tax-sheltering of investment income well beyond age 71. In contrast, you can no longer contribute to RRSPs after the year you turn 71 and cannot contribute new money to RRIFs: they’re strictly vehicles that shelter what you’ve got until the next forced annual withdrawal limit, which escalates over time from 5.28% at 71 to 20% a year once you reach 95.

Unlike RRSPs and RRIFs, seniors can continue to add to their TFSAs each and every year even after age 71. Even if you live past 100, as my friend Meta has (and who, as the column relates, continues to use the TFSA herself!)

Two ways seniors can get money for TFSAs without having to find “new” money

Continue Reading…

Retired Money: the case for laddering Annuities

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“The more bells and whistles, the lower the monthly income,” from annuities, says Caring for Clients’ Rona Birenbaum,

My latest MoneySense Retired Money column looks at the case for laddering annuities in order to avoid the problem of committing funds to annuities at interest rates that are only now coming off their historic lows. You can retrieve the whole article by clicking on the highlighted text: A low-risky annuity strategy to beef up your retirement cash flow.

Many investors are already acquainted with the concept of “laddering” guaranteed investment certificates (GICs), or bonds with different maturities. Maturity dates are staggered over (typically) one to five years, so each year some money comes due and can be reinvested at prevailing interest rates. This minimizes the likelihood of investing the whole amount at what may turn out to be rock-bottom interest rates, only to watch helplessly as rates steadily rise over time.

The same applies when it comes time for retirees or near-retirees to annuitize. At the end
of the year you turn 71 you must decide whether to convert your RRSP into a RRIF,
cash out and pay tax (few do this), or thirdly to annuitize.

Fortunately, annuitization isn’t an all-or-nothing decision. You can convert some of your RRSP to a RRIF and some to a registered annuity. You can take a leaf from the GIC laddering
concept and buy annuities gradually over five, ten or even more years. As regular Hub contributor Patrick McKeough observes in the piece, laddering annuities can reduce the potential downside: “You could buy one annuity a year for the next five years. That way, your returns will increase if interest rates rise, as is likely.”

Tally up how many annuities you may already have

Mind you, few observers believe in converting ALL your disposable funds into annuities. After all, as another Hub contributor — Adrian Mastracci — notes, you need to take inventory of the annuity-like vehicles you already may have, or expect to have: such as  employer-sponsored Defined Benefits, CPP or OAS. Some investors may have a high component of annuity-like income without realizing it, and many families may already have five or six such sources of annuity-like income.

Certainly you need to consider both the benefits and drawbacks of annuities. The main benefit is they are a form of longevity insurance: making sure you never outlive your money no matter how long you live. There’s a case for having enough annuities that your basic “survival expenses” (shelter, food, heat, transport etc.) are taken care of no matter what. Finance professor Moshe Milevsky is also quoted in the article to the effect there are compelling financial and psychological reason to at least partly convert to annuities. And Milevsky is famous for making a distinction between “REAL” pensions (like DB pensions) that behave like annuities, as opposed to vehicles like RRSPs and TFSAs, which provide capital that only have the potential to be annuitized. Hence the title of Milevksy’s excellent book, Pensionize Your Nest Egg.

But annuities are not perfect. Apart from the common reluctance to commit to buying annuities at today’s still-low interest rates, there’s also the matter of the irreversible nature of the decision to convert some capital to an annuity. You’re handing over a large chunk of change to an insurance company and should you die earlier than expected, they in effect “win,” to the partial detriment of your estate. If on the other hand you live to 120, then YOU “win.”

Continue Reading…

Why “Topping up to bracket” makes sense if you’re temporarily in a low tax bracket

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My latest column in Wednesday’s Globe & Mail looks at a strategy called “Topping up to Bracket,” which can be useful to anyone who is temporarily in a lower tax bracket.

Click on the highlighted headline to access the online version, assuming you have Globe subscriber privileges or haven’t exceeded the monthly free click quota: A strong tax case for early RRSP withdrawals.

When might you be “temporarily” in a lower tax bracket than usual? This can of course happen when you lose a job or if you’re in your Sixties and transitioning between full employment (typically earning in higher tax brackets) and Semi-Retirement, when it’s tempting to “bask” in lower tax brackets.

Temporary because as Semi-Retirement progresses, you can end up moving back into higher tax brackets: for example, if you start to receive Old Age Security (OAS) at 65, then take Canada Pension Plan (CPP) a few years later, these are both taxable sources of income.

And the big hit can come at the end of the year you turn 71, when RRSPs must be converted to Registered Retirement Income Funds (RRIFs) or else annualized or cashed out. RRIFs entail forced annual withdrawal rates that keep rising between your 70s and your mid 90s.

So that makes “Topping up to Bracket” (a term used in a BMO Wealth Institute paper on the topic, published around 2013) a strategy not to be ignored. In practice it means making sure that in those low-earning years you at least bring into your hands each and every year the roughly $12,000 of untaxed earnings that’s called the Basic Personal Amount (BPA). And as the G&M column explains, it’s also a good idea to at least bring in the dollars that are in the lowest tax bracket (15% federally, 5% in Ontario), or roughly $42,000. There are of course higher tax brackets above that but the law of diminishing returns starts to kick in beyond the $42,000.

Note too that this is a “use it or lose it” proposition. If for example a year went by that you failed even to bring in even that $12,000 income that would not have been taxed, you can’t carry forward the opportunity to benefit from it the following year. You will of course have another opportunity for the BPA that year but it won’t double up because you neglected to earn low- or non-taxed income the previous year. Continue Reading…

Retired Money: Early or Delayed CPP? Age 65 may be best compromise

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My latest MoneySense Retired Money column has just been published, which tackles that perennial personal finance chestnut of whether to take early or delayed CPP benefits. You can find it by clicking on the highlighted headline here: The Best Time to Take CPP: if you don’t know when you’ll die.

That’s a pretty big “if,” of course since with rare exceptions, our futures are unknowable. As readers of the piece will discover, there is a fair bit of personal anecdotes there, which is hard to avoid in a beat known as “Personal Finance.” As the column notes, we’ve written before that in theory it makes sense to delay CPP as long as possible, since monthly benefits are 42% higher than if you took them at 65. And while you can take CPP as early as age 60, you’d pay a 36% penalty to do so compared to taking it at the traditional age 65.

Since experts are all over the place on this one and have valid arguments for either side, it’s interesting that in practice very few Canadians actually wait till age 70 to start their CPP, even if it is an inflation-indexed guaranteed-for-life annuity. Government stats show age 60 is the single most popular option: according to the federal government’s 2016 data, of the 312,251 who began collecting CPP that year, 126,954 did so right at age 60, with the second most popular start date being age 65, when 93,460 started to collect. Only 4,844 waited until 70.

The balanced case for the traditional age 65

As I relate in the MoneySense piece, I still haven’t started to collect CPP myself, even as my 65th birthday looms this coming April. Continue Reading…

Retired Money: How to boost retirement income by 50%

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PUR Investing’s Mark Yamada

My latest MoneySense Retired Money column looks at an academic paper written by two Canadian investment pros, which explains how retirees can boost retirement income by as much as 50%. You can find it by clicking on the highlighted headline here: How to boost your retirement income by 50%.

In the recent Fall issue of the Journal of Retirement, PUR Investing Inc. president and CEO Mark Yamada and colleague Ioulia Tretiakova, the firm’s director of quantitative strategies, published a paper titled “Autonomous Portfolio: A Decumulation Investment Strategy That Will Get You There.” Click here for a summary.

Yamada and Tretiakova observe that the combination of rising life expectancy, minuscule interest rates and declining availability of employer-sponsored Defined Benefit pension plans is making retirement an anxious proposition, especially for the Baby Boom generation that is even now starting to storm the barricades of Retirement: 10,000 Baby Boomers retire every day in the United States, and roughly 1,000 a day in Canada.

Little wonder that one study (Allianz 2010) found 61% of those aged between 45 and 75 were more afraid of running out of money than of dying! Sure, you can decide to work a little longer, which lets you save more and cuts down the years you’ll need to withdraw an income, but there’s a limit to how long you can work (or find willing employers or clients). Ultimately, health and time are not on your side!

The full article describes Yamada’s Decumulation Investment Strategy, which is designed to let retirees better manage both retirement income and the probability of ruin.

Dynamic Constant Risk & Spending Rules

Unfortunately, the investment industry relies on historical risk and return data to project future returns, somewhat like navigating a car by peering through its rear-view mirror. Yamada aims to keep portfolio risk constant by reducing portfolio risk when market volatility rises and to increase portfolio risk when volatility falls (hence the term DCR, which stands for Dynamic Constant Risk). Continue Reading…