Victory Lap

Once you achieve Financial Independence, you may choose to leave salaried employment but with decades of vibrant life ahead, it’s too soon to do nothing. The new stage of life between traditional employment and Full Retirement we call Victory Lap, or Victory Lap Retirement (also the title of a new book to be published in August 2016. You can pre-order now at VictoryLapRetirement.com). You may choose to start a business, go back to school or launch an Encore Act or Legacy Career. Perhaps you become a free agent, consultant, freelance writer or to change careers and re-enter the corporate world or government.

Retirement Planning in your 20s

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By Jenn Hamann

Special to the Financial Independence Hub

Young people are notoriously focused on the here and now. With their entire lives ahead of them, it’s easy for them to lose sight of how important it can be to plan for the future. This is especially true when it comes to retirement planning. The subject is far from exciting, but it can have a tremendous impact on your life as you get older. Failing to have enough retirement savings when you leave the workforce could make it much more difficult for you to enjoy your golden years.

At least you wouldn’t be alone. More than 40 per cent of millennials say they have not yet started saving for the future. The good news is that the sooner you start, the better off you’ll be when the day finally comes.

One of the most significant obstacles when it comes to millennial retirement savings is simply waiting too long to get started. Many younger workers don’t take full advantage of their employers’ 401(k) matching contributions, for example (in the U.S.; the Canadian equivalent are group RRSPs or Defined Contribution pension contributions). The simple math says that the earlier you begin, the more you potentially could have when you cash out your savings.

If you’re one of those who are convinced you still have time to ignore your future, think again. The adjacent infographic shares some sobering facts about the importance of financial planning, as well as some tips you can use to be more prepared.

Jenn Hamann is Executive Vice President of ToInsure.Me, a leading provider of auto, life and home insurance. She has more than 12 years of experience in the industry, and currently focuses on sales, managing, planning, coaching and retaining business. 

 

How Real Return Bonds compare with regular Bonds, protecting against unexpected rises in Inflation

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Real Return Bonds (RRBs) pay you a rate of return that’s adjusted for inflation, but that’s not always as promising as it seems.

When a real-return bond is issued, the level of the consumer price index (CPI) on that date is applied to the bond. After that, both the principal and interest payments are typically adjusted every six months, upwards or downwards from that base level, to compensate for a rise or fall in the CPI.

In general, Government of Canada real-return bonds pay interest semi-annually, on June 1 and December 1.

How a real-return bond works: A theoretical example

The Bank of Canada issues $400 million of 30-year bonds maturing on December 1, 2049. The bonds have a coupon, or interest rate, of 2%.

If after six months from the date of issue, the new CPI level is, say, 1% above the level of the CPI on the issue date, then each $1,000 of bond principal is adjusted to $1,010 of bond principal ($1,000 x 1.01). The semi-annual interest payment is then $10.10 ($1,010 x 2% / 2).

If after 12 months, the level is 2% higher, then the bond principal is adjusted to $1,020 ($1,000 x 1.02), and the interest payment rises to $10.20 ($1,020 x 2% / 2).

Three important considerations to recognize with real-return bonds

1.) The price you pay for real-return bonds reflects the anticipated rate of inflation. In other words, if investors feel that inflation will rise 2% over the long term, the price of the bond will reflect that future inflation increase and its effect on the bond’s principal and interest payments. So, when you buy a real-return bond, you are only protecting yourself against unanticipated rises in inflation.

2.) When the inflation rate falls over a six-month period, the principal and interest payments of a real-return bond fall. In times of deflation, the inflation rate turns negative. In a prolonged period of deflation, the principal of a real-return bond could fall below the purchase price. Interest payments would fall, as well.

3.) As with regular bonds, holders of real-return bonds must pay tax on interest payments at the same rate as ordinary income. That income gets taxed at the investor’s marginal rate. In addition, holders of real-return bonds must also report the amount by which the inflation-adjusted principal rises each year, as interest income, even though you won’t receive that amount until the bond matures. That amount is added to the bond’s adjusted cost base.

If the CPI level falls, that reduces the inflation-adjusted principal. You deduct the amount of that reduction from your taxable interest income that year, and also subtract it from the adjusted cost base.

Real-return bonds in comparison to regular bonds

In simple terms, a bond is a form of lending whereby you lend money to a corporation or government. In return, a bond pays a fixed rate of interest during its life. Eventually, a bond matures, and holders get the bond’s face value—but nothing more. Receiving the fixed interest and face value at maturity is the best that can happen. Note, though, that in some cases, corporate bonds can go into default. As well, inflation can devastate the purchasing power of bonds and other fixed-return investments. Continue Reading…

Making the most of CPP and the Guaranteed Income Supplement (GIS)

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By Graeme Hughes, PFP, for Cutthecrapinvesting

Special to the Financial Independence Hub

Note from Dale Roberts: This is a guest post by invitation, from Graeme Hughes, PFP. Thanks to Graeme, this is a wonderful follow up post to The 3 Most Common Mistakes of Canadian Investors. Over to Graeme …

Canada’s tax and benefits system is a convoluted tangle of programs, rules and exceptions that can be a genuine challenge to navigate. Like all complex systems, having some knowledge of how it works often reveals opportunities to benefit. And as a taxpayer, it only makes sense to ensure that we are accessing all the benefits our tax contributions have made possible.

One of the greatest areas where this type of planning pays off is in structuring our early-retirement income to maximize pension benefits. Here we will be looking at two benefits in particular, the Guaranteed Income Supplement (GIS) and the Canada Pension Plan (CPP).

Accessing the Guaranteed Income Supplement (GIS)

Often, the GIS is viewed as being strictly a benefit for seniors who are living in poverty. However, recent studies show almost a third of Canadian seniors are receiving this benefit, and it can add substantially to your total retirement picture.

The GIS is an add-on payment to Old Age Security (OAS). It provides a maximum monthly benefit of $907.30 for single OAS recipients, and $546.17 each for married and common-law OAS recipient. Benefits are income tested, and clawed back at a rate of at least $1 for every $2 of taxable income for singles, and at least $1 each for every $4 of combined income for couples. The clawback rates are variable depending on total income, and more detailed tables can be found here.

The GIS is a non-taxable benefit, and OAS amounts are not included in the income calculation. Once annual income reaches $18,408 for individuals, or $24,336 in combined income for couples, the GIS benefit drops to zero.

How to maximize the GIS if you have modest savings

Knowing this, if I were a retiree with modest savings and no employer-sponsored pension, I would be tempted to ensure I reached age 65 without any RRSPs. Given the GIS clawback would apply to taxable RRSP withdrawals, the RRSP becomes a very inefficient way to fund additional retirement spending.

For example, if I am a single retiree, aged 65 or older, and I receive 70% of the maximum CPP amount ($808/month), I will be entitled to an additional $363 per month in GIS payments, along with my $607 OAS benefit (assuming 100% OAS eligibility).

While that may not seem like a lot of money, the GIS benefit represents 20% of my total income. For every dollar I take from an RRSP, I am going to lose at least 50 cents of that GIS benefit, and that would be a waste of my precious savings.

However, this clawback does not apply to TFSA withdrawals or withdrawals from non-registered accounts, since they are non-taxable. Keep in mind that in non-registered accounts, any interest, dividends or capital gains that are earned would result in GIS clawbacks, but these would likely be much more minor unless the balances are sizeable.

So for many retirees, it may be beneficial to liquidate their RRSPs prior to age 65, or shortly after 65, and move the proceeds to a TFSA first, with any excess amounts going to a non-registered account. This will maximize the value of the money they have worked hard to save, and optimize their entitlement to government benefits.

Of course, the tax consequences of liquidating RRSPs need to be carefully considered and compared to the GIS benefits likely to be gained. The larger the RRSP balances, the harder this strategy is to justify.

How to benefit from GIS if your Retirement Savings are more substantial

The GIS options become even more interesting for retirees that have larger amounts of savings and limited sources of retirement income outside of government pensions. In this case, appropriately structuring your affairs can provide a real advantage in increasing the longevity of your retirement assets. Continue Reading…

Sharing for Profit: 7 lazy ways you can earn money through the Sharing Economy

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By Sienna Walker

Special to the Financial Independence Hub

Sharing is caring. Sharing something you own, sharing a little bit of your time, or sharing a skill you’ve cultivated can amount to a pretty decent payday. In fact, this is the very foundation of the sharing economy idea that has taken world by storm.

The best part about sharing economy gigs is that many of them are often easy. Since you set your own schedule and choose the way you participate, you can engage whenever you feel like it. If you want a boost to your income on your own terms, the sharing economy might be a perfect fit for you.

1.) Deliver Stuff

Sometimes, people want specific food, but for whatever reason, they can’t prepare it themselves or drive out to go get it. If you join an app as a delivery driver, it can become your job to drop fast food at someone’s doorstep. It’s as simple as that.

Most delivery jobs will score you a little money from the app company and a tip from the delivery recipient. If you limit yourself to your local area and make yourself available on the weekends when people might be a little too – ahem – tipsy to drive, you can make a decent amount of money for relatively little effort.

2.) Rent out stuff you aren’t using

You can rent out almost anything you aren’t currently using. People who only need something for the short term don’t want to purchase it: they don’t want to be stuck with it after it outlives its brief purpose.

You can rent bikes, skis, surfboards, cameras, or even clothes. Over time, you might even make more money than if you had chosen to sell the item. As long as it stays in relatively good condition, you can rent it indefinitely.

3.) Rent out your house while you’re away

You’re going on vacation for two or three weeks. That leaves your house vacant for an extended period of time. It’s just sitting there, not making you any money. Unless, of course, you rent it. A rental property calculator can help you determine how much you can realistically charge as a rental fee for your home.

If you have extra space even when you’re home or your trip is going to be short, you can use short term rental apps to help supplement your income.

4.) Drive people places

If you don’t mind driving, you can always sign up with a ride hailing service. You’re essentially making money from your driveway. Some people make enough money becoming a driver that they make it a full time job. Before you sign up, compare and contrast the differences between services to be sure you’re choosing the best one for you. Much like food delivery, ride hailing app drivers typically make great money on the weekends if their coverage area includes a lot of busy bars. Help people get home safe and make some extra cash. Continue Reading…

CPP Payments: How much will you receive from Canada Pension Plan?

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Canada Pension Plan (CPP) benefits can make up a key portion of your income in retirement. Individuals receiving the maximum CPP payments at age 65 can expect to collect nearly $14,000 per year in benefits.

The amount of your CPP payments depends on two factors: how much you contributed, and how long you made contributions. Most don’t receive the maximum benefit. In fact, the average amount for new beneficiaries is just over $8,000 per year (as of March 2019).

CPP Payments 2019

The table below shows the monthly maximum CPP payment amounts for 2019, along with the average amount for new beneficiaries:

Type of pension or benefit Average amount for new beneficiaries (March 2019) Maximum payment amount (2019)
Retirement pension (at age 65) $679.16 $1,154.58
Disability benefit $980.24 $1,362.30
Survivor’s pension – younger than 65 $439.37 $626.63
Survivor’s pension – 65 and older $311.99 $692.75
Death benefit (one-time payment) $2,394.67 $2,500.00
Combined benefits
Combined survivor’s and retirement pension (at age 65) $869.86 $1,154.58
Combined survivor’s pension and disability benefit $1,096.12 $1,362.30

Now, you may not have a hot clue how much CPP you will receive in retirement, and that’s okay.

The good news is that the government does this calculation for you on an ongoing basis. This means that you can find out how much money the government would give you today, if you were already eligible to receive CPP. This information is available on your Canada Pension Plan Statement of Contribution. You can get your Statement of Contribution by logging into your My Service Canada Account, which – if you bank online with any of the major banks – is immediate.

Related: CRA My Account – How to check your tax information online

If you’d prefer to send your personal information by mail you can request a paper copy of your Statement of Contribution sent to you by calling 1.877.454.4051, or by printing out an Application for a Statement of Contributions from the Service Canada Website.

Note that the information available to you on your CPP Statement of Contribution may not reflect your actual CPP payments. That’s because it doesn’t factor in several variables that might affect the amount you’re entitled to receive (such as the child-rearing drop-out provision). The statement also assumes that you’re 65 today, which means that later years of higher or lower income that will affect the average lifetime earnings upon which your pension is based aren’t taken into consideration.

CPP is indexed to Inflation

Canada Pension Plan (CPP) rate increases are calculated once a year using the Consumer Price Index (CPI). The increases come into effect each January, and are legislated so that benefits keep up with the cost of living. The rate increase is the percentage change from one 12-month period to the previous 12-month period.

CPP payments were increased by 2.3 per cent in 2019, based on the average CPI from November 2017 to October 2018, divided by the average CPI from November 2016 to October 2017.

Note that if cost of living decreased over the 12-month period, the CPP payment amounts would not decrease, they’d stay at the same level as the previous year.

CPP Payment Dates

CPP payment dates are scheduled on a recurring basis a few days before the end of the month. This includes the CPP retirement pension and disability, children’s and survivor benefits. If you have signed up for direct deposit, payments will be automatically deposited in your bank account on these dates:

All CPP payment dates 2019

  • December 20, 2018
  • January 29, 2019
  • February 26, 2019
  • March 27, 2019
  • April 26, 2019
  • May 29, 2019
  • June 26, 2019
  • July 29, 2019
  • August 28, 2019
  • September 26, 2019
  • October 29, 2019
  • November 27, 2019
  • December 20, 2019

Why Don’t I Receive The CPP Maximum?

Only 6 per cent of CPP recipients receive the maximum payment amount, according to Employment and Social Development Canada. The average recipient receives just 59 per cent of the CPP maximum. With that in mind, it’s best to lower your CPP expectations when calculating your potential retirement income. Continue Reading…