Decumulate & Downsize

Most of your investing life you and your adviser (if you have one) are focused on wealth accumulation. But, we tend to forget, eventually the whole idea of this long process of delayed gratification is to actually spend this money! That’s decumulation as opposed to wealth accumulation. This stage may also involve downsizing from larger homes to smaller ones or condos, moving to the country or otherwise simplifying your life and jettisoning possessions that may tie you down.

Retired Money: Tax Brackets, Income Thresholds, Inflation Factors & other things retirees need to consider going into 2025

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My latest MoneySense Retired Money column looks at a variety of tax and savings limits changes that are effective early in 2025. Click on the highlighted headline for the full column: What retirees need to know about tax brackets for 2025.

As the column notes, at or near Retirement taxes and inflation are the two big threats to preserving enough wealth to last a lifetime.  The tax burden hits home with the annual tax-filing deadline in April, but the time to start thinking about the yearly ordeal is before year-end.

The complexity of this task is compounded by almost-annual changes to tax brackets, the Basic Personal Amount, OAS thresholds, inflation adjustments and much more. For starters, I recommend reading an excellent article by CIBC Wealth’s tax guru, Jamie Golombek, which appeared in the Financial Post here on Nov. 23rd, shortly after the Canada Revenue Agency released its new tax numbers for the year 2025.

 Let’s look first at inflation, the second serious scourge retirees face if they live long enough. Here, a useful tool suggested by certified financial planner Morgan Ulmer is Statistics Canada’s Personal Inflation Calculator, which lets you compare your personal inflation rate to the general CPI.

Ulmer, of Toronto-based Caring for Clients, sees the higher tax brackets and inflation adjustments as an “opportunity for retirees to build a savings reserve.” CPP is indexed to inflation yearly while OAS is indexed quarterly.  So “if a retiree is able to increase their spending at a rate that is less than CPI, the difference could be saved as an emergency reserve or invested in a TFSA.”

 Inflation and Tax Bracket changes

 Back to some key data cited by Jamie Golombek.  The inflation rate used to index 2025 tax brackets and amounts will be 2.7%: just over half the 4.7% in effect in 2024.  The good news is that the Basic Personal Amount (BPA) on which no federal tax is levied rises to $16,129 in 2025: It was $15,000 in 2023.

All five federal income tax brackets are indexed to that 2.7% inflation rate. In 2025, the bottom federal tax bracket of 15% will apply to incomes between zero and $57,375. The second lowest bracket of 20.5% will apply to incomes between $57,375 and $114,750. The 26% bracket applies to income between $114,750 and $177,882, while incomes between $177,882 and $253,414 will attract a 29% federal tax. After that the federal rate will kick in at 33%.

Below is a table summarizing that information prepared for MoneySense:

MoneySense.ca

 Don’t forget there will be additional provincial taxes on top of the federal haul, also indexed to inflation at various provincial rates.

 What is relevant for those in the Retirement zone is the higher threshold on Old Age Security: in 2025, according to Canada.ca, OAS begins to get clawed back for taxable income of $90,997.  OAS benefits disappear entirely at $148,451 for those aged 65-74 in 2025, and at $154,196 for those 75 or over. Note the OAS clawback is based on individual incomes, not household income.

Deferring CPP and OAS till 70

 Matthew Ardrey, portfolio manager and Senior Financial Planner for Toronto-based TriDelta Financial, agrees that tax brackets, whether federal or provincial, “become more of a consideration in retirement.” For many Canadians receiving employment income on a T-4, there is little we can do as retirees to keep income in the lower tax brackets. But there’s plenty to think about when considering tax minimization and decumulation strategies. Referring to Golombek’s article, Ardrey says that using federal brackets only, taxpayers can receive $57,375 of income and pay very low rates of taxation, especially when the $16,129 basic personal amount is considered.”

Retirees under age 70 can defer CPP and OAS until 70 and try to live on withdrawals from their registered plans instead. With no other income, taxpayers could have almost $50,000 of after-tax income, or $100,000 for tax-paying couples. Continue Reading…

Strategies for Building a Substantial 401(k) Balance

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Retirement planning may not be at the forefront of every twenty or thirty-something’s mind. However, starting early could mean the difference between a retirement spent in comfort or want. With social security’s uncertain future and the rising cost of living, the sooner you embark on saving for retirement, the better. Managing your retirement savings wisely will ensure a peaceful and fructiferous future. Learn the strategies now for building a substantial 401(k) balance [United States.]

Image by Adobe Stock/ juliasudnitskaya

By Dan Coconate

Special to Financial Independence Hub

Today, a robust 401(k) plan is more crucial than ever for securing your retirement. Understanding how to manage your contributions and investments effectively can set you on the path to Financial Independence. As the traditional employer-sponsored pension system becomes less common, individuals are increasingly responsible for their retirement savings.

By taking advantage of employer contributions, understanding investment options, and reviewing your plan, you can cultivate a retirement savings strategy that prepares you for the future and helps you build financial confidence. These strategies for building a substantial 401(k) balance will ensure it becomes a strong pillar of your retirement portfolio.

Choose the Right Investment Options

Most 401(k) plans offer various investment options, and selecting the right mix can directly impact your retirement savings. Investments fall primarily into stocks, bonds, and mutual funds or ETFs, all carrying different risk levels and potential returns. A balanced portfolio that reflects your risk tolerance, investment timeline, and financial goals can better weather market fluctuations. Review your options regularly and consider rebalancing your portfolio to adapt to any changes in the market or your personal situation.

Gradually increase Contributions

If you’re hesitant about contributing a significant portion of your salary to your 401(k) from the outset, consider implementing a gradual increase plan. Many employers allow you to set up automatic annual increases in your contribution percentage. Taking advantage of raises or bonuses to boost your contributions ensures that you consistently increase your savings without feeling the financial strain of a sudden change.

Regularly Review your Plan

Conducting annual reviews of your 401(k) to ensure it remains aligned with your financial objectives is vital. Life changes, such as starting a family or changing careers, can shift your needs and goals, requiring adjustments to your retirement strategy. Continue Reading…

Real Life Investment Strategies #5: Retirement Decumulation Strategies

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Steps to Retire the Way you Want: Set Your Retirement Goals, Put your Money in the Right Places, and Optimize your Withdrawals

Graphic by Steve Lowrie: Canvas Custom Creation

By Steve Lowrie, CFA

Special to Financial Independence Hub

Most of us feel young well into our 60s (or even later) and retirement seems like a faraway concern for the distant future. However, thinking about your retirement early allows you to comfortably enjoy your later years no matter what your priorities are – leaving a legacy for your loved ones, travelling, spending time on hobbies close to home or any combination. Putting together a retirement income plan early gives you the best path to safeguard your financial freedom post-retirement.

Retirement income planning doesn’t mean constant worrying and going without today. It just means taking stock of where you are financially, where you want to be in the future, and setting up a plan to get there. That retirement plan could include setting up the right investment strategies now to allow you the flexibility you’ll need in the future to generate cashflow from the right places and pay the least amount of tax. It also could mean contributing regularly and consistently now so you don’t have to make up for lost ground in the future.

Let’s get into what retirement investment vehicles and strategies you have, how to think about your retirement priorities and goals, and how you can plan a decumulation strategy for the retirement you want and deserve.

Your Retirement Vehicle Options

When thinking about retirement vehicle options, I like to visualize pots or buckets of money; each of those pots represent a savings vehicle from which you can withdraw retirement cash flow. Whether it’s pots or jars or briefcases filled with cash that you imagine, here are the labels you can put on them:

It’s crucial to consider all of the different retirement “pots” you currently have or need set up. For couples, it’s also important to remember these options apply to both spouses which can be extremely advantageous for your retirement withdrawal plan.

Your Retirement Priorities & Goals

Once you’ve explored your retirement savings vehicle options, you’ll want to determine your priorities and define your goals.

It’s a bit of a balancing act where you might need to make some decisions to prioritize your goals. Do you:

  • Maximize your retirement income and fun (lifestyle needs, travel, etc.) OR
  • Leave a financial legacy for your family and loved ones OR
  • Focus on charitable donations

To help you prioritize your goals, we’ve got some great blogs on this topic to get you thinking:

Remember, it doesn’t necessarily need to be one goal vs. the other. However, you may need to consider how you can achieve all your goals, perhaps by weighting their importance (my retirement fun: 60, legacy for the kids: 30, charity: 10). Or you could consider how to distribute your specific investment “pots”, for example, you may choose to spend all financial assets and leave the kids the real estate.

A few more tips to help with your retirement goal prioritization:

  • Keep your retirement goals realistic – you’ll want to ensure you have the ability to reach your goals with highest probability.
  • Balance your spending, savings, and withdrawals to align with goals.
  • Review the location of your savings in the necessary “pots” to ensure you can meet your goals optimally.
  • Focus on minimizing tax – determine the best strategy for your priorities today and tomorrow. You can pay tax now or later (estate timing) or your plan can be to smooth out your tax outlay over time. This is a key consideration when allocating your savings into your investment vehicles.
  • Timing – as the old adage goes, timing is everything and I don’t mean market timing. From an investment perspective, the best approach is systematic and consistent contributions and properly planned withdrawals.
  • Be flexible – the longer you have between now and retirement, the more that things can change, including your goals and financial circumstances.

Retirement Decumulation Strategies in Action

Let’s look at how people just like you can implement these retirement decumulation strategies to reach their retirement goals.

The Accumulators: Suzie and Trevor Hall (When We First Met Them)

Financial Accumulators Suzie and Trevor Hall
  • In their late 40s
  • Still deep in their accumulation years
  • Two teenage children
  • Own a home, which is almost fully paid off
  • Have been good about living within their means and diligently saving
  • Hope to retire within 15–20 years
  • Want to fully fund their children’s education
  • Plan to complete home renovations before they retire

During their accumulation years, Suzie and Trevor followed advice from their independent financial advisor:

  • Start with planning, not investing.
  • Establish a spending plan.
  • Invest systematically.
  • Do a lifeboat drill.
  • Remember that it’s priced in.
  • Established an appropriate emergency fund and lifestyle reserve. Continue Reading…

Estate Planning Checklist for Entrepreneurs

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Photo courtesy Pexels/Featured.com

By Robert Theofanis

Special to Financial Independence Hub

Estate planning is like going to the dentist. Everyone knows they should do it. But whether it’s getting your teeth drilled or contemplating your mortality, we’d all rather fill our time with just about anything else.

For entrepreneurs, this problem is even more acute. Your business depends on you, and high-priority items constantly appear at the top of your to-do list.

What I’ve found as an estate planning attorney is that my clients can get more done when we approach estate planning in a systematic way. This post contains an actionable plan for entrepreneurs like you to design and implement an estate plan.

I’ve organized the list by priority, with the most critical items first:

Obtain Term Life Insurance

If you have minor children, life insurance is the most important component of your estate plan. Most parents of young children simply haven’t had enough time to accumulate sufficient wealth to sustain a family without any additional income.

I like term insurance for this baseline protection because it’s cheaper than a permanent policy.

I also recommend that both parents have policies. Irrespective of who earns the income, both parents contribute to the household.

For the benefit amount, err on the side of more coverage and consider purchasing separate policies (e.g., two $1 million policies rather than one $2 million policy). This allows you to scale back the coverage amount without dropping coverage entirely.

If you don’t have children yet but are planning to, I still suggest getting coverage now. Life insurance premiums increase with age and pregnancy-related health issues may make it difficult to secure coverage later.

Create a Revocable Living Trust

A basic revocable living trust is the foundational legal document for an estate plan. Its purpose is to keep you and your property out of conservatorship and probate proceedings.

Included in this step is creating the other estate planning legal documents:

  • A pour-over will ensures that all property is distributed in accordance with the terms of your living trust, even if it’s inadvertently left out of the trust;
  • A durable power-of-attorney authorizes a financial agent to conduct transactions on your behalf if you’re incapacitated;
  • A medical directive authorizes a healthcare agent to make medical decision for you if you are unable to and specified your healthcare and end-of-life wishes (in some states, two separate documents are prepared for this purpose);
  • A guardian nomination appoints a guardian to raise your minor children if you are unable to.

Be sure to actually fund the trust! This is one of the biggest mistakes people make. This involves transferring title to real property, opening new financial accounts (bank, brokerage, etc.), and updating beneficiary designations.

Establish and Implement a Written Financial Plan

Estate planning is more than just creating a set of legal documents. It’s a multifaceted plan to achieve positive outcomes for you and your loved ones. So, while the first two items on this list are about limiting your downside, this item concerns your upside. Continue Reading…

How to Maximize Retirement Income with Hobbies

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In retirement, hobbies, believe it or not, can seamlessly transition into income-generating ventures: thus presenting an opportunity for older adults to monetize their passions. Whether it’s woodworking, photography, gardening, or crafting, the key lies in recognizing the market demand for these skills or products and strategically positioning oneself to capitalize on it. Here’s a quick look on discovering how collecting and small businesses can boost your finances in your later years.

 

Image Adobe Stock/Pikselstock

By Dan Coconate

Special to Financial Independence Hub

Retirement offers a perfect time to turn hobbies into profitable ventures. Many retirees seek ways to supplement income through hobbies that provide both enjoyment and financial rewards.

Choosing hobbies with financial benefits allows you to maximize retirement income with hobbies while staying engaged in activities you love. The right hobby can provide personal fulfillment and a steady income stream that supports your retirement goals.

Explore Collecting as an Investment

Collecting serves as one of the most effective ways to generate income. Collectibles like vintage items, rare artifacts, and diecast car models can appreciate over time. Market trends and knowledge about item values help collectors make smart investment decisions.

Limited-edition diecast car models typically increase in value, offering a return on investment. Collectors who stay informed about market demand can identify items with the most potential for appreciation. Adopting eco-friendly collecting practices for diecast model cars enhances the long-term value of your collection and supports environmental conservation.

Turn Hobbies into a Small Business

Starting a small business based on a hobby provides another income source. Retirees can transform passions like crafting, gardening, or baking into profitable enterprises. Selling handmade goods, plants, or homemade treats on platforms like Etsy or at local markets offers a steady income stream.

Consider expanding your hobby-based business by offering workshops or classes. Teaching others how to create or maintain their own collections or crafts can generate additional income. For example, a retiree who enjoys gardening can teach a course on growing and maintaining a garden.

Monetize Knowledge and Expertise

Sharing knowledge and expertise related to your hobbies can also generate income. Retirees can offer workshops, create online courses, or write e-books to teach others about their hobbies.

This method monetizes your passion and keeps your mind active and engaged. For example, if you have extensive knowledge of vintage car models, you could create an online course or write a book about the history and intricacies of collecting these items.

Invest in Appreciating Assets

Hobbies that involve acquiring appreciating assets, such as art collecting, antique restoration, or wine collecting, offer financial rewards over time. These assets often gain value as they age, providing an additional source of income in retirement. Staying informed about market trends and seeking expert advice ensures that your investments yield the best possible returns. Continue Reading…