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.

My recent blogs: KIPPERS, insecure retirement, annuities, post-Trump investing

Posted By Jonathan Chevreau | November 17, 2016

depositphotos_30337045_s-2015 — KIPPERS. Should parents dip into retirement savings to help their kids?

As regular Hub readers may know, I often write financial articles for other (mostly) digital media, usually the Financial Post, MoneySense.ca and Motley Fool Canada. Here’s some of the most recent blogs or columns, with links via the headlines.

Nearing Retirement and still insecure about your finances? Sadly, you’re not alone. (FP, Nov. 17)). This came out of a survey released this week by Mackenzie Investments that suggested many of us actually feel less secure financially about retirement the closer the actual date arrives. One reason is grey divorce and another perhaps related one is dipping into retirement savings to help adult children.

The latter idea was explored In an earlier FP blog I wrote this week: When Boomers should turn the taps off (or on) when it comes to financial assistance for their kids. (FP, Nov 15). There I pass along a term I learned from occasional Hub guest blogger Doug Dahmer of Emeritus Retirement Solutions: KIPPERS, also mentioned in the photo caption above.

KIPPERS stands for Kids in Parents’ Pockets Eroding Retirement Savings. I also mentioned this in a short segment on this topic on Tuesday with Peter Armstrong on CBC’s On the Money show.

A few weeks earlier, the CBC aired another segment between me and Armstrong titled You’ve never going to retire, and Here’s Why.

Canadian Personal Finance Conference this weekend

That of course touched on the new book I’ve coauthored with Mike Drak, Victory Lap Retirement. The FP has also been running excerpts of the book the last several Mondays. You can find the first four here. Number 5 is slated for next Monday. By the way, co-author and fellow blogger Mike Drak and I both plan to attend the Canadian Personal Finance Conference 2016 this weekend in Toronto. Hope to see other financial bloggers there!

Last weekend, the FP ran a my column on Locked-in Retirement Accounts (LIRAs): The RRSP’s less flexible cousin: Everything you need to know about the LIRA. Watch for a followup column that addresses reader queries on this topic.

Earlier this week, Motley Fool Canada ran my take on investing in the post-Trump-victory world: Don’t dump your long-term investment plan over Trump’s victory. And it’s just published my latest quarterly report for Stock Advisor Canada, this one on CRM2 and Best Interest (only subscribers with a user name/password combo can access this).

Over at MoneySense.ca on November 11th was the online version of my most recent column from the November issue of the magazine, which is on annuities: How to win using annuities in retirement.

Hey, no one promised my Victory Lap Retirement would be easy!

How a Personal Pension Plan can mimic gold-plated DB pensions

Posted By Financial Independence Hub | November 14, 2016

By Jean-Pierre Laporte

Special to the Financial Independence Hub

There are approximately 1.2 million Canadians capable of saving for their retirement and mimicking the ‘gold plated’ pensions of federal civil servants and teachers. Are you among them?

It’s well-known in policy circles that traditional defined benefit (“DB”) plans are better for employees but worse for the employers that underwrite them.

Why? Because the nature of the pension promise itself builds in an assumption that there will be sufficient assets, on an actuarial basis, to replicate a certain level of income, well into retirement. If markets do well, the promise is met. If markets underperform, these DB plans require that the employer dip into its corporate pockets to make up the difference through ‘special payments’. Short of a corporate insolvency, the DB model offers a guarantee of financial security that does not exist in any other type of tax-assisted plans (such as the RRSP, DPSP, PRPP or Defined Contribution plans).

While the mention of DB Plans conjures up visions of large public sector behemoths like the Ontario Teachers’ Pension Plan or the Healthcare of Ontario Pension Plan, they also exist at the other extreme: small professional corporations created by a single individual to carry out a given profession. Recently, small business owners and professionals are turning to the Personal Pension Plan (“PPP”), a type of registered pension plan that offers both DB and Defined Contribution (DC) accumulation methods under a single roof, with the freedom to select between the two each year.

The reason why the PPP works so well at the individual professional corporation (“PC”) level is that the interests of the plan member and of the shareholder are perfectly aligned. In years of market underperformance the requirement that extra tax-deductible contributions (special payments) be made, is simply a transfer of wealth from the owner’s taxable corporate pocket to his/her tax-deferred personal pension pocket. Likewise, strong market performance can lead to a “contribution holiday” for the PC and an even safer retirement pension for the shareholder/member.

Upgrading from RRSP savings to PPP savings

Annuities may have a place in your retirement investing

Posted By Pat McKeough | November 8, 2016

Canadian annuities offer a predictable source of income, but we advise against buying them.

An annuity may be worth considering for part of your assets, depending on your age, investment experience, the time you want to devote to your investments, your desire to leave an estate to your heirs and other aspects of your retirement investing.

But a key drawback to annuities is that annuity rates are closely linked to interest rates, which are at historic lows. In addition, annuities have no liquidity. If interest rates and inflation move up, your annuity payments would remain fixed and you would lose purchasing power. Plus, you would have no way to rearrange your portfolio. This is why we generally advise against investing in Canadian annuities.

There are basically three types of Canadian annuities:

1.) Term-certain annuities are payable to you, or your estate, for a fixed number of years. Your estate will receive the payments even if you die. You could outlive this type of annuity.

2.) Single-life annuities are payable to you for as long as you are alive. These annuities may come with a minimum number of years of payments. If you die while the minimum payment period is still underway, future payments would go to your estate.

3.) Joint and last survivor life annuities are payable as long as you, or your spouse, are alive.

3 Ways Canadian Annuities can hurt Your Retirement Investing

Can your pension plan pay out for 30 years?

Posted By Adrian Mastracci | October 25, 2016

“Keep close watch on the financial health of your pension plan. The family retirement depends on it.”

A worthy nugget of information often lands within my purview: one that musters important implications for investors.

A recent US headline read “State pensions are awash in red ink.” The estimated shortfall ballpark was 1 trillion dollars. Ouch! Today various pension plans are underfunded, while others could easily be heading that way. Some pension income benefits may be reduced if the weaker funding levels don’t improve.

Say your family plans to retire around age 60 with a pension and at least one spouse lives to 90. Ask this critical question: “Can your pension pay expected benefits for 30 or more years?”

Anyone who is a member of a pension plan should take note of this unsettling situation: those who are still contributing, along with those now receiving pension benefits.

Pension plans rely on three sources of funding:

Employer contributions
Employee contributions
Investment returns

Ongoing low returns are devastating for many pension plans. Longer life expectancy places additional demands on pension payouts.

Some pension plans may incur problems in paying all the promised benefits. Every pensioner should assume all pensions can undergo changes – even CPP, OAS and Social Security.

Participating in pension plans may mean making some irreversible decisions.
Notable pension events occur when:

A choice is presented to join a pension plan, buy back past pension service or retire normally or early.
An early retiree is offered the option of staying with the pension plan or transferring the commuted value.
Accepting a commuted value shifts responsibility to provide in retirement to the employee’s hands.
Switching from defined benefit to defined contribution keeps the employee working longer.

Steady pension income has always been an important part of the retirement puzzle for many families. Pension reductions can rattle some pillars and assumptions of retirement planning.

Consider what could happen to the retirement plan if the expected pension was reduced, say by 30%. Here are some key matters that arise:

• How would you make up the potential income shortfall?

• How much more investment capital would you require?

• Is there sufficient time to accumulate the additional funding?

Pension administrators typically provide an “annual pension summary.” Upon receiving the summary, every pension member should:

• Check the estimated funding level with the pension department.

• Review the most beneficial pension options to achieve family goals.

• Determine whether it’s more desirable to commence the pension early or later.

• Understand the implications of pension income splitting and $2,000 credit.

No doubt some retirement plans will face difficult choices. Hence, I favour starting this analysis at least five years before retirement. Long-term income goal adjustments may be necessary. There are no simple answers, even for pension plans that are rock solid today.

Be savvy and don’t assume that your pension remains iron clad forever. It may be called upon to deliver benefits for 30 years, perhaps more.

Adrian Mastracci, MBA, is president and portfolio manager for Vancouver-based KCM Wealth Management Inc., specializing in designing and stewarding retirement portfolios

Switching your RRSP to a RRIF is best for those retiring soon

Posted By Pat McKeough | October 10, 2016

Converting your RRSP to a RRIF is clearly the best of three alternatives at age 71 and there are four ways to make sure you get the maximum benefit from the RRIF (Registered Retirement Income Fund).

If you have one or more RRSPs (registered retirement savings plans), you’ll have to wind them up at the end of the year in which you turn 71. We think converting your RRSP to a RRIF (registered retirement income fund) is the best option for most investors.

You have three main retirement investing options:

• You can cash in your RRSP and withdraw the funds in a lump sum. In most cases, this is a poor retirement investing option, since you’ll be taxed on the entire amount in that year as ordinary income.

• You can purchase an annuity.

• Proceed with the RRSP to RRIF conversion

RRIFs are the best retirement investing option for most investors