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.

The “nice” problem of million-dollar RRSPs

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Are million-dollar RRSPs a looming tax problem for soon-to-retire baby boomers or simply a nice problem to have?

My latest Globe & Mail Wealth column has just been published on page B9 of the Tuesday paper and online, which you can access by clicking on the highlighted headline here: The secret to paying less tax in retirement.

As one expert cited — Doug Dahmer, who often guest blogs here at the Hub — tax is perhaps the single biggest expense in Retirement. This often becomes apparent when those growing RRSPs the Boomers and others have been accumulating are forced to become RRIFs or Registered Retirement Income Funds at the end of age 71, at which point they become taxable at your highest marginal rate, just like  interest or employment income. Million-dollar RRSPs are not that uncommon, according to the sources consulted for the column, whether individually or shared by couples.

(I say”forced” but of course there are two alternative options: annuitize or cash out. Very few people choose the latter option, while annuitization or partial annuitiization is certainly a valid option as you progress through your 70s, although ideally when interest rates are higher.)

The initial RRIF withdrawal percentage is 5.28% at 71 but minimum withdrawal rates rise steadily over time, hitting 6.82% at age 80, 10.21% by 88 and reach 20% by age 95 and beyond.

Draw down RRSPs/RRIFs early, delay CPP/OAS to 70

As the article notes, this has two implications: one, since it’s unlikely most investors with balanced portfolios will generate returns as high as the withdrawal percentages, most RRIF recipients will start breaking into capital. Continue Reading…

Which investments are best inside and outside RRSPs

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As we stated in an earlier article on RRSPs (What you need to know to build a productive RRSP) your investments gain doubly in your RRSP. Instead of paying up to 50% of your profit to the government in taxes, you keep 100% of your money working for you.

When you lose, however, you take a double loss. You lose the money you’ve invested as well as the opportunity to have the money grow for years, or even decades, sheltered from taxes.

So don’t use it as a place to find out if you have a talent for stock trading.

Successful investors put only their safest investments in RRSPs. These investments have the greatest potential to increase in value over time and therefore benefit from the RRSP’s continuing protection from taxes.

If these investors indulge in penny stocks, stock options or short-term trading, they do so outside their RRSPs.

If you hold speculative investments like this in an RRSP and they drop, you lose more than the money you invested in them. You also lose the tax-deduction value of a loss outside your RRSP. Outside your RRSP, you can use capital losses to offset taxable capital gains in the current year, the three previous years, or any future year.

If you invest in mutual funds, you have another set of tax concerns. At the end of the year, mutual funds distribute any capital gains they have made during the year, after deducting any capital losses, to their unitholders. So, you may have to pay capital gains taxes on your mutual-fund holdings, even though you haven’t sold.

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100 Kilometers per Hour to Full Stop!

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By Heather Compton 

Special to the Financial Independence Hub

You’re busy!  You’ve been diligently advancing your career, paying bills, raising kids and saving for retirement.  Lots of your available life hours spent grooming for, travelling to or toiling away at work.

Now fast forward to your first day of retirement — nowhere to be; no need to get out of your bathrobe or into the car.  For some that sounds like nirvana; for others, their worst nightmare. Even nirvana wears thin if it’s a steady diet with no variety.

The shift from active work-life to part-time work or full-time retirement is one of the important tasks of mid-and-later life.  Psychologists speak of it as a transition, and like other life transitions it brings both bumps and bonuses. Imagine adjusting, as one of my clients put it, to “twice as much husband on half as much income!”

What’s Next?

What comes next? You may need to reclaim or rediscover yourself.  You’ve defined yourself as parent, partner and businessperson and now you’re “out of work” on two fronts – kids grown plus the job has flown.  Where does your routine, sense of purpose, identity and social engagement come from?

A rockin’ retirement isn’t a given, it’s an intention.  A rich life is a goal worth meeting, but it takes focus that goes far beyond your net worth statement.

A Life with Style

At the core of virtually all measures of life-satisfaction is your state of health.  Now you are driving an older vehicle, one where replacement parts don’t function as well as the factory originals. Creating a vehicle-maintenance schedule becomes your new job.

The World Health Organization describes health as, “a state of physical, mental and social well-being.” That requires a focus on all aspects of your health – financial, physical, emotional, mental and spiritual well-being.

Begin Again

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What to expect when applying for CPP

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What should you expect when applying for CPP (Canada Pension Plan) benefits? As my latest Retired Money column for MoneySense explains, age 64 is not just the age the Beatles ask the question “Will you still need me, will you still feed me?”

It’s also the age when Service Canada can be expected to reach out to you with a letter to your home address, giving you details of how the Government of Canada will feed you with CPP benefits once you turn 65 (or as early as 60 should you choose reduced early benefits).

But fear not, Ottawa will also  still need you, in the form of taxable revenue: like Old Age Security, CPP benefits are fully taxable.

The full piece can be accessed by clicking on the highlighted headline: CPP application: Here’s what to expect during the process.

The piece’s focus is on the actual application process but does touch on the age-old topic of the optimal age to start receiving benefits: which can be anywhere between age 60 and 70. The Hub has tackled this several times in its almost three years of existence. Use the search engine to the right and enter CPP, or click here.

Try the Canadian Retirement Income Calculator

The piece also links to a useful web tool provided by Service Canada: the Canadian Retirement Income Calculator, which you can access by clicking on the highlighted text.

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Retired Money: Sticker shock on Healthcare costs for Seniors

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Senior with her caregiver at home

Have you factored rising Healthcare costs into your retirement planning? Here’s my latest MoneySense Retired Money column, which you can access by clicking on the highlighted headline: One huge cost to factor into retirement plans.

That huge cost is of course unexpected medical expenses, which tend to escalate the further along you go in your golden years. Typically, the early years of Retirement (say, in your 60s) are dubbed “Go-Go” years, which are the healthy ones during which you can travel, and medical costs tend to be minimal.

Costs rise as you go from Slow-go to No-go years

But as time goes on, often between the late 60s and early 70s, you can expect a few medical problems to emerge for at least one member of a senior couple, if not both. That’s why they some dub the middle period the “Slow-go” years.

And of course, the last few years is where costs can really mount up: the so-called “No-go” years, especially if you no longer “stay in place” in your home, or require extensive in-home care, or are forced out of the family home altogether to go to a retirement home or nursing home.

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