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.

How to make realistic retirement calculations for your future

Posted By Pat McKeough | June 13, 2017

When you’re investing and planning for retirement, make realistic calculations rather than indulging in wishful thinking.

If you plan to retire at 65, and you’re 50, you won’t be dipping into your investments for 15 years. If you are in reasonably good health, you could live well into your 80s: possibly longer.

Let’s say you have $200,000 in your RRSP, and expect to add $15,000 in each of the next 15 years.

To determine if this is enough, you need to make some realistic retirement calculations about investment returns and income needs.

What you can expect

Long-term studies show that the stock market as a whole generally produces total pre-tax annual returns of 8% to 10%, or around 6% after inflation. For the purposes of retirement planning, we’ll assume a 6% yearly return, and disregard inflation. Your $200,000 grows to $479,312*, and your yearly $15,000 RRSP contributions add up to $370,088, for total retirement savings of $849,400.

*Be sure to check your math. There are many compound-return calculators available online. For example, you can find a comprehensive compound-return calculator at the Bank of Canada’s web site.

Income and outgo

If you continue to earn 6% a year, and you withdraw $50,964 a year (6% of the $849,400 in your RRSP), you can avoid dipping into capital until your mid-70s, when RRIF rules require a larger withdrawal.

However, if you start taking money out faster, or earn lower returns, you’ll run out of money.
If you withdraw $90,000 a year while earning 6%, the money you’ve accumulated will last just over 13 years. If you earn 5% but withdraw $90,000 a year, your money will be gone in just over 12 years.

Beware of getting caught in a vicious circle

Turning 65 soon? Service Canada wants to give you OAS benefits!

Posted By Jonathan Chevreau | June 10, 2017

Turning 65 in the next year? These things do eventually happen, God Willing!

The bad news is you are now considered by the Government to have reached Old Age; the good news is that also means Ottawa wants you to consider starting receiving Old Age Security (OAS) benefits the month after you officially turn 65.

My latest MoneySense column provides all the details, starting with a letter Service Canada should be sending you automatically shortly after you reach 64. Click on the highlighted text for the full column about how to get ready to receive Old Age Security benefits and possibly the Guaranteed Income Supplement (GIS) to OAS: What to expect when receiving OAS at 65.

As you’ll see, no action at all is required if they did send you this initial package and you’re happy to receive gross (pre-tax) cheques mailed to the address they have on file. If you want the funds deposited electronically to your bank and/or have tax deducted at source (as I did), then you either have to go to the web site provided or call them on the phone.

I have to say my initial attempt to do this on the Internet was a frustrating one. It turned out to be far easier to call them on the telephone on the English-language helpline listed in the letter: 1-800-777-9914. Due to “high call volume” I was put on hold for 15 minutes, during which time the automated voice advised listeners to apply for OAS at least six months before their 65^th birthday and no more than a year in advance. It also said the maximum monthly OAS benefit is currently $578.53.

I chose to have 25% tax withdrawn at source so with no further action on my part, I can expect my first OAS deposit of $433.90 (net of tax) to arrive magically in my bank on or about May 29, 2018, and every month after that for as long as I live, like any other pension. By then it may be slightly more, as it may be indexed to the cost of living.

Take OAS early, CPP late if you can possibly swing it

Keep in mind that, like the Canada Pension Plan (CPP), you can opt to defer receipt of OAS benefits to as late as age 70, thereby raising the payout. I revealed my reasons for taking OAS as soon as it’s on offer in an earlier MoneySense column last summer: Why I’m taking OAS right at 65. Continue Reading…

Time to stop following the Retirement herd

Posted By Michael Drak | June 7, 2017

We are all social animals: we crave interaction and generally don’t like being alone. We crave that feeling of togetherness and being part of something bigger, the added comfort and safety that comes with being part of a group or a herd.

The herd protects individuals from being singled out, and in the animal kingdom provides safety from being killed by a predator.

Many people have developed a “herd” mentality in life deriving comfort by going with the flow and if everyone else is going in one direction they must know something that we don’t. It is easier not to complicate things by forging our own path based on what we learn or believe. What happens if we are wrong and the herd is right?

When it comes to retirement the “herd” has been doing this retirement thing for a long time. So they must be right, right?

I used to be a follower, part of the herd if you will. I was willing to put my fate in the hands of others and follow along blindly. Then I realized the retirement herd was heading in the wrong direction, and this wasn’t going to work for me. Let me explain.

Retirement worked when life expectancy was much lower

When the concept of retirement was created just over a hundred years ago, it worked. The reason it worked was because life expectancy was much lower and if you were one of the lucky ones to reach the retirement finish line, you could expect to enjoy a couple of years in the proverbial “rocking chair,” watching the world go by.

Blend income splitting with retirement strategies

Posted By Adrian Mastracci | June 5, 2017

My investing premise is straightforward: Splitting family income is very beneficial. Take full advantage of all provisions that apply.

Think of income splitting in the same breath as your retirement planning. In my view, the two camps ought to fit like a glove to deliver the best value. Families are keenly interested in paying the least income tax. There are a few low-cost activities left on the platter.

It’s never too early to get familiar with the menu. Let’s blend income splitting with your retirement strategies.

Ideally, a family pays less income tax where two spouses achieve similar income levels. Equalizing incomes allows each spouse use of the graduated tax scales from low to high.

Another beneficial goal is to equalize asset levels as much as possible. Retirees who reduce the “clawback” retain more of the OAS pension and, perhaps, the age credit.

A dozen tips for splitting income near retirement

Utilize these income splitting tips before and after retirement: Continue Reading…

Can I afford to Retire?

Posted By Financial Independence Hub | June 2, 2017

The following is the second excerpt from Create the Retirement You Really Want: And Retire Smarter, Richer and Happier

By Clay Gillespie

Special the Financial Independence Hub

It was a beautiful May morning when I next saw Rachel and Mike. Rachel was carrying a large gift-wrapped box.

“This is for you,” she said, smiling and handing the box to me.

“Thank you,” I said, pleasantly surprised. “Most of my clients wait until they see how their portfolio performs before expressing their appreciation.”

“Shall we take it back then?”

“No, no! I’ll keep it,” I said, smiling, as I began to slide off the ribbon and remove the wrapping.

I opened the lid, looked inside and grinned with pleasure. “Much appreciated,” I said, looking proudly at a genuine leather soccer ball with my daughter’s name custom-printed on the top panel. “Sarah’s going to love it!”

“We wanted to give you a memento of our first meeting,” Rachel said.

“How very appropriate. Well, I don’t have a soccer ball for you,” I said, putting the ball down. “But hopefully I have an equally useful gift.”

“One that will last a lifetime?” Rachel asked.

“Yes. You might say it’s a gift that keeps on giving,” I said, grinning and handing them each a file folder.

“Our retirement numbers?” Mike asked.

“Yes. These are your illustrations.”

“Will we need to eat cat food?” Mike asked with a smile.

“No.” I laughed. “My goal is to help you maximize your retirement income, not minimize it.”

“And we won’t outlive our money?” Mike asked, more serious now.

“You should have plenty left for your children, unless you live to be Methuselah’s age.”

“Methuselah lived to be 969 years old,” Rachel said. “So I think the odds of that happening to us are slim,” she said pointedly.

“Right. My mistake,” I admitted. “I’ve taken the liberty of including a life expectancy table in your retirement illustration, so you’ll know the odds.”

“The odds of us dying at a certain age? I’m not sure I’m ready to see that!” Mike said uneasily.

“Don’t be such a worrywart, Mike,” Rachel said, chiding him gently. “It’s not as if you’re going to see the exact date and time of your death.” Suddenly, she frowned and looked at me. “Are we?”

“No,” I said smiling. “The actuaries aren’t that good, at least not yet. The life expectancies I’ve included are estimates based on a number of factors including your current age, your diet, exercise frequency, stress, body fat, genetics and the quality of health care.We’ll get to those in a moment. What you’re about to see is a financial illustration. It’s designed to give you an initial picture of your retirement situation for planning purposes. But first, we need to review your finances together so we’re all on the same page. Agreed?”

“Agreed,” they said together.

“Good. Here’s a quick snapshot of your current finances. As we go through it, I want you to let me know if anything is amiss.”

This is what they saw:

“As you can see, your gross income is $170,000 per year, while your combined income after tax is approximately $125,000.” “We work hard for our income,” Rachel said defensively.

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