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.

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

Fixed Income: What about inflation?

Posted By Financial Independence Hub | September 27, 2016

By Kevin Flanagan, Senior Fixed Income Strategist, WisdomTree

Special to the Financial Independence Hub

The last few months have certainly given the money and bond markets a lot of divergent news headlines to digest. Not surprisingly, the focus has been on negative rates abroad, geopolitical events and, a bit more recently, some better-than-expected employment news juxtaposed with a softer-than-expected GDP report. That begs the question: What about inflation? Isn’t that a key ingredient in the bond market mix?

Without a doubt, U.S. inflation data has taken a backseat for fixed income investors, and for good reason; there just haven’t been any fresh developments lately. Certainly, the conversation has shifted from a year ago, when deflation concerns were permeating market psychology. But the latest figures don’t elicit concerns that price pressures will be rearing their ugly head anytime soon, or at least that’s what the collective thinking is in the fixed income markets.

Breakeven inflation rate

So, what does the inflation backdrop look like? According to the widely followed Consumer Price Index (CPI), the year-over-year inflation rate came in at +1.0% in June (Note 1)—very little changed from the readings posted over the last four months, but definitely higher than the +0.1% for the same month in 2015. The core gauge, which excludes food and energy, rose at a +2.3% annual clip and has been residing in a range last seen in 2012. There continues to be a large dichotomy between core goods (-0.6%) and core services (+3.2%) .(Note 2)

How much will my Defined Benefit pension pay in Retirement?

Posted By Robb Engen | September 23, 2016

I contribute to a defined benefit pension plan at work. How much will I get from the pension plan in retirement? That depends on when I retire or leave the plan. Hang on, we’re about to get math-y.

Normal retirement age is 65 and I joined the pension plan in 2009 at age 30. Retiring in 2044 (the year I turn 65) would give me 35 years of pensionable service.

The pension plan has a retirement calculator on its website. Curious about the amount of retirement income I’d receive at various ages, I took a look. The calculator just needed a couple of inputs: current salary, plus an assumption for future annual salary increases (I used 2 per cent).

Retiring at age 65 would max-out my pensionable service and give me an annual retirement income of $46,000 in today’s dollars. But what happens if I don’t make it until 65? Retiring five years earlier at age 60 changes the equation substantially.

Retiring at 60

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