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Q&A with Kornel Szrejber: Addressing major gaps in your Retirement Plan

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A good majority of my clients reach out to me looking for retirement planning advice. They want to know if they have enough assets to retire comfortably, how much longer they should work, what type of investment strategy makes sense in retirement, when to take CPP and OAS, and how to set up tax efficient withdrawals from their savings and investments.

My conversation with Kornel Szrejber for the Canadian Financial Summit this year was about addressing the major gaps in your retirement plan. Below is a summary of what we discussed – but you can check out the full interview, along with the rest of the line-up, at the Canadian Financial Summit website.

Investing is just one part of the Plan

Kornel Szrejber: A common mistake that I see Canadians make is focusing only on what investments to buy, as opposed to seeing the investments that they choose as just one piece of financial planning and their financial wellbeing. Can you talk about what trouble we as Canadians can get into, if we are only focusing on what investments to buy as opposed to looking at the whole picture?

Robb Engen: It is common for Canadians to focus on their investments rather than looking at all aspects of their finances. In fact, most of the clients that come to me want to talk about investing.Yes, investing is important. Setting up a investment strategy that matches your risk tolerance and time horizon, and more importantly one that you can stick with for the long term is crucial to your overall retirement plan. But when you step back and look at the bigger picture, you’ll see that financial planning is about so much more than investing.

It’s a comprehensive look at your spending. It’s about making sure you and your spouse are on the same page – understanding your values around money and aligning that with your spending habits. It’s about disaster proofing your life by having appropriate life and disability insurance, a will, and an emergency fund. It’s about mapping out both your short and long term goals so that you can prioritize your savings into the appropriate vehicle(s).

Attributes of an Early Retiree

Kornel Szrejber (Twitter.com)

Kornel: You’ve worked with many individuals and families here in Canada. Are there any patterns that you’ve noticed between those that are struggling financially vs those that are on-track to retire early? (i.e. actionable things that people can do to be one of those that are on-track). 

Robb: The people who seem to have it together tend to have a reasonably low cost of living and can max out at least their tax-sheltered accounts (RRSP/TFSA) each year. They have clearly defined short- and long-term goals that keep them focused on saving. Many have a high income, but that is not a prerequisite to a good financial future. They also automate many of their financial decisions, so they pay themselves first through automatic contributions, they set alerts to pay their credit card balance in full each month, and their investments automatically rebalance (through a robo-advisor or an asset allocation ETF).

Conversely, those who are struggling usually have some high interest debt and have trouble getting through the month without dipping into credit. They may or may not have a good handle on their expenses, but there’s just no wiggle room or margin for error. That means, when something comes up, and it always does, any progress made goes out the window and they can’t seem to get ahead. They treat credit card debt like a way of life and not like the ‘hair-on-fire’ emergency that it is. And, they typically don’t know exactly where their money is going from month to month.

Another major reason why so many people struggle financially is because their list of wants exceeds their ability to pay for them. I love the line from Paula Pant, author of the Afford Anything blog, that goes:

“You can afford anything, you just can’t afford everything.”

I think this is so true when it comes to our personal finances and all of those short-term goals and aspirations that we all have. Money is finite and we simply can’t do everything we want – at least not all at once. So, I think the people who are on track to retire early have a good sense of where their money goes and they’re able to prioritize saving for retirement while juggling all of their other short-term needs and wants.

Not enough attention paid to these Retirement Planning decisions

Robb Engen

Kornel: Are there any important financial decisions that you find Canadians tend to oversimplify and make quick decisions about, when in reality they actually need thorough analysis and have a very significant impact?

Robb: Usually anything involving a bit of math. One that comes to mind is when you leave a job and whether to keep your pension or take the commuted value and invest it in a LIRA. This is not a decision where you just want to take the advice of a friend or colleague. It requires some thoughtful analysis.

This is actually a decision I’ve had to make for myself when I left my day job earlier this year, and even I sought an outside expert opinion help me decide. Another critical decision is when to take CPP. I’ve heard so many myths about CPP and that you should take it as soon as possible (i.e. at 60), but in many cases the most optimal age to take CPP is to defer it to age 70. This enhances your benefit by 42% and provides longevity insurance.

Finally, there’s the question of whether to contribute to an RRSP or TFSA. If you’re below a certain tax bracket it probably makes more sense to invest in your TFSA rather than an RRSP, and vice versa.

Impactful financial decisions

Kornel: What would you say are some of the most impactful financial decisions that we can make to set ourselves up for success? And which ones can we do ourselves vs having to seek out the help of a fee-only financial planner like yourself?

Robb: Starting to invest at a young age and, more importantly, setting up a system to make the contributions automatic. You can start with as little as $25 or $50 a month. It’s not about the starting amount, but about building the habit of saving over time. Be a savvy financial consumer and understand where incentives may be misaligned, or when the seller may not have your best interests at heart. That’s the essence of financial literacy.

Spend less than you earn, obviously, and try to avoid debt where possible. Don’t buy more house than you can afford, and if you do buy make sure you stay there for 10 years. Continue Reading…

Canadians turn to digital advice amid Covid uncertainties

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By Michael Walker, Royal Mutual Funds Inc.

Special to the Financial Independence Hub

In today’s digital world, we haven’t forgotten the importance of ‘old school’ methods to help people keep on top of their finances. Every November, as part of National Financial Literacy month, financial planners across the country talk to Canadians about the importance of having a plan in place to guide their financial future; one that takes into account the unexpected and which can be adjusted as lives change. You can make a plan on a pad of paper, you can create it on your laptop, your tablet or your mobile device. The important thing is to set it down so you can review it and make adjustments as your life changes.

What’s proving to be a real game-changer, however, is the access Canadians now have to financial advice through digital channels: particularly now, when economic uncertainty due to COVID-19 has many Canadians asking what lies ahead for their financial future.

Canadians who have seen their savings and investments negatively impacted by the pandemic have been seeking reassurance about what lies ahead for their financial future. They want to know how their retirement plans have been affected; will they need to work longer than expected? How can they rebuild their ‘just in case’ fund? Will they still be able to contribute to RESPs for their children or their grandchildren?

Increasingly, as physical distancing has meant Canadians are unable to meet in person with their financial advisors, we’re seeing Canadians turn to digital means to get answers to their financial questions. We already had well-established digital channels at RBC providing digitized advice and insights in place ahead of the arrival of the pandemic. When the number of clients seeking digital advice surged, we were able to quickly respond to their needs and not only provide digitized advice, but also connect clients remotely to our advisors.

Free digital advice accessed 24/7 from home or office

MyAdvisor – only available at RBC – is a key example. This free digitized advice service helps clients create a personalized plan online and provides access to the expertise of our advisors – all from the comfort of their homes and workspaces. Clients can readily view a complete picture of their financial accounts – even those held at other banks – on interactive screens. They have real-time, 24/7 access to their personalized plan through MyAdvisor’s digital dashboard and can see the impact of their money decisions before they make them. They also can get the advice they need, when they need it, by connecting with one of our advisors in their local community through live video, phone and, where possible, in person.

To give you an idea of how many Canadians are now seeking digitized advice supported by the expertise of our advisors, there are now over two million clients connected through MyAdvisor: twice the number as last year. Between April and September of this year, the number of clients logging in increased 21% and video appointments jumped to 20% from 2%. During that same timeframe we also saw a huge increase – 80% – in completed appointments, where clients went beyond logging in to look at their financial picture; they booked appointments and then met with our advisors. Continue Reading…

Covid pandemic impacting Canadians’ mental health with worries about rising Debt and Housing

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A third of Canadians were financially unprepared for the pandemic, and more than 75% think Covid-19 has impacted their mental health, according to a Manulife Debt Survey released late Tuesday. Young people are particularly concerned that their hopes for home ownership are slipping out of reach: two thirds of Canadians served who do not own a home worry about saving for one. 

A whopping 36% said they worry significantly about saving for a home, while 28% are concerned about supporting their children through post-secondary education (28%) and 28% about saving for retirement.

On average, Canadians have been allocating nearly half their income to essentials like food and housing since COVID-19 began, with 58% of homeowners and 54% of renters worry about making payments.

Manulife Bank CEO Rick Lunny

“Debt can negatively impact mental health and leave Canadians feeling like their financial goals are unachievable. The pandemic has made that even more pronounced,” said Rick Lunny, President and CEO, Manulife Bank. “It’s so important to have financial flexibility, especially when one looks at purchasing a home – it’s easy to feel stressed. Financial conversations are essential to identify opportunities, what matters most and help you stay on track, no matter the financial environment.”

A financially unprepared population

The survey found 35% admit they were financially unprepared for the pandemic. 74% believe their financial situation has been impacted as a result of the pandemic and 69% of them  say the impact has been overall negative: 42% worry that it may take them over a year to recover to pre-COVID-19 levels.

One in four are struggling to keep up with their bills, with one in six laid off due to COVID-19: an equal number say they would have been laid off had it not been for the wage subsidy provided by Ottawa.

Some have flourished

The survey reveals a sharp disparity in how the pandemic has impacted us, with some flourishing as others have been devastated. Manulife views this as evidence of  a K-shaped recovery narrative. On the one hand, while Canadian on average, appear to be saving more compared to a year ago (16%  of after-tax income, on avg. vs. 14%  in Fall 2019), 24% have been saving absolutely no after-tax income compared to the same period last year. Within the indebted population there has been a significant increase in the proportion of those who say everyday living is the cause of their debt: 24%. This suggests more Canadians who are in debt are struggling to make ends meet, even if fewer Canadians (27% debt-free vs. 21% on Fall 2019) are now in debt overall compared to a year ago.

Continue Reading…

Biden Presidency may be more taxing for Canadians with cross-border affairs

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By Elena Hanson     

Special to the Financial Independence Hub

Finally, the U.S. election season is behind us. But a new presidential administration typically means changes in the taxation landscape, and President-Elect Joe Biden is sure to follow suit. In fact, a Biden presidency may have certain implications for a number of people on this side of the border.

One of the proposals in his election campaign may prove especially punitive to Canadian taxpayers, especially those who hold U.S. real property or any U.S. publicly traded securities in Canadian- or U.S.-based investment portfolios, RRSPs, RRIFs or TFSAs. (Think of your shares of Apple or Microsoft, which have seen a great deal of growth in recent years with quarterly dividends literally dripping into your accounts!)

Tax implications at death diverge in the 2 countries

Hopefully, most Canadians are aware that the tax implications at death tend to diverge when it comes to Canada and the United States. In Canada, capital assets of the person who dies are subject to deemed disposition on the person’s terminal tax return, unless those assets are jointly held with a surviving spouse or they go to a trust designated to the surviving spouse. If the latter two conditions apply, there will be a tax deferral and the tax to be paid only happens when the surviving spouse dies.

In the U.S. non-American citizens are taxed on the market value of their U.S. assets held at the time of death if the total value of such assets exceeds USD $60,000. Interestingly, that $60,000 threshold was set up back in the 1980s and is not subject to any adjustment for inflation. This clearly demonstrates that foreign taxpayers are quite low on the priority list for policy makers in that country.

In addition to this incredibly low filing threshold, there is no deferral permitted upon the death of the first spouse. There is also a presumption that the person who died, the decedent, owns 100 per cent of the couple’s property and must be taxed on the entirety of the couple’s U.S. assets in excess of the $60,000 exclusion.

Now this is where salt gets rubbed into the wound. The executor of the will may be required to look back over the preceding three years – prior to the passing of the person – to determine if they had gifted in any of those years. If so, the value of the gifted property would have to be brought back for tax purposes.

Canada-US Income Tax Treaty provides some relief for Canadians

Luckily for Canadians, the Canada-U.S. Income Tax Treaty overrides harsh provisions of American domestic law. For example, Article 29-B of the Treaty allows taxpayers to avoid U.S. taxation (but they still must file tax returns if the value of the estate exceeds the $60,000 exclusion) if the worldwide market value of the property of the deceased is less than USD $11.58 million (2020 rates). That exclusion is doubled if the assets are jointly held with a surviving spouse. But this generous escape hatch is not automatic; the person in question, a U.S. non-resident, must file their non-resident estate tax return within nine months of the date of death.

Now, let’s get back to the recent U.S. election outcome and why it matters to Canadians. With Joe Biden as President of the United States, that exemption of USD $11.58 million is expected to be lowered quite significantly, and may happen as soon as January 1, 2022. In fact, it may even happen in 2021 following Biden’s inauguration, although it is unlikely that exclusion would be the first tax reform the administration will choose to focus on.

At this point, we do not know how much the exemption will be lowered. Based on changes to the U.S. estate tax over the past two decades, it has already been adjusted at least three times. In 2003, it went from $600,000 to $1 million, then in 2009 to $3.5 million and one year later in 2010 to $5 million. It is likely that the exemption will revert to either the 2009 or 2010 level, subject to adjustment for inflation. Continue Reading…

7 Retirement tips for young Savers

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By Mikayla St. Clair

Special to the Financial Independence Hub

One might think that planning for retirement while still young is a hindrance and a waste of time. However, the truth is that early planning has its benefits because you are not just planning for your old age but preparing for every other day you live as well. Planning is not easy; you need a few retirement tips on how to go about it regardless of whether you are just thinking about it or already have a plan. Here are seven appropriate for young savers

1.) Focus on financial stability

The real aim of planning for retirement is to ensure one has financial freedom in old age. If having a retirement plan below 30 years seems off, look at it this way, retirement is like saving to ensure you are financially stable. This is feasible through working out your expenses early; save up for the coming month’s expenses.

2.) Live within your means

Often young people tend to live lives that are way beyond their means. With this, most of their earnings go into acquiring things they may not need. As a result, some rarely have anything for saving. While the idea of getting anything you want sounds good, it may only be momentary and poses dangers in the future.

3.) Have a Plan

With a single monthly pay-check, budgeting may be tricky. There are bills to be paid, debts to be cleared, and much more. That is why you need a plan, plan your expenditures, and ensure to leave some for savings. How do you achieve this?

Cut back on unnecessary costs; if your workplace requires long commutes, consider moving somewhere closer. Spending those extra dollars or minutes on the road may not seem harmful, but they accumulate into a significant loss of wealth with time. Start small; often, the ideology people have is that each contribution must be in high number in saving. However, you may invest too much and exhaust everything. Start small, and eventually, things will build up. Continue Reading…