Tag Archives: Retirement Income Planning

Retired Money: 2 useful Retirement books have starkly different views of wisdom of deferring CPP and even OAS to age 70

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My latest MoneySense Retired Money column looks at two recently published books by two of the country’s top authors on Retirement Income Planning. You can find the full column by clicking on this highlighted headline: Near retirement without a Defined Benefit pension? Here’s what you need to know.

One of the new books is retired actuary Fred Vettese’s new revised edition of his book, Retirement Income For Life, which I first reviewed in 2018, and which you can find here. Vettese has revised and expanded the book to the spring of 2020, allowing him to look at the Covid-19 issue and how an extended Covid-related bear market could put further wrenches in retirement plans.

The book describes several “enhancements” to a base case of an average almost-retired couple with no DB pensions and roughly $600,000 in savings. This base case – Vettese dubs them the Thompson family — pay high investment management fees (on the order of 2%, typically via mutual funds).

Couples in his base case also tend to take CPP as soon as it’s on offer at age 60 and OAS as soon as possible at age 65. Vettese continues to pound the table about the value of these government pensions and recommends that people like the Thompsons delay CPP till age 70 if at all possible. Remember, in the absence of a DB plan, CPP and OAS are worth their weight in gold, being government-guaranteed-for-life sources of income that are inflation-indexed to boot.

Vettese is fine with ordinary average folk taking OAS at 65. However, and this seemed new to me, in a section for high-net worth couples (which he defines as having $3 million in investable assets), he suggests they should also delay OAS to age 70, along with CPP.

As an actuary, Vettese sees this enhancement as a simple case of transferring risk from a retiree’s shoulders to the government’s. Why worry about investment risk and longevity risk when the government can worry about it on your behalf?

Similarly, a related enhancement is to engage in the same type of risk transfer by converting a portion of registered savings to the shoulders of life insurance companies: he suggests 20% can be annuitized, ideally after age 70. That’s a bit less than the 30% his first edition he recommended immediately upon retirement.

One of Vettese’s enhancements to the base case is simple enough: to cut investment management fees. Larry Bates devoted an entire book to this theme: Beat the Bank, which I reviewed two years ago here.

Try the free PERC calculator

There are two other less compelling enhancements: knowing how much income to draw and having a backstop. Knowing how much income can be figured out with a free calculator that Vettese twigs readers to: PERC or the Personal Enhanced Retirement Calculator, available at perc.morneaushepell.com. Continue Reading…

When did Retirement Income Planning get so complicated?

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By Ian Moyer

(Sponsor Content)

Retirement planning used to be easy: you simply applied for your government benefits and your company pension at age 65. So when did it get so complicated?

Things started to change in 2007 when pension splitting came into effect. While we did have Canada Pension Plan (CPP) sharing before that, not too many people took advantage of it. Then Tax Free Savings Accounts (TFSA) came along in 2009. At first you could only deposit small amounts into your TFSA, but in 2015 the contribution limit went to $10,000 (it’s since been reduced to $6,000 per year). Accounts that had been opened in 2009 were building in value, and the market was rebounding from the 2008 downturn. Registered Retirement Savings Plan (RRSP) dollars were now competing with TFSA dollars and people had to choose where they were going to put their retirement money.

In 2015 or 2016 financial planners suddenly started paying attention to how all of these assets (including income properties) were interconnected. There were articles about downsizing, succession planning, and selling the family cottage. This information got people thinking about their different sources of retirement income and which funds they should draw down first.

Of course there is more to consider, such as the Old Age Security (OAS) clawback. When, where, and how much could this affect your retirement planning? People selling their business are often surprised that their OAS is clawed back in the year they sell the business, even if they’re eligible for the capital gains exemption. Not to mention what you need to do to leave some money behind for your loved ones. Even with all this planning, the fact that we pay so much tax when we die is never discussed, although the final tax bill always seems to be the elephant in the room. We just ignore it, and hope it’ll go away.

Income Tax doesn’t disappear at 65

Unfortunately, income tax doesn’t disappear at age 65, and you need time to plan ahead so you can reduce the amount of tax you pay in retirement. A good way to do this is to use a specialized software that takes all your sources of income and figures out the best strategy to get the most out of your retirement funds. Continue Reading…

Are all Pension incomes created equal?

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Image Shutterstock

By Ian Moyer

Special to the Financial Independence Hub

Pension incomes are not created equal. They come in all shapes and sizes. They are as varied as the people who have accumulated them and who seek to use them. 

In this seemingly infinite variety, in this mathematical complexity, there is a common thread as far as advisors are concerned: delivering clients the most after-tax income possible. 

CPP, OAS, Defined Benefit Pension, Dividend Income, Interest Income, RRIFs, Part Time Employment Income, Corporate Dividends, TFSAs: These are just a few of the various sources of income individuals may have access to when they exit the workforce.  Upon retirement, decisions about what, when, and how much income to draw upon, move to the forefront.

Tax is key to coordinating multiple income streams

Coordination here is key as each of these sources of income is subject to different tax rates, different tax deferrals and different estate taxes. Tax is key, in other words.

Recent or prospective retirees need more than a competent advisor at this stage. Understanding the tax rates, tax deferral rates and the implications regarding OAS and Income Splitting is one thing. But accounting for these sources of income and the complicated ways in which they interact requires an algorithm.

The specialized software, Cascades, cascadesfs.com, performs these calculations, giving users informed withdrawal strategies. Designed by financial advisors in partnership with software developers, Cascades uses actual tax rates, not average tax rates, projecting for the duration of retirement, including longevity risk.

Because numbers require context to be meaningful, let us consider prospective retirees Bill and Anne Smith.

Case Study: a Couple in their late 60s

Retirement Plan: Bill and Ann are 68 and 67 currently. They have been retired for a few years but still have RRSPs and a LIRA and want to know if they should start using them for income or defer payments until age 71. 

Income Sources: Both have CPP and OAS. Anne has a defined benefit pension from having worked as a teacher. 

Investments: Bill has a healthy RRSP and Anne has a modest RRSP and a LIRA. They have maxed out their TFSAs and each have about $100,000 additionally in individual non-registered accounts. 

Total: 12 different income sources and investment accounts to manage for retirement income

Cascades provides direction in the following way. Users — whether they be Anne and Bill themselves, or their advisors — fill in a detailed online questionnaire, submit their responses and in under ten seconds they have a report. This report (an excerpt is shown at the top of this blog) automatically gives three potential strategies and shows which one works best. For Anne and Bill, drawing down and re-investing their registered accounts first is expected to save them over $75,000 in their estate compared to a complete deferral of their registered money. 

As far as Bob and Linda Sanderson are concerned, on the other hand, a Cascades report advises them to do just the opposite and ultimately predicts a savings of $125,000. Here’s how:

Quite different withdrawal recommendations for this younger couple

Bob and Linda are both 55 and currently working. They plan to retire in 10 years. They have a rental property they maintain that they plan to sell in 15 years and want to know how to plan for the long-term. 

 

Income Sources: Both will receive CPP and OAS. Bob will receive a small defined benefit pension. Both will earn rental income until sale of the property. Both will receive corporate dividends until age 80 from a holding company. 

Investments: Both have large RRSPs, nearly capped TFSAs, and a small amount of non-registered savings. Additionally, Linda has a small LIRA. 

Total: 18 different income sources and investment accounts to manage for retirement income.

Cascades proposes three withdrawal strategies and highlights the best plan. Using all of their non-registered savings before rolling over registered investments will save Bob and Linda over $125,000 in their estate compared to an early drawdown of their registered money. Cascades software is designed to help users do their due diligence on the matter of retirement planning. The results are specifically tailored to the retirement in question and they are reliable, informed and rigorously defined as they are by Canada’s vast and varied tax laws.

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Ian Moyer is the founder of Ian C. Moyer Insurance Agency Inc. and Cascades Financial Solutions Inc.

Top 10 Rules for successful Retirement Income Planning

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By Doug Dahmer

Special to the Financial Independence Hub

As a Retirement Income Specialist, I have spent the past 10 years helping those transitioning from their savings years to their spending years to discover the secrets of how to optimize their future income streams, while minimizing the amount of taxes they pay. These years of experience have provided me with a great number of valuable lessons. I have reduced this learning to a list of top 10 success rules for retirement income planning.

In a world where (unless you work for a government agency – police, nurses, teachers, government employees etc.) the guarantees of a corporately sponsored retirement income stream have virtually gone the way of the dodo bird. Corporate defined benefit pension plans have been replaced with defined contribution plans and group RRSPs.

Upon retirement, the vast majority of baby boomers are now faced with the daunting challenge of determining how to convert a large lump sum of accumulated retirement savings into a recurring income stream that lasts as long as they do. These risks and responsibilities were previously carried out by disciplined and talented pension plan managers. They have now been quietly delegated to the individual – and this has occurred without providing the adequate tools to perform the tasks.

It is my hope that the following 10 rules are helpful to those who have been left to their own devices to cobble together a safe, secure retirement income.

1.) Take ownership in your future success

A plan is not a plan until, the people who have to live with the choices contained in the plan, have played an active role in crafting these choices. The level of commitment one has toward following the prescribed progression of choices contained in the plan is directly proportional to the confidence you have that these choices will lead to successful achievement of the life outcomes most important to you. By taking ownership in your own plan helps keep you focused on the aspects of your life you have control over — choices — while identifying the need to put protective mechanisms place to mitigate the potential damage of events that are beyond your control.

2.) Your Retirement Income Formula is not a static product

Retirement Income Planning is not a “One and Done” event. It is also not an exact science. Every pilot before leaving the ground files a detailed flight plan knowing full well that no flight has ever gone according to plan. The pilot must constantly monitor where they not only relative to their desired destination but also relative to their original flight plan. Retirement Income Planning, like flying, contains no roads to follow or signs to provide directions. Wondering too far off course can lead to mid-air collisions or running out of fuel. Confidence in your Retirement Income Formula comes from testing it, stressing it and constantly re-adjusting it, as life unfolds. Only by engaging in a planning process that evolves with your life, will you achieve success and security. As daunting as this may sound, like filing a flight plan, when you have access to the right tools this task can be made significantly easier.

3.) Link your life plan to your financial plan

The key to financial success in the second half of life is to directly connect your desired life plan to your investment plan. If your money managers do not have an intimate understanding of your year-by-year cash flow demands or the specific portfolios you plan to source these funds from, you are not getting the level of protection – or service – that you deserve.

4.) Create forward knowledge of how much you need and when

Better financial decisions will always be made when you have advance knowledge of the what, the when, and the how much of your desired lifestyle. People who blindly chase the unknown savings target of “more” are the people who make the most financial errors.

5.) Don’t trust your future to outdated ‘rules of thumb’

Conventional wisdom that served past generations well, is no longer applicable. Baby Boomers are in the process of redefining retirement. Governments are having to respond to the financial implications of a rapidly aging society. Within this state of flux, tremendous new opportunities exist for those who find them. Devastating risks await those who fail to recognize the new reality. Probably the largest mistake baby boomers are currently making is the date they choose to start their Canada Pension Plan. A poor start date choice can frequently cost the average couple well over $100,000 over the balance of their lives.

6.) Embrace variables, not averages Continue Reading…