Tag Archives: RRIFs

Federal Budget 2019: Liberals unveil $22.8 billion in new spending in pre-election budget

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Not surprisingly, the Liberals’ fourth federal budget released Tuesday afternoon is the predicted pre-election spendathon targeting the two big voting blocks of Seniors and Millennials. You may wish to refresh this link from time to time, or check my Twitter feed at @JonChevreau. Also check out FP Live’s “Everything you need to know about Federal Budget 2019.”

One of the first reports out was the CBC: Liberals table a pre-election budget designed to ease Canadians’ anxieties. It said that Morneau’s fourth budget includes $22.8 billion in new spending. The 460-page document is titled Investing in the Middle Class. Not surprisingly, the CBC noted, there is no timeline for erasing the Deficit, projected to be $20 billion next year, then falling to $15 billion two years later, and then to $10 billion in 2023-24.

First-time home buyers can tap RRSPs for $35,000

As predicted, the Budget targets Millennials who are finding it hard to get a foot on the housing ladder. It  boosts the amount of money that can be withdrawn from RRSPs for a first-time home purchase, from the previous $25,000 to $35,000 ($70,000 for couples). Low-income seniors will be able to keep more of the Guaranteed Income Supplement (GIS) if they opt to remain in the workforce and safeguards are being introduced to protect employer pensions in the event of bankruptcies.

Among other spending initiatives is ensuring access to high-speed Internet by 2030 across the country, $1.2 billon over three years to help First Nations children access health and social services, an additional $739 million over five years to repair water systems on First Nations reserves, and a federal purchase incentive of up to $5,000 for electric battery or hydrogen fuel cell vehicles with sticker prices below $45,000.

Little wiggle room in a Recession

The Financial Post’s Kevin Carmichael filed a piece headlined “Liberals leave themselves little wiggle room in the event of a recession.” And Andrew Coyne commented that “the federal budget is a testament to the pleasures of endless growth. Forget productivity, tax cuts or investment.” One of his colourful quips was this:

“I’ve said before that these are deficits of choice, rather than necessity. A better way to describe them might be deficits for show.”

The Globe noted that the $23-billion in new spending spans more than a hundred different areas, although the focus is on new home buyers and training programs for workers. Later this year there will be $1.25 billion (over 3 years) “First Time Home Buyer Incentive” managed by the Canada Mortgage and Housing Corporation. The Globe added that “CMHC would put up 10 per cent of the price of a newly constructed home and 5 per cent of an existing home, and share in the homeowner’s equity.” To qualify you must be a first-time home buyer with annual household income below $120,000.

8 ways personal finances will be affected: GIS, CPP & more

G&M personal finance columnist Rob Carrick listed 8 ways the budget will impact ordinary citizens’ finances. He noted that seniors receiving the GIS will be able to earn $5,000 without affecting benefits, up from $3,500, and that there will also be an additional 50% exemption of up to $10,000. Contributors to the Canada Pension Plan who are 70 and older and haven’t applied for benefits will be “proactively enrolled” starting next year. Carrick said Ottawa says about 40,000 people over 70 miss out on CPP benefits averaging $302 a month. He also writes that the tax break on stock options will be limited for employees of larger, mature companies (as opposed to startups), with annual caps of $200,000 on stock options eligible for preferential tax treatment. Continue Reading…

What to consider before converting your RRSP to a RRIF

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By David Mortimer

(Sponsored Content)

Congratulations, you’ve retired! After many years of working and saving, the time has finally come for you to travel, spend more time with family, or do any number of activities you may not have had time for when working 40+ hours per week.

One of the first decisions you now need to consider is when to convert your RRSP to a RRIF? Technically, you are required to do so by December 31stof your 71styear, but many retirees find themselves wondering if they should do so early. Here are some things to consider before making the conversion from RRSP to RRIF.

Am I retired for good?

It’s important for people to consider whether they’ve retired for good before converting their RRSP to a RRIF. Remember it may not be so easy to turn back  after making the conversion from RRSP to a RRIF so if you are planning to return to work, even part time, you may find yourself with a tax problem if you’re working and taking an income through your RRIF. The taxes you end up paying could easily wipe out any financial gains you would make from working part time, not to mention it would not allow you the option to continue contributing to your RRSP (once converted to a RRIF), which will further reduce your taxes – providing of course you are under the age of 72!

Thinking you might like to keep busy with a part time job? Consider supplementing your finances with your tax-free savings account and non-registered investments before touching your RRSP. If you draw these out first while still working, there will be fewer tax consequences. You may also be better off taking money from your RRSP on a short-term basis rather than officially converting to a RRIF right away.

When it comes down to it, don’t collapse your RRSP into a RRIF until you’re fully retired, and have considered all your potential income streams and their potential tax consequences.

What income streams are available to you?

When making the decision on when to convert your RRSP to a RRIF, it’s important to look at how you will be funding your retirement. Do you have a workplace pension you will be receiving? What about Old Age Security (OAS) or Canada Pension Plan (CPP)? Keep in mind that your OAS has certain claw-back provisions once your income exceeds a certain threshold. Continue Reading…

Is typical retirement advice good? – Testing popular Retirement rules of thumb

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By Ed Rempel, CMA, Fee-for-Service Planner

Special to the Financial Independence Hub 

You want to retire soon. How should you set up your retirement income?

You talk with some friends, read about it on the internet, and talk with a financial advisor. Are you actually getting good advice?

When it comes to retirement income, most financial advisors rely on a few rules of thumb handed down from one generation of advisors to the next. The rules appear to be common sense and are usually accepted without question.

Do these rules of thumb actually work?

Before giving clients this advice, I tested them with 150 years’ history of stocks, bonds and inflation. I wanted to see if these rules were reliable for a typical 30-year retirement. (The average retirement age is 62. In 50% of couples that reach their 60s, one of them makes it to age 92.) 

These five rules are the “conventional wisdom” – the advice typically given to seniors:

  1. “4% Rule”: You can safely withdraw 4% of your investments and increase it by inflation for the rest of your life. For example, $40,000 per year from a $1 million portfolio.
  2. “Age Rule”: Your age is the percentage of bonds you should have. For example, at age 70, you should have 70% in bonds and 30% in stocks.
  3. “Sequence of returns”: Invest conservatively because you can’t afford to take a loss. You can run out of money because of the “sequence of returns.” You can’t recover from investment losses early in your retirement.
  4. Don’t touch your principal. Try to live off the interest.
  5. Cash buffer: Keep cash equal to 2 years’ income to draw on when your investments are down.

The results: NONE of these rules of thumb are reliable, based on history.

Let’s look at each to understand this.

1.) “4% Rule”: Can you safely withdraw 4% of your investments plus inflation for the rest of your life?

Based on history, the “4% Rule” was safe for equity-focused investors, but not for most seniors.

In the results shown in the graphic at the top of this blog, the blue line is the “4% Rule,” showing how often in the last 150 years a 4% withdrawal plus inflation provided a reliable income for 30 years.

The “4% Rule” only works with at least 50% in stocks.

The “4% Rule” worked only if you invest with a minimum of 50% in stocks. Even safer is 70-100% in stocks. It is best to avoid a success rate below 95% or 97%. They mean a 1 in 20 or 1 in 30 chance of running out of money during your retirement.

Most seniors invest more conservatively than this and the 4% Rule failed miserably for them.

A “3% Rule” has been reliable in history, but means you only get $30,000 per year plus inflation from a $1 million portfolio, instead of $40,000 per year.

These results are counter-intuitive. The more you invest in stocks, the safer your retirement income would have been in history.

To understand this, it is important to understand that stocks are risky short-term, but reliable long-term. Bonds are reliable short-term, but risky long-term. Why? Bonds get killed by inflation or rising interest rates. If either happens during your retirement, you can easily run out of money with bonds.

The chart below illustrates this clearly. It shows the standard deviation (measure of risk) of stocks, bonds and cash over various time periods in the last 200 years. Note that stocks are much riskier short-term, but actually lower risk for periods of time longer than 20 years.

Stocks are more reliable after inflation than bonds after 20 years.

Ed’s advice: Replace the “4% Rule” with “2.5% +.2% for every 10% in stocks Rule.”  For example, with 10% in stocks, use a “2.7% Rule.” If you invest 70% or more in stocks, then the “4% Rule is safe.

2.) “Age Rule”: Your age is the percentage of bonds you should have. For example, at age 70, you should have 70% in bonds and 30% in stocks.

Continue Reading…

Retirement investing advice: here’s what works and what doesn’t

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Retirement investing advice is a subject we’re asked about all the time. And it’s one that we deal with on a practical day-to-day basis with our Successful Investor Wealth Management clients.

If you want to pay less tax on dividends while you’re still working, investing in an RRSP (Registered Retirement Savings Plan) is the way to go. That’s because dividends you receive in an RRSP grow tax free.

Is an RRSP the best savings plan for retirement?

RRSPs are a great way for investors to cut their tax bills and make more money from their retirement investing.

RRSPs are a form of tax-deferred savings plan. RRSP contributions are tax deductible, and the investments grow tax-free. (Note that you can currently contribute up to 18% of your earned income from the previous year. March 1 is the last day you can contribute to an RRSP and deduct your contribution from your previous year’s income.)

When you later begin withdrawing the funds from your RRSP, they are taxed as ordinary income.

 A Registered Retirement Income Fund (RRIF) is a great long-term investing strategy for retirement

Converting your RRSP to an RRIF is clearly one of the best of three alternatives at age 71. Continue Reading…

Why “Topping up to bracket” makes sense if you’re temporarily in a low tax bracket

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My latest column in Wednesday’s Globe & Mail looks at a strategy called “Topping up to Bracket,” which can be useful to anyone who is temporarily in a lower tax bracket.

Click on the highlighted headline to access the online version, assuming you have Globe subscriber privileges or haven’t exceeded the monthly free click quota: A strong tax case for early RRSP withdrawals.

When might you be “temporarily” in a lower tax bracket than usual? This can of course happen when you lose a job or if you’re in your Sixties and transitioning between full employment (typically earning in higher tax brackets) and Semi-Retirement, when it’s tempting to “bask” in lower tax brackets.

Temporary because as Semi-Retirement progresses, you can end up moving back into higher tax brackets: for example, if you start to receive Old Age Security (OAS) at 65, then take Canada Pension Plan (CPP) a few years later, these are both taxable sources of income.

And the big hit can come at the end of the year you turn 71, when RRSPs must be converted to Registered Retirement Income Funds (RRIFs) or else annualized or cashed out. RRIFs entail forced annual withdrawal rates that keep rising between your 70s and your mid 90s.

So that makes “Topping up to Bracket” (a term used in a BMO Wealth Institute paper on the topic, published around 2013) a strategy not to be ignored. In practice it means making sure that in those low-earning years you at least bring into your hands each and every year the roughly $12,000 of untaxed earnings that’s called the Basic Personal Amount (BPA). And as the G&M column explains, it’s also a good idea to at least bring in the dollars that are in the lowest tax bracket (15% federally, 5% in Ontario), or roughly $42,000. There are of course higher tax brackets above that but the law of diminishing returns starts to kick in beyond the $42,000.

Note too that this is a “use it or lose it” proposition. If for example a year went by that you failed even to bring in even that $12,000 income that would not have been taxed, you can’t carry forward the opportunity to benefit from it the following year. You will of course have another opportunity for the BPA that year but it won’t double up because you neglected to earn low- or non-taxed income the previous year. Continue Reading…