Tag Archives: RRSPs

WealthBar Q&A: How one Robo-advisor handles Retirement Income Planning

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WealthBar CEO Tea Nicola

What follows is a sponsored Q&A session between Hub CFO Jonathan Chevreau and Tea Nicola, Co-Founder and CEO of WealthBar, a robo-adviser.

WealthBar provides financial planning with low-fee ETF portfolios and actively managed Private Investment Portfolios.

Through their financial advisers, easy-to-use online dashboard and financial tools, they are making investing more accessible for Canadians from coast to coast.

 

 

 

Jon Chevreau

Jon Chevreau: Welcome, Tea. While many so-called robo-advisers seem to focus on young people building wealth, what about the end game? How do you handle the shift for older investors from accumulation into spending your savings in retirement? 

Tea Nicola: Once a client who is accumulating assets decides that retirement is on the horizon and they let us know, we lead them into the retirement transition process. At this stage, they probably have a pretty good idea as to what they would like to spend after taxes. Their goal is to understand now if their savings and all their sources of income will be enough to fund their retirement years.

The conventional wisdom is to collect all the sources of income that the client will have and analyze it year by year. This step is essential to make sure that the goals are met. That includes the monthly cash flow for basic expenses, the annual travel budgets and one-off purchases as well as any legacies that they may desire.

We then make sure their savings can meet all those goals. If there are shortfalls, we adjust the savings rate to meet the goals by the time they want to stop working. Then, we iterate this every six months or so, both before and after the retirement date. We do this to make sure the transition is smooth and that routines are appropriately established.

Jon: You’re talking about managing expectations?

Tea: I would call it being realistic about expectations. For instance, we need to be careful about talking about a monthly income when it comes to drawing down on retirement savings.

What we typically see is an uneven drawdown, with extra spending in the first few years of retirement. The client is in a rush to do all the things they held off on while working. So, they go on world tour, get a golf membership, enjoy some fine dining, or generally treat themselves to something special. But after a few years, their spending habits ‘normalize.’ The initial exuberance declines and their expenses follow suit. You get cases like one client in her 90s, who is literally worth millions, who now has monthly expenses of about $2,000 a month.

With that in mind, our financial plans help clients to achieve the goals they want to achieve, without necessarily boxing them into a lifestyle category that doesn’t really apply for most of their retirement. This involves very realistic, practical planning that I would say goes into a bit more depth than other robo-advisers, or even many traditional wealth management firms.

Jon: Sometimes you’ll hear a kind of magic number bandied about for how much people need to retire. $1 million. $2 million … Is there a guideline that really makes sense?

Tea: It depends on the person, which is why financial planning needs to be tailored for each individual. Just like with salaries, we know that someone making $75,000 can feel like they’ve got as much money as they could possibly need. Continue Reading…

How to “Liberate your Losers” from your RRSP to later save tax

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It is admittedly a complex strategy but the Globe & Mail’s Report on Business has just published my latest article for high-net-worth investors who don’t mind trading RRSP losses today for tax savings tomorrow. You can retrieve it by clicking on the highlighted headline here: An RRSP strategy to ‘liberate your losers” in order to save tax.

The article is a followup to an earlier Globe article I ran late in the summer, which was summarized in this Hub blog: The ‘Nice” problem of million-dollar RRSPs. 

Liberating your Losers is a phrase used by a broker source of mine who prefers for now not to be identified. The strategy describes a possible bright side to crystalizing RRSP losses by “withdrawing them in kind” to non-registered status. That is, you keep the position but in effect move it outside the RRSP.

An alternative to early RRSP drawdowns

This is an alternative to the more typical RRSP drawdown tactic of first selling your stocks inside the RRSP, then withdrawing the cash. Either way you are “deregistering” some of your RRSP, which means paying withholding taxes. You’ll pay 10% for withdrawals under $5,000, 20% for those between $5,001 and $15,000 and 30% beyond that. This can be handled automatically by your RRSP trustee.

Liberating your losers can make sense under three circumstances, my source says: when you have had bad timing in your RRSP/RRIF investment choices; when you’re confident your investment will return to its previous higher value; and if you prefer to pay tax on 50% of a capital gain rather than 100% of income.

Making Lemonade from Lemons

Mind you, I also talked to three sources who were willing to be on the record, and some were skeptical that the strategy was worth implementing. Continue Reading…

My RRIF playbook: what you need to know in 2017

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“Retirement at sixty-five is ridiculous. When I was sixty-five I still had pimples.” — George Burns (1896–1996) Comedian, actor, singer and writer

There are three retirement accounts everyone ought to understand. They are the RRSP, the TFSA and the RRIF (Registered Retirement Income Fund).  I submit that the early part of each year is preferred to review the RRSP and TFSA. That leaves the RRIF to be dealt with well before year-end.

Start paying special attention to planning the RRIF, even if you don’t yet need one.

Be very mindful of the RRIF. Recognise its purpose and how it complements the other two accounts. Review it periodically to ensure it stays on track.

The RRIF is firmly entrenched as a prominent retirement planning vehicle, serving as an essential foundation of retirement nest eggs. For example, starting a RRIF at 71 implies long planning, often to age 90 or more: especially if there is a younger spouse or common-law partner.

Three conversion choices for RRSPs

RRIFs typically result from the aftermath of mandatory RRSP conversions. Three conversion choices include cashing the RRSP, purchasing a variety of annuities and using the RRIF account. The RRIF is most popular because it provides considerable flexibility. Avoid cashing RRSPs.

Continue Reading…

Retired Money: Cashing RRSP to pay off debt is a poor strategy

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Should you cash in your RRSP to pay off debt? While some prospective retirees may be tempted to do so, this is one of a score of damaging financial myths, according to insolvency trustee and author Doug Hoyes.

I mention this in my latest MoneySense Retired Money column, which has just been published. You can retrieve it by clicking on the highlighted headline here: The wrong way to pay off Debt.

As I say in the article, Cashing in your RRSP to pay off debt is Myth #9 of 22 common financial misconceptions outlined in Hoyes’ new book, Straight Talk on Your Money (cover shown adjacent: we share a common publisher.)

Hoyes is particularly concerned about senior debt in Canada and how these myths can affect their retirement. Myth #10 often afflicts retired seniors: that Payday Loans are a Short-term Fix for a Temporary Problem.

Seniors racking up debt faster than other age groups

Earlier this week in the Financial Post, columnist Garry Marr reported that Seniors in Canada are racking up debt faster than the rest of the population. Over the past year, senior debt grew by 4.3%, according to a survey published Tuesday by Atlanta-based Equifax Inc. Continue Reading…

The “nice” problem of million-dollar RRSPs

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Are million-dollar RRSPs a looming tax problem for soon-to-retire baby boomers or simply a nice problem to have?

My latest Globe & Mail Wealth column has just been published on page B9 of the Tuesday paper and online, which you can access by clicking on the highlighted headline here: The secret to paying less tax in retirement.

As one expert cited — Doug Dahmer, who often guest blogs here at the Hub — tax is perhaps the single biggest expense in Retirement. This often becomes apparent when those growing RRSPs the Boomers and others have been accumulating are forced to become RRIFs or Registered Retirement Income Funds at the end of age 71, at which point they become taxable at your highest marginal rate, just like  interest or employment income. Million-dollar RRSPs are not that uncommon, according to the sources consulted for the column, whether individually or shared by couples.

(I say”forced” but of course there are two alternative options: annuitize or cash out. Very few people choose the latter option, while annuitization or partial annuitiization is certainly a valid option as you progress through your 70s, although ideally when interest rates are higher.)

The initial RRIF withdrawal percentage is 5.28% at 71 but minimum withdrawal rates rise steadily over time, hitting 6.82% at age 80, 10.21% by 88 and reach 20% by age 95 and beyond.

Draw down RRSPs/RRIFs early, delay CPP/OAS to 70

As the article notes, this has two implications: one, since it’s unlikely most investors with balanced portfolios will generate returns as high as the withdrawal percentages, most RRIF recipients will start breaking into capital. Continue Reading…