Posts Tagged ‘Retirement’

As the ‘baby boomers’ rapidly approach the magical age of 65, more and more questions are being asked about retirement income.  For most people their retirement income will be made up a combination of government programs and pension plans.  For those who have worked most of their lives, the income stream is made up of a combination of CPP, pension, RRSP and depending on income level from all these OAS (old age security).

For those who haven’t worked or haven’t worked much the situation is a bit different.  You may not have worked much because you have been a stay-at-home mom or situation in life has prevented you from working all of your life; regardless the reason here’s options that’s available to you.

1. CPP – As a paid into program, how much you receive will depend on how much you contributed to the program.  In most cases if you have worked a little bit you will be entitled to some CPP (Canada Pension Plan). Normally CPP sends out estimates before retirement age, so please do review their documents to ensure that they are accurate.  For those who worked but may have taken a break in working to raise your children you maybe able to have up to 7 years credited to your work time and thus increasing what your CPP payments.  See Child-Rearing Provision webpage for more details.  You will have to fill out some forms to have this added.

If you have not received any estimates as you approach 65 (actually you can do this at any time and if you are moving out of the Canada to work, I suggest you get this before you leave) you can request a copy of your contribution statement on-line, via mail.

2. OAS (Old Age Security) Pension – is a program to provide income supplement is available to anyone who has lived in Canada.  Because it is part of the general revenue, no contribution is required.  However, there’s a residency proviso.  The program is the largest pension program offered by the government and you may even be entitled to the program even if you don’t live in Canada (US residents!)  In this post will assume that you currently lives in Canada.  To qualify for the program you must be:

  • 65 and over
  • Canadian Citizen or legal resident
  • lived for more than 10 years in Canada after age of 18

You can apply after 64, but the government may auto enroll you.

How much you will receive will depend on how long you have lived in Canada.  If you have lived in Canada for 40 years after the age of 18 you will be entitled to the maximum amount as long as claw-back does not occur.  The current maximums can be found at Service Canada website.   It’ is $6618.48 per year, hardly enough to live on.

OAS Claw Back – OAS is available to everyone, but for those who have pension plans and other retirement income stream there’s a claw back clause for those who have sufficient private income stream that it is deemed that they don’t need government support.  While I have heard a lot of clients complaints about claw back from client, it is important to recognize that the claw back doesn’t happen until you have more than (in 2013) $70,954 in private retirement income.  I think what irks people is that they give it to you and then take it away.   To minimize OAS claw back, it is important to income split between spouses especially if one is receiving a good pension and one is not, but that’s another topic and post entirely.

GIS (Guaranteed Income Supplement) – Because the government recognizes  that $6618.48 isn’t enough to retire on, for those Canadians who does not have any other additional source of income, they have a separate program called GIS for those who makes less than $16, 728 (2013).  You can be entitled to this program at age 60 if your spouse is 65 and collecting OAS and GIS.  For single people the eligibility starts at age 65 when you are eligible for OAS.  You will have to apply for this program. However, once you applied, you don’t have to re-apply but will be required to file taxes every year.  This program for singles has maximum pay out of $8974.32.  The actual amount you will receive will depend on how much income from all sources you have.  Check out this webpage (scroll down half way) to get the table or download the pdf.

So the government will essentially ensure you have about $16,000 of income to live on.  While it’s better than nothing, it isn’t designed for you to live well.  If you live in a low housing cost area, this amount might be barely sufficient to offer a none destitute life.

For those of you who are in need of all of these program, I would highly recommend setting up a meeting with your local Service Canada representative who can walk you through all of the programs and help you apply for them before you turn 65 so that your entitled payments will start once you turn 65.

As always, please let me know if this post is helpful and if there’s other topics you would like to have covered.


Read Full Post »

So what should you do with your RRSP if you leave Canada? The simple answer is you can keep your RRSP as is.  However, if you want to access the funds in the future there will be a 25% tax withholding, this amount is considered your tax paid. If you are happy with this you don’t need to do anything further.

If you believe your tax payable should be less than 25%, you can elect to file Canadian taxes and the difference would be refunded.  Keep in mind that for RRSPs the amount you redeem is considered income for that year, which means unless you have a small RRSP and no other sources of income, your income tax payable for the amount is not likely to be less than 25% .  You may also need to report the amount redeemed as part of your income in your new country as per that country’s income declaration requirements.

If you are certain ahead of time that your income tax payable would be less than 25% you can fill out Form NR5, Application by a Non-Resident of Canada for a Reduction in the Amount of Non-Resident Tax Required to be Withheld. This will reduce your withholding before the redemption even occurs.  This process isn’t any easier than filling out taxes, but it only needs to be done every 5 years so it will save you needing to fill out taxes each year if you are doing multiple redemptions.

Another option is to convert your RRSP to a Registered Retirement Income Fund (RRIF) and receive regular payments from the accounts.  The same minimum withdrawal requirements apply for RRIFs as they do with RRSPs and the 25% withholding tax also applies to all payments (unless your country of residence has specific tax treaties).  A reduced tax withholding amount of 15% is possible for US-Canada. This reduction applies if the payment is less than the greater of 10% of fair market value or twice the minimum withdrawal requirement (amount of withdrawal < greater [10% of FMV, 2x RRIF minimum withdrawal]).  A preferential NOTA BENE rate can be acquired but only if redemption is scheduled for regular periods.

As an example, suppose you have a $100,000 RRSP (as of December 31, fair market value) which has now been converted to a RRIF, you are currently 65 years and you want to make withdrawals.

The minimum required for RRIF withdrawal for the year is 4% or $4000.  You would like to withdraw $12,000 a year or $1000/mon.

Under standard non-resident rules you will receive $750/mon with 25% tax withheld.

If you are in the US, to get the reduced rate: 10% of FMV is $10,000  and twice the minimum withdrawal is $8000. The greater of the two is $10,000.  This means the first $10,000 of redemption is tax withheld at 15% and the excess amount is tax withheld at 25%

So for our example, the first 10 months you will received $850/mon and the last two months  you will receive $750/mon.

If you are in the UK such periodic payments should not be subject to any withholding.

If you are thinking of withdrawing from your RRSP I would strongly suggest you research your own country’s tax treaty and discuss it with your institution before proceeding.  They may still want to withhold 25% and let you deal with CRA to claim any amount that was taken in excess.

Of course, you always need to remember that the amount you take in as income may be subject to taxes in your new tax jurisdiction and will need to be reported as per their tax rules.

You may be able to transfer the amount into registered retirement plans, i.e. 401K etc.   The reverse can be done regularly by any large financial institutions in Canada, but I generally find Canadians financial services personnel have more experience dealing with moving money to US than US financial services personnel have in transferring money to Canada.

So in summary – file an NR5 if you really think your tax rates will be less than 25% and see what number they will come up with. Know your tax treaties and use any tax treaty rules in your favour as able, but be prepared to work with your Canadian institution and educate them as required.

Read Full Post »

As a financial planner I am often bemused by the thousands of financial self help books.  Like most self-help books, they simplify complex problems and provide an easy sounding and tempting solution which never quite works.  If any one of the books actually were able to help most people to save more and invest wisely then I hardly think that there will be so many books crowding the financial planning  section of the book store. But while they don’t actually provide the cure that they promise, most are harmless. So as I was recently flipping through “The Total Money Makeover: A Proven Plan” by Dave Ramsey, a few things caught my eye which I really felt I had to comment on. In the section “what this book is not” the author responds to previous challenges to his approach. In fact, if you search for  “Dave Ramsey bad advice” on Google you’ll get over 100,000 hits, so what I have to say may be treading some old ground. In a subsection entitled “This book is NOT going to mislead you on investment returns” he says:

“People seem to think that making a 12% return on your money in a long-term investment is impossible. And that if I state that there is a 12% return available then I have lied to you or misled you. I recommend good growth stock type mutual funds in this book as a long-term investment and dare to state that you should make 12% on your money over time.”

He then goes on to explain how the S&P 500 has averaged 11.67% in the last 80 years and how this indicates that you should therefore be able to get the same returns. Now, you can search for  funds that have averaged 10 year returns over 12% on Morningstar (I found 19).

Morningstar search result where mutual fund's 10 year average return is > 12%

But none of the above funds had the tenure that Ramsey had indicated in the book where he’s citing data from the 1930’s. Ramsey did give return data but slyly did not tell you what funds he’s invested in, rather referring to you to speak to one of the “approved” advisors (I would assume that they pay a fee to be approved by Mr Ramsey who must share his secrets with them).

So a little more digging led me to this list which does seem to be the funds that Mr. Ramsey is talking about in his book.

Hey if there are magical funds out there that are giving you S&P returns over the long term then sign me up (keep in mind this means they have to be beating the returns of the S&P since there are fees involved).  But why aren’t any of the funds that’s recommended by him on my morning star list?

So I dig a little deeper.

I looked at American Funds Invmt Co of America fund. The fund was created on March 31, 1934 just as the country was coming out of The Depression.  Up to Dec 31, 2011 it had an average return of approximately 11.79% annually. Even accounting for inflation which was 3.37% over that time, the returns are still above 8% annually.  So Mr. Ramsey seems to be telling the truth.

But again I ask, why isn’t on my morning star list? It didn’t make it on to my little search list because it’s return for the last 10 years is only 4.42% although it has been out performing S&P by 0.42%.

And that’s the problem that Mr. Ramsey’s critics and myself included have with his assumption of 12% return.  Just because a fund has returned on average 12%,  doesn’t mean that your return will be 12%.  When you invest matters a lot.  If you were smart and got into these funds 3 years ago at the depth of the current downturn, your return on this fund would be over 20% annually.  However if you started to invest 5 years ago (at the top of the market) your return would only be 1% annually.

Mr. Ramsey will of course say that for you to gain the average return, you need to invest in the long term.  As you can see, the 10 year results aren’t 12% but what if we look at 20 years?  The answer is 5.99%.  Only when you go back 30 years – a very long investment horizon for most people – do your numbers start to look better at 11.88%.  The question is will you able to hold the investment for 30 years and ride through all of the 50+% corrections? What if that correction came as you are just about to retire?  These are the questions that many who are nearing retirement are grappling with.

So what’s the solution?

Well I don’t really have one.  I’m no better at driving forward on an unmarked road while looking in the rearview mirror than you.  But I have a general approach that you can try to help you to get to your goals:

  • Work out what kind of returns you need to retire – be reasonable in your assumptions about your life style and government program’s availability. Likely the return won’t need to be 12%.
  • Create a portfolio that can give you a good shot at that return.  If you only need 5% to retire, then a more conservative portfolio will work.  If you need 6-7% a 60/40 portfolio will work.
  • Make your portfolio more conservative over time so that corrections have less impact on you as you near your goals, but keep your return assumptions the same.
  • Track where your investment funds should be annually/every 5 years and see if your portfolio (including money you may still be adding to to it) is meeting your objective.
  • If it isn’t, then you need to put away a bit more to guarantee the returns.
This way by the time you retire, hopefully you will guarantee you have the amount of funds you will need through both investment returns and putting enough away.

Read Full Post »

%d bloggers like this: