This is a common question that most start to consider as they approach their retirement years. There are typically 3 phases of retirement spending that one will age through. Watch this video to learn more.
Today we’re going to talk about how much you need to retire, which is a very common question that everyone eventually asks when they’re thinking about their future years. And the answer is really not simple. However, a good gauge is how much you’re currently spending.
Most retirees find that they don’t spend a whole lot less from their working years to their retirement years. Especially in the early stages of retirement. So a good planning strategy is to make sure that you’ve got enough of a retirement income when you’re starting retirement to approximate what you’re spending in your working years.
None of us know when our expiry date is, which is a factor in understanding how much you’ll need to save to provide you with that income for a lifetime. If we knew, it would be a lot easier to plan. But what you can do is make sure that you’re looking at where all of your assets are going to be coming from. Some people have pensions through work, and of course, all of the dollars that we save for our retirement will be added together to provide that income in retirement.
Having a proper financial plan completed along with projections to ensure you know where your income is going to be coming from in your retirement, how that’s going to be taxed, and what your net result will be is very important.
When you enter retirement, we find that there tends to be three phases of retirement income needs. In your early years of retirement, you’re going to need an income quite similar to your working years as this is typically when you are in your best health and interested in pursuing some of the hobbies and activities that you didn’t have time to pursue when you were working. That typically lasts from the time that you retire until maybe 75 or 80.
Once you hit your 80s, for most people they’re going to slow down and so will your spending. Oftentimes, the spending shifts from things that you might want to buy or do to being able to shift some of your wealth to the next generation. You might be thinking about giving money to children or grandkids. And you may be just done with travel and some of the major expenditures that people tend to pursue in their early retirement years. You will still spend money, and you want to make sure you have enough income to meet the needs of those years, but it will change.
The final phase of retirement spending is the later years of retirement. That third phase tends to be a lot of a slower spend, however, the challenge with the third phase of retirement is that sometimes there are healthcare costs. Healthcare costs can be really difficult to predict. We don’t know if somebody is going to need care, and it can be particularly challenging for couples. If one person needs care while the other is able to remain at home, you can end up having double the costs of living at this stage of life.
It is really important to build a buffer into your retirement plan so that if need be, you have assets available for that phase of life and potential healthcare costs that could arise.
If you haven’t done a projection, please reach out to your advisor so that you have a good understanding of what your retirement income is going to look like and that you have everything you need to make your retirement comfortable. You can learn more about our retirement planning services and approach here.
In this edition of Questions From Clients, Kelley Doerksen, CFP®, CIM® explains how RESPs (Registered Education Savings Plans) work. Learn about some of the key concepts surrounding RESPs such as grants, contributions, and withdrawals.
RESPs are a very effective way to save money for your child’s post-secondary education as you receive grants from the Government when you make contributions to the RESP.
An RESP will provide you with a 20% grant from the Government when you make contributions. You can receive up to $500 a year in grants. However, if you’ve missed some years of making contributions, you can go back and you can receive up to $1000 a year of the current year’s grants and previous year’s missed grants. You can continue to receive grants for your child until your child is 17, so long as you’ve started making contributions prior to their age 16.
When you go to withdraw from an RESP, although there are some rules and regulations, it’s actually fairly simple. When your student starts University or Post-Secondary, so long as they’re in a qualified post-secondary institution, you can begin withdrawals.
The student will need to provide proof of enrolment, and from there, RESP withdrawals can be made. There is no limit to how many dollars of contributions that can be taken out, however in the first year of school, there is a limit to the amount of grants and growth that can be withdrawn during the first 13 weeks of school.
The nice thing about an RESP is that your contributions have already been taxed when you’ve made the contribution initially to the RESP, and you won’t pay any tax on the contributions when they are withdrawn.
The grants and the growth are going to be taxed in the hands of your child. Many students don’t pay tax or pay very minimal tax while they’re students in University; therefore an RESP is a very effective way to income split from your assets to your child and potentially see no tax on the grants and the growth when that withdrawal is made.
To learn more about the terminology and specific rules pertaining to RESP accounts, please watch this video. If you have questions about how to use an RESP, please contact us and we’d be happy to help.
If you feel confused when you look at your investment statements, you’re not alone. We often get asked how to read and understand the information on these statements. In this video, Kelley Doerksen walks you through the key information you will typically find on your statement and what it represents.
On a typical investment statement, you’re going to start by seeing the book value. The book value represents the cost of your investment, so the amount that you’ve purchased as well as any additional dividends or distributions that have been added to that particular position or security. That book value is going to be all of those contributions less any withdrawals that you’ve made on that security.
You’re also going to see the market value, which is the amount that particular position or security would sell for on the given day. Book compared to market value is important information when you’re looking at an investment in a Non-Registered account particularly because that’s going to indicate some of the taxation information that you might need to know.
The difference between book and market is going to be your gain or loss. If you’ve got an unrealized gain or loss, it means that you haven’t sold that position, and you are going to eventually realize that gain or loss when you make a disposition.
Our clients will also see income on current positions on their statements. This represents for most of our clients, the dividends that they’re earning on that particular holding. It could also represent the interest income that you’re earning on the bond position.
Another really important piece to your statement of course, is the performance. So, on your statement you’re going to typically see a net result – what your portfolio has done less fees have already been considered. That’s typically going to be a percentage, and you’re going to see that indicated for short, mid-term, and long-term performance. The most important indicators tend to be the longer-term history of your portfolio performance because it shows how consistent your performance has been and what a job your portfolio manager has done for you.
You’re also going to hopefully see fees in a clear and transparent way. Your statement should show what you’re paying for the cost of fund management and for the cost of advice that you’re receiving.
Another important element to your statement is going to be the asset allocation. That’s going to show you the amount of stock versus bond, or fixed income that your portfolio holds. Every client has a different asset allocation depending on their needs and their level of growth desired, and this is going to be indicated on your statement. You will typically see a listing of all of your stocks together with a percentage that you hold in stocks as well as a listing of your fixed income posted together with a percentage there as well.
If you have any questions about your statements, how to read them and what they mean, we’re always happy to help so please reach out to one of our advisors. To learn more about the type of investment solutions we offer, visit blackburndaviswealth.ca.
If you have a Defined Benefit Pension Plan (DB Pension), you likely have questions about how it works and how it interacts with your overall financial plan. In our latest Question From Clients video, Kelley Doerksen, CFP® explains some of the key information you need to know about these plans.
It’s common to have a pension from your employer that you contribute to and know very little about! Especially if you contribute to a “Defined Benefit” pension (often referred to simply as a DB pension). While each pension is unique, let’s look at 6 similarities:
1. Predictable Income for a Lifetime
Once retired and your pension begins, a DB pension will pay you a set amount of income for your lifetime. Some pensions also offer indexing, which will increase your income by some percentage of inflation.
2. Income for spouse or partner on death
Many DB pensions allow you to choose if your pension will continue to be paid to a spouse or partner in full upon the death of one of the pensioners, or if it will continue at a reduced rate. The choice you make at retirement will influence the amount of pension income you receive for life.
3. Guarantees
Most DB plans allow you to choose a guarantee period. This is not related to how much time you will receive your pension income for (remember, these plans pay for life), but relates to how long a death benefit would be made available to your beneficiaries upon death of the pensioner(s).
4. Commuted Value (lump sum transfer) is an option
When you leave the plan, either due to retirement or leaving the employer, most plans allow you to take a commuted value (lump sum). This lump sum can be transferred in part without immediate tax penalty to a LIRA (Locked-in Retirement Account), however often there is also a taxable portion to consider. You should always make sure that any immediate tax hit does not erode the assets available to you in such a way that you cannot equal your predicted pension income. This is a complex decision, and assistance from your financial planner will be valuable.
5. You are making contributions
Nearly all Defined Benefit pensions require a contribution from the employee as well as the employer. In fact, most DB pensions have relatively large contribution requirements of their employees in the range of 10 – 11% of your gross salary. You can be assured that the employer contributes at least as much as you do.
6. Limited Reporting
Many DB pension holders receive a statement only once annually. This is different than what you may be used to with your investment reporting. Since your value from a DB pension comes from the income you will be provided with at retirement, there is little need to receive more frequent statements as the ‘value’ is related to your years of service (and other factors), not specifically investment returns.
If you have questions about how your Defined Benefit Pension interacts with your overall financial plan, please reach out to us and one of our financial planners would be happy to walk you through your specific details.
We often get asked what the differences are between a TFSA (Tax-Free Savings Account) and RRSP (Registered Retirement Savings Plan) account.
We’ve put together this summary to review the primary differences and rules pertaining to each account. If you have any questions, please reach out to us here.
TFSA (Tax-Free Savings Account):
There is no deduction available, but no tax on withdrawals
TFSA contribution limit is cumulative, less contributions; withdrawals provide room back (including growth) in the new calendar year
Can be used for short-term savings, mid-long term, and estate planning
Can name spouse as successor owner, and beneficiaries for estate planning
Withdrawals do not generate a tax slips; drawing money out does not impact income-tested benefits
You must be 18 years old in order to open a TFSA, and can contribute and withdraw based on the plan rules for your lifetime
Can invest using many of the same types of investments as within an RRSP or Non-Registered account
You might be required to pay non-resident withholding tax on US situated investments
There is no need at any time to convert your TFSA to an income plan, it can be held as-is until your death if desired
RRSP (Registered Retirement Savings Plan):
Deduction provided against T4 earnings; suitable if you are earning employment income, not dividends
Contribution room is limited to 18% of previous years’ earned income, less adjustments for pension contributions, up to a maximum specified by CRA each year. Accumulates if you don’t use it
Access available through the Home Buyers Plan or Lifelong Learning Plan without immediate tax consequences
Naming beneficiaries on an RRSP other than your spouse can have unintended tax consequences and it’s important to speak with your Financial Planner, Accountant, and Lawyer to determine your best course of action
Withdrawals are taxed as ordinary income
On death, an RRSP may be eligible for a “spousal rollover”, shifting taxation of the RRSP to the death of the recipient spouse
When withdrawing from RRSP assets once retired, most individuals are in a lower tax-bracket than during their working years which could result in favourable tax outcomes
Depending on your situation, a spousal RRSP could be used to accomplish long-term income splitting
You must convert your RRSP to a RRIF (Registered Retirement Income Fund) by age 71, and you must begin to withdraw a CRA mandated minimum at age 72
Both TFSA & RRSP Accounts:
You can’t deduct interest costs related to borrowing to invest in either a TFSA or RRSP
You can’t deduct investment management fees in either a TFSA or RRSP
You can’t claim a capital loss in either a TFSA or RRSP
Please reach out to us for further information regarding these accounts, or if you have a specific question pertaining to your individual situation.
