Retirement Income | Smof Investment Manager, LLC https://www.you-first.com Fri, 14 Aug 2020 22:59:25 +0000 en-US hourly 1 https://www.you-first.com/wp-content/uploads/2017/10/favicon.jpg Retirement Income | Smof Investment Manager, LLC https://www.you-first.com 32 32 Portfolio Drawdown Strategies https://www.you-first.com/portfolio-drawdown-strategies/ https://www.you-first.com/portfolio-drawdown-strategies/#respond Fri, 14 Aug 2020 22:59:25 +0000 https://mammoth-seashore.flywheelsites.com/?p=7689 Drawing from your portfolios?  Worried about the next pullback?  What can you do to minimize the impact of a correction? Markets have been on an upward trajectory since late-March and most portfolios currently sit flat or slightly positive for the year.  This is quite the turnaround from just a few short months ago. However, headwinds... Read More

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Drawing from your portfolios?  Worried about the next pullback?  What can you do to minimize the impact of a correction?

Markets have been on an upward trajectory since late-March and most portfolios currently sit flat or slightly positive for the year.  This is quite the turnaround from just a few short months ago.

However, headwinds remain.  Renewed infection waves, policy exhaustion, and permanent economic damage are all short- and medium-term risks that markets have not fully priced in.

If you are already drawing down your portfolio and you are concerned about what the next few months or years may bring, here are a few strategies for you to consider:

Follow the plan: When we meet with our retired households, we always perform a cash flow exercise to determine what a sustainable drawdown is for a portfolio.  The analysis incorporates a rate of return of projection that is conservative relative to historical performance and factors in negative return years.  If you withdraw less than the upper limit of what is shown in the cash flow analysis, then you have a good chance of your portfolio outliving you.

Reduce your monthly withdrawal: Are you spending less these days, but still drawing the same (possibly taxable) income from your portfolio only for these funds to accumulate in your bank account?  If so, consider reducing your monthly withdrawal.  This preserves more of your funds in your tax-sheltered account to help you with your future cash flow needs.

Reduce your RRIF Minimum Annual Payment (MAP):  Anyone with a RRIF account must draw a prescribed minimum each year, usually in the 5-15% range.  One of the provisions of the federal government’s aid package was a special 25% reduction of the 2020 MAP.  We have written about this before and many of you have already taken advantage of this option.  If you wish to reduce your 2020 MAP, please contact us.

Replenish your cash wedge:  For most of our retired households, we place the equivalent of 1-2 years’ worth of cash flow in a safer cash or income investment.  This way, your short-term cash flow needs are not exposed to market volatility and you’ll never have to sell any of your investments at a low point in order to pay for living expenses or to make the minimum annual RRIF withdrawal.

This is called the “cash wedge” strategy and is an important retirement planning tool. The Globe & Mail wrote about it a few months ago (for subscribers only, but we can share a copy with you).

If your cash wedge balance is currently low, this is a great time to replenish it and secure the equivalent of one, two, or even three years’ worth of income depending on your overall market outlook.

Draw your lump-sums now: If you contact our office to say, “I’m going to need X dollars for a project in the next year or so, when’s the best time to take this from the portfolio?”, our answer will likely be “right now”.

This is less about timing the markets, and more about applying a philosophy of selling from a position of strength, rather than weakness.  We do not know what next month or next year will bring, but we do know that markets are at a short-term high.  Drawing sooner rather than later is the prudent move right now.

Pre-retirees: The above information applies to you too.  Normally, we reallocate your portfolio to a more conservative mix in the years leading up to retirement.  With markets at or close to their all-time highs, this is a great time to transition your portfolio.  You will end up taking profits from your equities, reducing portfolio risk, and securing your upcoming retirement cash flow needs.

If applicable, many of these ideas will be addressed at your next annual review.  However, we may contact you ahead of time if we feel your portfolio requires more immediate attention.  Of course, feel free to contact us immediately if you want to ensure these ideas are properly implemented in your portfolio.

 

Don’t hesitate to contact us with any questions around these strategies and how they may be relevant to your situation.

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Back to Basics: Registered Retirement Savings Plan (RRSP) https://www.you-first.com/back-to-basics-registered-retirement-savings-plan-rrsp/ https://www.you-first.com/back-to-basics-registered-retirement-savings-plan-rrsp/#respond Fri, 25 Jan 2019 00:42:39 +0000 https://mammoth-seashore.flywheelsites.com/?p=6640 We feel it is important to periodically review the basic tax-advantaged account structures available to Canadian investors. In this article, we’ll discuss the Registered Retirement Savings Plan (RRSP) and it’s sibling, the Spousal Retirement Savings Plan (SRSP). Who Will Make Best Use of an RRSP? You will benefit from an RRSP if you are working... Read More

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We feel it is important to periodically review the basic tax-advantaged account structures available to Canadian investors. In this article, we’ll discuss the Registered Retirement Savings Plan (RRSP) and it’s sibling, the Spousal Retirement Savings Plan (SRSP).

Who Will Make Best Use of an RRSP?

You will benefit from an RRSP if you are working and your income is greater than your anticipated retirement income will be, you want to save money for retirement, you want your savings to grow in a tax-sheltered manner, and you will not need this money until retirement.

How Does an RRSP Work?

  • RRSP contributions made from March 2nd of the current calendar year through March 1st of the following calendar year will count toward your tax return for the current calendar year. For your 2018 Tax Return, your contributions made from March 2, 2018 through March 1, 2019 can be deducted.
  • Generating RRSP Space: individuals who live in Canada and derive earned income will generate RRSP space. The calculation is 18% of earned income to a maximum of $26,500 for 2019. The annual earned income required to maximize the annual RRSP generation is about $147,250.
  • Generating Tax Saving: you receive a tax saving on RRSP contributions equivalent to your marginal tax rate. Let’s use the example of Suzie, an executive at Wonderful Foods Inc. Suzie makes $100,000 per year. Based on this income, her 2018 combined BC + Federal marginal tax rate is 38.29%.
    Suzie receives a bonus in cash and decides to contribute $5,000 of it to her RRSP. She will therefore generate a tax saving of $5,000 x 38.29% = $1,914.50. If we assume Suzie’s employer withholds tax such that she has a tax refund/balance due of exactly $0, then this $5,000 contribution will give Suzie a refund of $1,914.50. It is important to remember that “tax saving” isn’t necessarily the equivalent of “tax refund”.
  • Carry Over Unused RRSP Contributions: You can carry over your RRSP contributions if you want. This is helpful if you want to contribute now, but you know that in the next few years, your marginal tax rate will be higher.
  • Tax-Sheltered Growth While Invested: Anyone who has invested in a non-registered account must declare any capital gains, dividends or distributions, and interest earned on their investments. Not so in the RRSP. While money is invested within the RRSP, growth of any sort is sheltered from taxation.
  • Equalize Retirement Basket (with a Spousal RSP): Consider the case of Suzie and her husband, Ralph. Suzie earns $100,000 per year but Ralph stays at home taking care of the children. Thus, if Suzie contributes only to her RRSP, then there will be a sizeable retirement income disparity. This disparity can be dealt with ahead of time by utilizing the Spousal RSP. In this example, the SRSP is in Ralph’s name (so at retirement, Ralph claims the income) but contributions use Suzie’s RRSP space. This makes sense because Suzie is in a high marginal tax bracket compared to Ralph, so there is a sizable tax savings in the present, and income sharing lowers the overall tax paid in retirement.
  • Defer Tax until Retirement: In theory, your working-age income (and resulting tax rate) will be higher at retirement. Ramin makes $175,000 per year, so his marginal tax rate is 45.80%. He contributes $20,000 per year to his RRSP and realizes a tax saving of (45.80% x $20,000) $9,160. In retirement, Ramin converts his RRSP to a Retirement Income Fund (RRIF) and withdraws $10,000 from the RRIF. His total income at retirement is $75,000 per year. At $75,000 per year, Ramin’s RRIF withdrawals are taxed at 28.20%. By deferring his income via RRSP, Ramin has effectively saved 17.60% in tax upon redeeming, or $176 per $1,000 redeemed in this example.

Frequently Asked Questions

Question: How do I find my RRSP Deduction Limit?
Answer: You can find your new RRSP limit on your Notice of Assessment.

Question: What happens to my RRSP space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use in a given year will be carried forward indefinitely.

Question: What happens to my RRSP space if I don’t use it? Do I lose this space?
Answer: No. Any contribution space that you do not use in a given year will be carried forward indefinitely.

Question: I have a workplace/group RRSP, how is this treated at tax time?
Answer: An important benefit of a workplace RRSP is that you receive the tax saving at the time of the contribution. Your employer will take gross income and contribute it to your work/group RRSP. In addition, most (but not all) work/group RRSPs will contain an employer matching component. For this reason, it is almost always advisable to maximize any workplace RRSP prior to contributing to an external RRSP.

Question: What if my working income is the same as, or lower-than, my RRSP income?
Answer: If this is the case, and you don’t foresee a situation where your working income will ever exceed your retirement income, you may not derive a meaningful tax saving in the present, but redemptions at retirement still count as income. The TFSA may end up being best for you. We can assist you in determining what makes the most sense given your specifics.
However, if you feel that over time, your working income will increase and there will be a subsequent tax advantage versus your projected retirement income, you can always contribute to your RRSP and carry over your contributions until your income and marginal tax rate have increased.

Question: I’d like to save up to buy a house, so I need my savings prior to retirement. I suppose I should just contribute to my TFSA then, right?
Answer: Not necessarily. There is a provision called the Home Buyers Plan (HBP), which allows you to withdraw up to $25,000 for use toward the down payment on your first home. Think of this as an interest-free loan to yourself. Of course, the loan must be repaid to your RRSP over time. You have a 2-year grace period, at which point you must repay a minimum of 1/15th of the balance withdrawn per year, over 15 years.
Consider Suzie from our previous example. Suzie withdrew $15,000 via HBP to fund a portion of her down payment. After her 2-year grace period, Suzie will have to repay her RRSP $1,000 per year for the next 15 years.

Question: Is there a provision for people returning to school?
Answer: There is! The provision is called the Lifelong Learning Plan (LLP). You can redeem up to $10,000 in a calendar year, and up to $20,000 in aggregate, to help fund your continued education. Repaying the LLP is similar to the HBP, but you have to repay 1/10th per year over 10 years.

Question: I have over-contributed above my RRSP limit. What are the consequences and what do I do?
Answer: Every person has a cumulative “buffer” amount of RRSP space. This amount is $2,000. So, over-contributions less than $2,000 don’t require any action. If you have contributed in excess of this $2,000 buffer amount, you will have to pay a penalty of 1% per month on any excess above the $2,000 buffer. This 1% per month will add up fast, so if you even think you may have over-contributed, you’re better off investigating right away.

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Reminder: Canada Pension Plan Premiums increase this year https://www.you-first.com/reminder-canada-pension-plan-premiums-increase-this-year/ https://www.you-first.com/reminder-canada-pension-plan-premiums-increase-this-year/#respond Fri, 25 Jan 2019 00:40:40 +0000 https://mammoth-seashore.flywheelsites.com/?p=6661 Did your last paycheque look a little low? That’s because starting in 2019, the amount you contribute to Canada Pension Plan (CPP) will increase from 4.95% to 5.10% for earnings between $3,500 and $57,400. These contributions are matched by your employer. Therefore, if your salary is $57,400 or higher, you will pay approximately $81 more... Read More

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Did your last paycheque look a little low? That’s because starting in 2019, the amount you contribute to Canada Pension Plan (CPP) will increase from 4.95% to 5.10% for earnings between $3,500 and $57,400. These contributions are matched by your employer.

Therefore, if your salary is $57,400 or higher, you will pay approximately $81 more in premiums this year.

The CPP is being enhanced over the next seven years. You will gradually pay higher premiums now in order to receive a larger benefit at retirement. The overall aim is to grow the amount you will receive to one-third of average work earnings, up from a quarter.

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Weekly Update – December 28, 2018 https://www.you-first.com/weekly-update-december-28-2018/ https://www.you-first.com/weekly-update-december-28-2018/#respond Fri, 28 Dec 2018 20:58:34 +0000 https://mammoth-seashore.flywheelsites.com/?p=6582 “In the New Year, never forget to thank to your past years because they enabled you to reach today! Without the stairs of the past, you cannot arrive at the future!” – Mehmet Murat Ildan Weekly Update – So Long, 2018 For the last time in 2018, we will leave you with our tax- and investment-related... Read More

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“In the New Year, never forget to thank to your past years because they enabled you to reach today! Without the stairs of the past, you cannot arrive at the future!” – Mehmet Murat Ildan

Weekly Update – So Long, 2018

For the last time in 2018, we will leave you with our tax- and investment-related strategies. We compiled a list of investment, RRSP, business, and child-related planning tips to cover before the end of the year.

On behalf of all of us here at Smof Investment to you and your families, we’d like to wish you a very Happy New Year!

Investing

  • Portfolio mix. Different investments are taxed at different tax rates. If you invest in both registered and non-registered accounts, ensure your portfolio mix is optimized for tax-efficiency.
  • The amount added to the TFSA room on January 1st, 2019 will increase to $6,000, bringing the lifetime total to $63,500. Consider putting funds into your TFSA to the extent you can make contributions (or via a transfer from your non-registered account). Ensure you don’t exceed your contribution room due to the significant penalty on over-contributions. If you have authorized us for CRA access, we can confirm your TFSA limit.
  • If you were planning on withdrawing from your TFSA, do so by the end of the year. The amount you withdraw will be added to your TFSA room at the start of 2019. If you withdraw in January 2019, you won’t get the room back until January 2020.
  • If you have investments in a non-registered account in a capital loss position, consider triggering the capital loss to offset capital gains realized during the year.
  • For non-registered accounts, delay purchases until January 2019 to minimize your allocation of taxable income for 2018.

Taxes

  • Any donations you want to claim on your 2018 tax return must be made by December 31, 2018.  Donations must be made to a registered charity. Contributions above $200 result in a 29% federal tax credit. Keep the donation receipts!
  • If you are a first-time donor, you can claim an additional 25% credit on up to $1,000 of donations made after March 20, 2013.  2017 is the final year in which this credit can be claimed.
  • Public transit tax credit. This credit was fully eliminated following the 2017 tax year. You do not need to keep bus passes to declare on your tax return anymore.
  • If you are over 65 with no private pension, consider withdrawing $2,000 from a RRIF account to trigger the $2,000 pension credit.
  • For seniors or those eligible for the disability tax credit (DTC), renovations to make a home accessible qualify for the non-refundable home accessibility tax credit—worth up to $1,500.

RRSP

  • The deadline to make an RRSP contribution for the 2018 tax year is March 1, 2019. If you have authorized us for CRA access, we can confirm your RRSP limit, factoring in any contributions you’ve made with us. An RRSP contribution has a tax savings potential of anywhere between 20%-47.7% for BC residents.
  • If you turned 71 this year, this is the final year you can contribute to an RRSP. Consider making an RRSP contribution in December of the year you turned 71 if your income in 2017 is higher than what you expect in later years.
  • If you turned 71 this year, you must wind up your RRSP by the end of the year. For most people, this means a conversion to a RRIF account with minimum annual withdrawals starting the following year.
  • Consider withdrawing funds from your RRSP if you have low income for the year.

Self-Employment / Business / Corporations

  • The Tax On Split Income (TOSI) rules were implemented in 2018.  There is now limited ability to pay dividends to family not directly involved in the business
  • However, there are exceptions.  For example, family members who are shareholders and work in the business on average at least 20 hours per week are exempt from TOSI.  If a shareholder’s over 24 and owns at least 10% of the votes and value of the shares, then the TOSI rules don’t apply.
  • Also affecting business-owner clients are new rules for passive investment income effective for tax years after 2018, including a reduction in the small business deduction (SBD) for Canadian Controlled Private Corporations (CCPC) with passive investment income between $50,000 and $150,000. The SBD is reduced to zero at $150,000 of investment income.
  • One suggestion to reduce passive income by December 31 is to ensure you are taking enough money to maximize RRSP and TFSAs.  Income of about $147,000 at 18% results in the maximum 2019 RRSP contribution of $26,500.

Children

  • If you have a RESP and your child has turned 17 in 2018, this is the final year of his/her grant eligibility.  If you have grant room remaining, you can contribute up to $5,000 in the final year, generating a $1,000 grant.
  • Pay child-care expenses for 2018 by December 31st, 2018 and get a receipt. Remember that boarding school and camp fees qualify for the child care deduction.
  • If your child qualifies for the disability tax credit, and if RDSP assets or income will not disqualify him/her from receiving provincial income support, consider setting up an RDSP to qualify for the Canada Disability Savings Bond (CDSB – lifetime maximum of $20,000 per child). Contributions to an RDSP qualify for the Canada Disability Savings Grant (CDSG – lifetime maximum of $70,000 per child)
  • Children’s fitness and art credit. These credits have been phased out and you won’t receive a credit for these costs on your 2018 return

 

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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Canada Pension Plan (CPP): When Do I Apply? https://www.you-first.com/canada-pension-plan-cpp-when-do-i-apply/ https://www.you-first.com/canada-pension-plan-cpp-when-do-i-apply/#respond Tue, 02 Oct 2018 19:22:59 +0000 https://mammoth-seashore.flywheelsites.com/?p=6416 In 2012, new rules were introduced that allowed Canadians to apply for CPP benefits as early as age 60 at a reduced rate, or as late as 70 at an increased rate. This was meant to address Canada’s evolving landscape of retirement, with some Canadians retiring before age 65 while others are working past it.... Read More

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In 2012, new rules were introduced that allowed Canadians to apply for CPP benefits as early as age 60 at a reduced rate, or as late as 70 at an increased rate. This was meant to address Canada’s evolving landscape of retirement, with some Canadians retiring before age 65 while others are working past it.

Using the age 65 benefit as the base amount, the reduction for application before your 65th birthday is 0.60% per month, or up to 36% lower if you are applying at age 60. The increase for application after your 65th birthday is 0.70%, or up to 42% higher if you apply at age 70.

In other words, if you are eligible for $1,000 a month at 65, you can choose to apply for and receive a benefit of $640 at age 60, or $1,420 at age 70.

So, what should you do?

As usual, there is no single answer for everyone. The main factor is longevity, but there are other considerations such as taxes, GIS/OAS eligibility, whether you are still working from 65-70, or whether expenses will be much higher in the earlier stage of retirement.

The illustration below looks purely at the lifetime accumulation of CPP benefits if one decides to apply at age 60, 65, or 70. It assumes that the benefits received are invested and earning 3% a year.  The chart on the left plots the break-even points and the table on the right provides lifetime totals for the three different application ages.

 

 

 

 

 

 

 

 

The break-even point for age 60 vs. 65 CPP application is age 76. In other words, the cumulative payments of a person who applies for CPP at 65 will catch up to the ones for a 60-year-old at age 76.  By age 90, the age 65 applicant will have received an additional $87,000 in benefits than the age 60 applicant.

Therefore, if you live past age 76, you will receive a larger CPP payout applying at 65 than at age 60. Again, there are other factors to consider and everyone’s situation is different, but most cases we come across argue for an age 65 application instead of age 60.

What about applying age 70 vs. 65? The break-even age for this comparison is age 86. Thus, if you live past age 86, you are better off applying at age 70 than at age 65. Age 86 is close to average life expectancy in Canada and therefore applying at 70 is a riskier bet to make.

Conclusion: Apply at 65, IF you are a healthy person with normal projected life expectancy, IF you are not in OAS/GIS clawback range, IF you are not still working (but talk to us first!)

Other sources supporting deferral of CPP application:

Unconventional Wisdom – Should I delay CPP and OAS until age 70

Financial Post – This retirement decision could be worth $72,000, but few Canadians take advantage of it

Globe & Mail – The baby boomers dilemma: When to start collecting CPP

Wealthbar – CPP Benefits – Should you take it sooner or later

CIBC Wood Gundy – Does it make sense to take CPP early

 

This information is provided for general information purposes only. It does not constitute professional advice. Please contact a professional about your specific needs before taking any action.

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