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    Manage RRIF rules carefully – or you could run out of money

    Planning for retirement can be challenging. Attempting to balance your need for current income against the risk of outliving your savings is hard enough and, as it turns out, the federal government is not making things any easier.

    Back in 1992, the federal government was running a significant deficit and needed cash. To help rectify this problem, the Income Tax Act mandated that at age 71, Canadians must convert their registered retirement savings accounts into Registered Retirement Income Funds (RRIFs). Seniors had to begin drawing a minimum amount out of their RRIF every year, which was taxed upon receipt. This measure was implemented to help the federal government manage their cash levels and remove the deficit.

    Fast forward to today and the RRIF rules have not changed, but the landscape certainly has. In a recent report by the CD Howe Institute, it was noted that today the average 71-year-old male can expect to live almost 30% longer than in 1992, whereas women can expect to live 15% longer.

    Not only are we expected to live longer, but the investment yield environment is vastly different today than it was in 1992 when the average yield on government of Canada bonds stood between 7.2% and 8.5%. In 2014, this range has fallen drastically to between 1.1% and 3.1%.

    Longer life expectancy is a good thing, but it means we must plan to spread our retirement savings over a longer time horizon.  If the minimum withdrawal schedule implemented in 1992 were to be updated to reflect today’s longer lifespans and lower interest rates, RRIF withdrawals would start at 2.68% at age 71 and rise to 3.76% at age 85.  Instead, the mandatory minimum withdrawal begins at 7.38% at age 71 and rises to 10.33% at age 85.  The odds of living long enough to see the real value of your RRIF depleted are much higher in today’s environment.

    RRIF july20141 1024x638 Manage RRIF rules carefully – or you could run out of money
    Source: “Outliving Our Savings: Registered Retirement Income Funds Rules Need a Big Update”. Robson, William B.P & Laurin, Alexandre. C.D. Howe Institue. 2014.

     

    This can be problematic for seniors who use the minimum withdrawal rate as their annual spending budget. Too often people make the mistake of assuming that this rate is sustainable and will provide them with a lifetime of income. As a point of reference, in our retirement planning assumptions, we generally use a 6-7% annual withdrawal rate assuming retirement at age 65, otherwise one may risk depleting their capital. (Keep in mind that if one retires earlier, 4-5% may be a better rule of thumb to use as the maximum annual withdrawal amount.)

    How can you avoid the potential downfalls of inflated RRIF minimum withdrawal rates?

    1. Seek professional help.
    2. Do not assume that RRSPs alone will adequately fund retirement.  Build savings elsewhere – such as in Tax-Free Savings Accounts (TFSA) and non-registered accounts.
    3. Plan for added tax payments on rising RRIF income.

    Seniors, with the help of wealth management professionals, are advised to create their own retirement plan specific to their personal financial situation. The majority will likely use a portion of their minimum withdrawal from their RRIF to fund their lifestyle and transfer the remainder into a non-registered investment account to maintain savings for future spending.

    There are roughly 200,000 Canadians who are over the age of 90. In 25 years that number is expected to triple. Canadians who are beginning to think about retirement should seek professional help so they can effectively manage their savings to provide security and peace of mind throughout their retirement years.

    The dog days of August … A time to reassess success

    The summer is a great time to take a break from many of the day-to-day activities that take up most of our time and thoughts. It’s time to enjoy the outdoors and share it with family and friends. It’s also an opportunity for reflection when we perhaps better see the forest from the trees.

    As wealth managers at Newport Private Wealth we encourage our clients to reflect on personal, family and business goals. Some questions to ask are: Where do you see yourself in five years? What obstacles or challenges do you need to overcome to get there? What is the greatest risk to your financial prosperity?

    If retirement is part of the plan, are you on track? Is your personal balance sheet up to date? Have you recently done financial projections to test your plan (see summertime offer to crash test your retirement plan)?

    If you are a business owner, how current is your business plan? Should you re-examine your growth strategy, target an acquisition or plan for succession? Do you even know what your business is worth should a suitor come knocking?

    For me, summer is the best time of year to share quality family time. It’s a great opportunity to reinforce family values, strengthen ties and build on shared experiences that are, frankly, priceless.

    For most of the year we get caught up in the details of managing our lives. At Newport Private Wealth, we structure and manage investment portfolios, plan to minimize taxes, prepare effective estate plans and generally help our clients manage their financial affairs. Our job is to plan and implement strategies to help our clients achieve their objectives. Defining those objectives is critical to the success of any plan and should be considered thoughtfully at a time when the mind is less cluttered.

    During these dog days of August, take some time to consider some of the more important questions towards achieving success in your personal, family and business life.

    Even the wealthy worry about retirement

    FPArticle 2009 golden egg Even the wealthy worry about retirementCan I afford to retire?

    This question, more than any other, is asked by clients approaching retirement.

    Individuals balance their spending and savings during their working years to reach a point at which they have accumulated sufficient capital to augment any pension income to support their expenses. That’s retirement affordability.

    The retirement affordability equation appears simple. It isn’t. That’s because there are too many variables like life expectancy, future health care costs, investment returns and inflation, etc. that can change materially and have a dramatic impact on whether you enjoy a comfortable retirement or not.

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    Is the next generation ready to fund retirement?

    succession 5April Is the next generation ready to fund retirement?Last week’s federal budget included the much anticipated changes to the Old Age Security (OAS) pension. But not nearly as soon as some thought.

    With changes being phased in over six years beginning in 2023, the reality is that the majority of Canada’s baby boomer population will be unaffected by the changes. Currently, at over $6,000 per year with a claw back feature reducing the amount received based on income, the reality is that for most of our clients OAS is an afterthought in their retirement planning.

    But what this change does signify is a continuation of two societal trends that have been going on for decades. [read more >>]

    Reset your clock. Market timing doesn’t work.

    I recently met with two of my clients, a retired couple, to review their investment accounts. They were pretty pleased with the performance so they asked me to take a look at an account they had managed elsewhere that hadn’t performed as well. After doing a bit of digging, it became apparent that a different strategy was being employed: market timing. This involves buying securities when you believe the market is about to go up and selling them when you believe the market is about to go down.

    Market timing, technical analysis, program trading, whatever terminology is used to describe the process, is a method that rarely benefits an individual investor and often serves to generate higher commissions for the advisor. Anyone who has taken an introductory finance course will remember that missing the ten best trading days in any year can result in an investor missing a substantial portion of their potential return. This is so often quoted that it is treated as gospel by advisors. So I decided to look at returns for the S&P TSX over the three-year period ending December 31, 2011, the same time frame that my client had asked about.

    i 3f601c535d40d856a000812be5f88c61 Ten Best Days Reset your clock. Market timing doesnt work.

    Over the three year period, the stock market generated a positive return of 29.47%. $100 invested on January 1, 2009 would be worth $129.47 on December 31, 2011. If an investor missed the ten best trading days in each of the 3 years, 30 days in total, they would have lost 41.1%. So the saying is true.

    However, when you look at the data, many of the worst performing days fall right around the best performing days. To be fair, a market timer probably isn’t only going to be out of the market on the 30 best days. If you had also missed the three days preceding and following the best performing days, you would have generated a positive return of 2.49% over the three year period. Much better than the loss of 41.1% but significantly lower than the buy and hold strategy.

    It is only natural that as investors we seek to outperform the market. However, over the long term the best strategy is to diversify your portfolio across a large number of investment categories in a manner that reflects your tolerance for risk and your objectives for your portfolio. Properly structured, you will be able to withstand any market volatility and remain invested, resulting in superior long-term returns.

    Surviving spouse, it’s okay to spend the money

    i 4f279cd55166c4a25cf589da81b705e5 shutterstock 67336159 Adjust Surviving spouse, its okay to spend the moneyI recently had the experience of counselling a long-time client who, despite a very secure financial position, was overcome with anxiety about money. What became clear to both of us after a lengthy and at times emotional discussion was that her anxiety was not about money at all. Rather it was about her obligations to her children, as the sole beneficiary of her late husband’s estate.

    It’s a scenario we see frequently: a surviving spouse, usually the wife (life expectancies between men and women being what they are) of a sole or principal income provider, with more than sufficient capital to sustain her lifestyle is anxious and unsettled. Through discussion, we come to understand that the uneasiness is related to guilt over spending money that is perceived to be earmarked for heirs.

    [read more >>]

    Individual Pension Plans revived

    With Hallowe’en just passed, it brings to mind another spectre that appears to have been revived: Individual Pension Plans (IPPs). And it’s good news for business owners.

    As we have written previously in this blog (See previous articles), IPPs have long been one of the most favourable tax strategies for business owners to save for retirement.
    However, this year’s federal budget, which proposed new funding rules for IPPs, significantly reduced their attractiveness. Recently however, the rules were modified to restore most of the tax benefits that make these retirement vehicles so attractive.

    [read more >>]