Financial Planning, Retirement Issues


TFSAs vs RRSPs

December 21st, 2013 ernie Posted in Retirement Account No Comments »

The TFSA and RRSP are two savings vehicles that Canada has created to help consumers save for their retirement and other expenses in their lives and avoid becoming poverty stricken when they retire or are hit with significant health issues and can no longer work.

TFSA

The TFSA is a Tax Free Savings Account that allows Canadians to deposit into with after tax money and earn income from the investments also tax free. Canadians can withdraw money from the TFSA at any time and not pay tax on that income. Consumers may invest in bonds, GIC’s and mutual funds. As of January 1, 2013 Canadians can contribute a maximum of $5,500 annually to the TFSA. This is a great way to save money with after tax dollars, generate income and not have to pay income tax on the income.

RRSP

The RRSP on the other hand is a Registered Retirement Savings plan design to reduce the total tax paid by Canadians since contributions are made with before tax dollars. A deposit to a RRSP has the effect of reducing the person’s income for tax calculation purposes and often generates a tax refund which can be used for any purpose.  Any withdrawals from an RRSP generate tax and are added to the person’s income in the year the withdrawal is made. Deposit maximums are based on the individual’s income and the investments can be in bonds, mutual funds, GGIC’s and stocks in a self managed RRSP.

TFSAs vs RRSPs

Which Investment Should Be Considered

Investors who can maximize the contributions to both investment vehicles should probably do so, unless they happen to have a mortgage that needs to be repaid or other debt. Studies have been conducted that show that both the TFSA and the RRSP generate almost identical amounts of after tax savings for the same set of assumptions over a longer period.

Withdrawals and Impacts on Government Plan

The TFSA offers more flexibility in terms of withdrawals than the RRSP since money must be de-registered from the RRSP and generate income tax in the year it is withdrawn. The TFSA does not generate any added tax and it also does not affect government plans such as the GST/HST Credit, the Canada Child Tax Benefit and the Working Income Tax Benefit. TFSA money withdrawn can be re-contributed at any time.

Seniors who are  currently living on RRSP or RRIF withdrawals find that even modest withdrawals from these plans upon retirement affect the retiree’s eligibility for income-tested government benefits and credits, such as the Guaranteed Income Supplement (GIS), Old Age Security (OAS) benefits and the Age Credit. Withdrawals from a TFSA are not considered to be “income and they have no impact on the amount of GIS or OAS received nor will such withdrawals reduce the Age Credit.

Seniors should meet with an adviser and discuss the best course of action regarding how to proceed with their RRSP and TFSA planning to minimize tax and to also make sure that other government plans are not impacted.

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Individual Retirement Accounts

November 7th, 2013 ernie Posted in Retirement Account No Comments »

Individual Retirement AccountsQuality of life during retirement is really the issue that everyone is looking for and we all have different visions of what that might be, based on our up bringing, where we live and many other things that have happened to us as we shaped our lives. Some people will have corporate or company pensions to rely on. It is usually never enough and that is why we happen to think that individual retirement accounts are just as important for someone with a pension as it is for someone who does not have a corporate pension.  For self employed people an individual retirement account is even more important.

Individual Retirement Accounts – Areas to Focus On

Manage Risk

It is all about managing risk over the long term. Investing in quality stocks and mutual funds as well as bonds, while maintaining diversity can be a recipe for success. Growth and income stocks and mutual funds over the long term will help to ensure that your retirement plan is sizable and meets your objectives for retirement.

Self Employed

If you are self employed it is possible that you will be able to sell your business when you retire, however sometimes plans do not always turn out the way you think. Your company may not be worth as much as you hoped it would or it might even go bankrupt leaving you high and dry when it comes to retirement. Build an individual retirement plan account to give yourself that extra bit of insurance. If your business does well, you will even be better off!

At the very least it will help you top up pension from your company or from your business when you sell it. Having s secondary plan for retirement is just good business sense.

Need to Manage

Just like a business, the retirement account must be managed. You may decide to use a financial adviser, however we urge readers to be very involved and to make informed decisions every time your adviser recommends something. Review your portfolio once per month or at minimum once per quarter. Set up review sessions with your adviser at least twice a year to make course corrections in terms of your investment balance and diversity.

Diversity

We have all heard of people who had all of their retirement with one company, only to find that the company goes bankrupt and they lose everything. Regardless of how loyal or strongly you feel about a particular investment, always diversify your investments so that your risk level does not place you in a position to lose your total investment. In addition use several investment advisers and test investment scenarios against both of them before making a decision.

Focus on Growth, Income and Balance Investments

High growth stocks can go up fast and they can descend fast. Growth & income stocks will generate income for your retirement plan as well as there is potential for growth in the value of the stock. These are usually the best stocks to follow over a long period of time. Maintaining a balance of investments across various industries will also provide diversification and protection from downturns in one economic segment or another.

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Guaranteed Retirement Accounts

October 21st, 2013 ernie Posted in Retirement Account No Comments »

Guaranteed Retirement AccountsLet’s just say at the outset that there is no such thing as a guarantee when it comes to retirement and retirement accounts. If someone is trying to tell you that, then you need to really read the fine print to examine all of the conditions and the reasons why they may not meet their perceived guarantee. All of us would like to have a guarantee, however it is just too difficult to provide this sort of commitment given the unknowns associated with future interest rates, the volatility of the stock market and the changing market conditions that most of us are familiar with.

Investing in GIC’s

If you really want a guarantee, you will need to consider placing all of your investments in low interest GIC’s which are guaranteed by the government up to a specific amount. Of course the GIC’s will not pay a great deal of interest. They are among the lowest in the industry, but they are certainly stable and your principle will remain intact.

The problem with GIC’s is that the interest they generate is usually less than the inflation rate and so the purchasing power of your money in your GIC’s is decreasing over time. You can actually end up with less money in terms of what you can purchase with a GIC since they pay such low interest rate.

There probably will be many readers who will say I might as well just keep my money in a savings account if there is no guarantee. If you are looking for stability with no risk, this is one of the best places to meet this requirement. Again there is virtually no interest income and your money does not keep pace with inflation. There is the old saying, no risk , no gain and this is certainly true in the case of investments.

Annuities As Investments

Consumers should also remember that when an investment adviser is telling you that you have a guaranteed investment, they are selling you a product that the company that is offering this product is also going to make money on as well. The return on such an investment is also going to be very low as well. Some people will purchase an annuity which is a guaranteed payment for as long as you live. Once you pass away the payments stop and the amount you invested is gone as well and cannot be considered as part of your estate.

Retirement Planning and Risks

The question that many of us ask ourselves is whether our money will last as long as we are going to live and will we be able to live in the quality of life that we would like. This is something that we all struggle with especially if we do not have a company pension. People with company pensions or government pensions are in a pretty good situation, especially if they can live on their pension.

If they need to augment their pension income with money from their retirement account they then have all of the same issues that consumers all over the world have concerning their retirement accounts. Will their money last as long as they need it.

Guaranteed Retirement Accounts

We happen to think that the best strategy is to live off the income that the investments generate. We also thing that consumers should invest in dividend paying stocks which are blue chip in nature and have a history of increasing their dividends on an annual basis. It is one way to ensure that you may get a raise every year from your investments. A good mix of stocks that pay dividends and bonds that pay a decent interest rate are in our opinion one way to manage the risk and at the same time ensure that you have a decent income from your investment retirement account.

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Individual Retirement Accounts

October 14th, 2013 ernie Posted in Retirement Account No Comments »

Individual Retirement AccountsThere are all types of retirement accounts. Some are individual, some are spousal, some are open in the sense that you can make withdrawals while others are locked and consumers who retire are only allowed a maximum amount each year to be withdrawn. For specific details about what kind of account you have, consumers should speak with their investment adviser or their bank depending on who they have their retirement accounts with.

In this post about individual retirement accounts we thought we would discuss estimating our income during retirement and how this can be done very easily. In my case I have two ways of estimating, only because I really want to get a different opinion and check my assumptions. Many people will ask their investment adviser to develop an estimate for them. In this case he or she will ask you a number of questions, fill in the details and the answer will pop out of his computer in terms of a nice graph showing you how much you will have in the way of income.

Estimating Income from Individual Retirement Accounts

In our case we listed all of the pension income we would receive in each year. This consists of income you may receive from both government as well as any income you get from company pensions. Depending on your age and also your company that you work for you may actually get a company pension, however this is become less frequent as companies are pushing the responsibility of saving for your pension back to the individual. People are living much longer and it is just too expensive for many companies who want to stay competitive. The sad reality is that most people must plan for their retirement and many are not saving enough.

Next you need to calculate the income you can expect from your retirement accounts. The simple way is what I have completed initially. All I have done is take the income in terms of dividends and interest income from the various investments to see what income I would have without touching the principle each year. If I can accomplish this feat, then I will never need to touch the principle and will always have income coming in from these investments barring major changes in the market.

If this income is not sufficient to meet your needs, then you may have to enlist the help of your investment adviser to help you with the calculations.

Complex Income Analysis from Your Retirement Account

Your retirement account investments will generate income from dividends and interest. Let’s assume that level is 3% for our model. In addition on average over the years, the value of your investments will grow over time as the market increases. There will be some volatility over the years and some years it will even be negative, bit over the long term there will be a positive increase. Let’s assume 2 % for a total of 5% gain on average each year.

Next you need to decide how much you are going to take out each year. This can be decided by making a decision regarding your life expectancy or just picking a number that is reasonable, and meets your income requirements.

Planning Your Retirement

When you investment adviser plugs these numbers into his model, he can quickly tell you how long your payments will last and whether you have enough saved in your individual retirement account. Some adjustments may need to be made at this time to balance your income with your life expectancy to ensure that your savings will last long enough.

Adjustments can be made every year to account for good and bad years and changes to your assumptions about income needs etc. Work closely with your adviser to make sure that you have sufficient income to meet all of your lifestyle needs.

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