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Retirement income options for a DC Pension Plan?

Retirement income options for a DC Pension Plan?
Retirement income options for a DC Pension Plan?
Written by Jim Yih
Recently I wrote about theoretical retirement income options from a Defined Benefit Pension and a Defined contribution Pension.
This week, I would like to look at this from a more practical perspective via a case study of Paula.
Paula has turned 60 this year and is getting ready for retirement.  Although she has a pension through work, it’s a Defined Contribution pension and her biggest concern is knowing how much income she will get from her pension plan.  Let’s take a look at her retirement income options.
The DC Pension plan is at Sun Life.  It is invested in a few different mutual funds and sitting with about 65% equities and 35% fixed income investments.  The pension has done quite well because of the strong market growth over the past 3 years.   She has made over 12% compound annual returns over the past few years which has helped her to accumulate $450,000 in her pension.  Paula is divorced with 2 adult children who are both financially independent.  She has owns her own home and has no debts.  She has another $110,000 in RRSPs and $38,000 in her TFSA.
Pension to Life Annuity
When Paula retires, she will be faced with a number of different retirement income options.  The first option to explore is the Life Annuity.  With a Life Annuity it’s important to get quotes from a financial advisor or from different insurance companies.
Life Annuity rates will change on a daily basis so it’s important to always shop around for the best deal.  After getting some quotes from a financial advisor licensed to sell Life Annuities, here’s a summary of three quotes:
·         Great West Life = $2201.57 per month
·         Sun Life = $2173.83 per month
·         Manulife = $2015.69 per month
Obviously, the best deal for Paula is GWL who will pay Paula about $26,418 per year in pension income.  This is a lifetime income which means it pays until she dies.  She will never outlive her income.  The income is secure and predictable. However, if Paula passes away early, there is no return of capital to her after 5 years.
Related article:  The math of life annuities
Pension to LIF
A Life Income Fund (LIF) is a little more flexible but as a result also a little more complicated.  With the LIF, you can set the income to whatever you want as long as it is within a minimum and maximum.  While that may sound simple, the complexity comes in that the minimum and maximum changes every year.  Here’s some scenarios to look at:
1.  Minimum income LIF.  The minimum income levels for the LIF are exactly the same as the minimum income levels for the RRIF.  Here’s a look at what the minimum income LIF would look like for $450,000
As you can see, the minimum income starts much lower than the Life annuity ($15,173 vs $26,418 per year) but increases as Paula gets older.  I used a very conservative return assumption of 2% for illustration purposes only.  Remember that the minimum income will change as rates of return change.  This chart was produced with financial calculators from Mackenzie Financial.  You can play with this data and use your own set of assumptions.
2.  Maximum Income LIF.  Unlike a RRIF where there is no maximum income restriction, the LIF has an annual maximum that also changes year by year.
From this illustration, you can see that the initial income is much higher than the Life Annuity ($33,592 vs $26,418) but the income decrease over time. Again, this is based on a very conservative 2% rate of return assumption.  A higher return can dramatically change the income values over time.
The LIF offers much greater flexibility from the perspective that you can set your income amount (subject to minimums and maximums) and you can change your income anytime.   With the LIF, you are responsible for making investment decisions which for some is an advantage but for others a disadvantage.
A Life Annuity will benefit those that live a long time because the income is guaranteed for life.  Those that have shorter life expectancies will benefit with the LIF because there is always an estate value.  What you don’t use in the LIF will be passed on to beneficiaries.  If will be taxed first to the estate but beneficiaries are likely to get something.
3.  Level income LIF.  Most people prefer to have a level consistent income in retirement as opposed to one that increases or decreases over time.  If we set the income at the same level as the Life Annuity ($26,418 per year), we can see the breakeven point based on a 2% return.
As you can see in this illustration, money runs out at age 81.  If you think you will live longer than age 81, then a Life Annuity might make more sense.  If you think you will die before age 81, the LIF will make better sense.
50% Unlocking
To complicate matters a little more, Alberta has pension unlocking rules.  As you can see from the information above, pension rules can make it quite restrictive to access extra money from a pension plan.  Given that many people were unable to use all their pension money in their lifetime, some provinces introduced unlocking rules.  In Alberta, were Paula lives, she is able to unlock 50% of the pension funds and transfer it to a RRSP or RRIF which has no withdrawal restrictions or income maximums.
Issues and considerations
In looking at these numbers, the Life annuity looks not too bad but it does not give Paula any flexibility. Life annuities are great for their predictability and simplicity but most people are not choosing life annuities because of low interest rates and lack of flexibility.  Life annuities are also great if Paula lives for a long time.
Choosing the LIF gives Paula much more flexibility in choosing income.  These projections are using a 2% return so any increase in returns can increase the income.
Paula could always transfer the LIF to an annuity in the future if interest rates increase.  She could not move from an annuity to a LIF because once she purchases the annuity, she is locked in for life.
Choosing a life annuity is not great for estate planning purposes as her children may not get any money from the annuity.  That’s where the LIF has a greater appeal because any money Sally does not use can be given to the children or grandchildren at death (subject to taxation).
After showing Paula all the information, she decided the LIF was the best way to go.  She decided to unlock 50% to a RRIF and move the other 50% to a LIF.  With the LIF, she chose a maximum income ($1400 per month) and then set the RRIF at $1085 per month.

2 More Reasons Women Can’t Afford to Ignore Finances

2 More Reasons Women Can’t Afford to Ignore Finances
2 More Reasons Women Can’t Afford to Ignore Finances
Written by Sarah Milton
“My life didn’t please me, so I created my life.” – Coco Chanel
Writing about women and finances means striking a careful balance between the way things are and the way things are perceived to be. Women have come a long way in the quest for equality but, when it comes to managing money and building wealth, the gap between men and women is much larger than people might imagine. It’s tempting to want to “fix the problem” but the trouble is that when we focus too much on the inequality itself, we lose sight of the fact that it matters less than it exists and more how we react to it. I don’t think it’s possible for our world to ever be completely fair because fairness is always a matter of perspective (any parent can give you plenty of examples of that!) but I do believe that there are things we can do as individuals to level the playing field.
Last week I wrote about three of the five reasons that women need to focus on their finances and this week I’m going to share the final two.
Women Are Often the Caregivers for Aging Parents
Research suggests that women are more likely to take time off work, reduce their working hours or turn down promotions in order to care for aging/ill parents. According to the American Journal of Public Health, “women provide the majority of informal care to spouses, parents, parents-in-law, friends and neighbours, and they play many roles while caregiving—hands-on health provider, care manager, friend, companion, surrogate decision-maker and advocate.” Whether it is through choice or a sense of duty, there’s no doubt that taking on a caregiving role has a dramatic impact on a woman’s earning power, her ability to save and also her physical and emotional health.
The cost of long-term care is one that concerns a lot of people and it’s an expense that is often underestimated. In an ideal situation we would all lead happy, healthy, independent lives until the moment we pass away peacefully in our sleep but the reality is that, for many people, old age brings reduced mobility and an increased dependence on others for assistance with activities such as bathing, dressing and food preparation. When a person’s financial resources won’t stretch to the cost of an assisted living or long-term care facility (or they simply don’t want to move) the responsibility for their care is often assumed by their family, friends and neighbours. More often than not, these caregivers are women.
Related article:  The not so free 55
The fact that women are more likely to find themselves in a caregiving position might not be “fair” but the knowledge that it’s more likely should motivate women to make saving, wealth building and financial stability a priority in order to create a financial buffer against the cost of caring for ageing parents or an unwell spouse. From a personal perspective, both my parents are in their late 70s and, while they’re currently in good health, I’m very aware of the fact that could change. I’m also very aware of the fact that they live 5000 miles away. If I don’t want my sister to have to shoulder the responsibility of caring for our parents should something happen then that means I need to put myself in a situation where I have the financial resources to get on a plane and go home if I’m needed without having to rely on credit or my retirement savings in order to fund the trip. I also want to have the choice of being able to care for my parents should the need arise instead of having to leave that responsibility to someone else because I can’t afford to help.
They Let Others Handle the Money
It’s stereotypical to assume that most women have a challenging relationship with money but there is a wealth of evidence to suggest that, statistically, women are poorer after divorce or the death of a spouse. Divorce increases the risk of poverty for women and studies conducted by BMO show that women can actually experience a decrease of income by over 40% after a divorce. The largest decrease in wealth (and the greatest increase in poverty) is seen in married adults who become divorced between the ages of 67 and 80.  BMO estimates that 52% of debt problems can be attributed to either divorce or separation which is a huge problem when you consider the impact that carrying debt can have on your retirement income and your ability to save.
Older women in particular, tend to defer to the advice of others and are often blissfully unaware of the details of household finances which creates stress and difficulty in the event that they are widowed. Statistically, the vast majority of women will live most of their retirement years without a spouse which makes it critically important that women take control of their finances (and their financial future) from an early age if they don’t want to become part of the statistic that shows 75% of low-income seniors are women.
The simple fact is that we have no control over what life throws at us but we have every control over how we respond to it and how we attempt to protect ourselves from it. Just because women are more likely to work part-time, work for minimum wage and take time off from work in order to care for children or other family members doesn’t mean that they are doomed to a life of financial lack. There are plenty of examples of “low income” people who have built wealth and plenty of examples of “high income” people with nothing to show for it but debt and “stuff”. The statistics don’t shape our reality, only our own actions can do that.
Rather than holding us down, these statistics should inspire and motivate women to learn more, do more and build more in order to improve their personal financial situation. Whether you’re male or female, rich or poor, the principles of wealth building are the same: know where you stand financially, pay yourself first and spend less than you earn. I believe that time, education and discipline are our three biggest allies in building wealth and that educating ourselves (and those around us) about finances, creating a good relationship with money and

The differences between LIFs and RRIFs

The differences between LIFs and RRIFs
The differences between LIFs and RRIFs
Written by Jim Yih
Recently I wrote about the differences between a LIRA and a RRSP.  In this article I want to follow up and discuss the difference between LIFs and RRIFs.
What is a RRIF?
A Registered Retirement Income Fund (RRIF) is the most common income option for the RRSP.  If a RRSP is a tax sheltered bucket of money, the RRIF is simply a tax sheltered bucket of money with a hole in it.
While the RRSP is designed for accumulation of funds for retirement, the RRIF is really designed to create regular systematic income in retirement.  Some people suggest that you can withdraw money from a RRSP whenever you want so why would you need the RRIF?  The RRIF is really diesigned for regular income in retirement.  If you wanted monthly income, you may not want to call up the bank or your financial advisor everytime you needed money. Instead, you would automate that income via a RRIF.
What are some of the differences between a RRSP and a RRIF?  You can make contributions to a RRSP but not to a RRIF.  Because the RRIF is designed for income, there is a minimum income amount that must be withdrawn every year from a RRIF
Related article:  RRIF Minimum income rules
What is a LIF?
LIF stands for LIfe Income Fund and the key word is income.  A LIF is very similar to RRIF.  In fact, the LIF is to a LIRA what the RRIF is to the RRSP.  A LIF is used to convert LIRA money to income just like a RRIF is used to convert RRSPs to income.
A LIF is very important for those people that are retiring with a Defined Contribution Pension Plan
What are the differences between RRIFs and a LIFs?
Just like the LIRA has similarities to the RRSP, the LIF has a lot of similarities to the RRIF.
·         A Life Income Fund is designed to create regular income.  If we used the bucket analogy, the LIF and the RRIF are just buckets with holes in them.
·         In both cases, there is a minimum income that must come out of then plan.
·         Income is only taxed when you receive income.
·         In both the RRIF and the LIF, you can invest in many different types of investments like GICs, bonds, mutual funds, stocks, etc.
The big difference between the LIF and a RRIF is that the LIF not only has a minimum income but also a maximum income that prevents you from spending the money too quickly.
Unlocking rules
Before you convert a LIRA to a LIF for income, you should research the pension unlocking rules in your province or territory.  When it comes to pensions, every province has its own set of rules so the pension unlocking rules can vary across Canada.
Because the LIFs have a maximum income, it can be very restrictive to access funds.  As a result unlocking rules can be very favourable because they create greater flexibility.
Because of the restrictive nature of pension funds, I usually suggest people draw from LIFs before RRIFs and to draw the maximum out of the LIFs (not the minimum).  The theory is to use up as much restrictive money as possible before using less restrictive money.  This is not always the case as personal planning is important instead of using general rules of thumb.

A case study on CPP combined benefits

A case study on CPP combined benefits
A case study on CPP combined benefits
Written by Doug Runchey
I provided calculations for a client recently, and I think his situation might provide a good example of how receiving a CPP survivor’s pension can affect the decision of when to start receiving your CPP retirement pension.
When you’re eligible for both a CPP retirement pension and a CPP survivor’s pension, you get CPP combined benefits. If you want to know more about how these CPP combined benefits are calculated, read Understanding CPP Survivor Benefits.
 John’s situation
John has been receiving a CPP survivor’s pension since his wife died three years ago. The current amount of this pension is $500 per month. He has been a maximum contributor to CPP every year since he was 18; he will turn 60 this year.
His CPP statement of contributions (SOC) indicated that his retirement pension would be $689.45 if he took it at age 60, $1,038.33 if he waited until age 65, or $1,474.43 if he waited until age 70.
John’s understanding of his choices
John knew that the above retirement pension choices from the SOC did not apply to him, due to the combined-benefit rules. He thought that combined benefits were “capped” at the maximum of a single retirement pension ($1,038.33 for 2014). So he thought that his choices were either to take a combined benefit of $1,038.33 at age 60 or continue receiving his CPP survivor’s pension of $500 until age 65 and then to take his combined benefit of $1,038.33.
In his mind, this made for a simple decision between taking his retirement pension at age 60 or 65; he thought he would always be ahead if he took it at age 60.
However, he wasn’t sure what would happen if he waited until age 70 to start his CPP, and that’s where he wanted my help.
The truth about John’s choices
The first thing I had to clarify with John was that due to the combined-benefit rules, he would only receive $976 monthly if he took his CPP at age 60, not the maximum of $1,038.33. The second thing I had to clarify was that if he took his CPP retirement pension at age 60, the combined benefit amount would be recalculated to $862.27 when he reached age 65.
Putting these two calculations together with the fact that he would continue to receive his CPP survivor’s pension of $500 monthly if he waited until age 65 to take his retirement pension, it appeared that waiting until age 65 might be a viable option. This is because the “breakeven age” for waiting until age 65 would be age 79 (this is the point in time that the total dollar payout of CPP under the two choices is equal).
The whole truth about John’s choices
The final thing that I had to clarify with John was what he would receive if he waited until age 70 to started receiving his CPP retirement pension. This is where he was really surprised.
If John waited until age 70 to start receiving his CPP retirement pension, his combined benefit at that time would be $1,474.43. In the meantime, he would continue receiving his CPP survivor’s pension of $500.00 until age 65, at which time it would be recalculated to $514.33 and continue at that rate until he applied for his retirement pension at age 70.
The breakeven age for this choice compared to taking it at age 60 would be age 77, which is even earlier than the age-65 breakeven age calculated above.
Summarizing John’s choices
1.        John could start receiving his retirement pension at age 60. He would receive a combined benefit of $976 from age 60 to age 65, at which time it would be recalculated to $862.27.
2.       John could start receiving his retirement pension at age 65. At that time he would receive a combined benefit of $1,038.33, and in the interim he would continue to receive his survivor’s pension of $500.
3.       John could start receiving his retirement pension at age 70. At that time he would receive a combined benefit of $1,474.43. In the interim he would continue to receive his survivor’s pension of $500 until age 65, at which time it be recalculated to $514.33.
From a total payout perspective:
·         If he doesn’t live past age 76, he is better off taking his CPP at age 60.
·         If he lives at least until age 77, he is better off taking his CPP at age 70.
·         Taking his CPP at 65 is never the optimal age, when compared to the other two choices.
The combined benefit rules are an important factor in deciding when to start receiving your CPP retirement pension. If you are receiving a CPP survivor’s pension and are trying to decide when to take your own CPP retirement pension, know what your true choices are.
Note that the above breakeven calculations were accurate in John’s situation, but may not apply to you if the amount of your survivor’s pension and/or if your retirement pension choices are different from the above amounts.
If you are in this situation, and want to find out more about your choices, contact me at I can calculate (for a fee) what your combined benefit would be at the various ages, along with the breakeven ages for each choice.

Ontario moves ahead with ORPP

Ontario moves ahead with ORPP
Ontario moves ahead with ORPP
July 30, 2014
The Government of Ontario is moving ahead with its mandatory provincial pension plan, the Ontario Retirement Pension Plan (ORPP), after the provincial budget received royal assent last week.
“The federal government has consistently refused to commit to an enhancement of the CPP, so Ontario is leading the way with the ORPP,” says Associate Minister of Finance Mitzie Hunter. “Without help, that future is discouraging for many, especially since two-thirds of Ontario workers don’t have access to a workplace pension and many are unable to save enough on their own to provide for a secure retirement.”
The province says the ORPP will:
  • Provide a predictable stream of income that is indexed to inflation and paid for life in retirement.
  • Be mandatory for the more than three million Ontarians without a workplace pension plan, and require equal contributions from employees and employers.
  • Operate at arm’s length from government and be responsible for managing investments associated with annual contributions of approximately $3.5 billion.
  • Support long-term economic growth as pension payments from the ORPP would help people maintain their standard of living in retirement and continue spending.
  • Be developed in consultation with pension experts, business, labour, individuals, families and communities across the province in order to ensure that a broad range of perspectives is heard.
The ORPP aims to provide a replacement rate of 15% of an individual’s earnings, up to a maximum annual earnings threshold of $90,000.
Contributions will be shared equally between employers and employees and not exceeding 1.9% each (3.8% combined) on earnings up to a maximum annual earnings threshold of $90,000. The ORPP maximum earnings threshold would increase each year consistent with increases to the CPP’s maximum earnings threshold.
Since the provincial plan is intended to assist individuals most at risk of undersaving, particularly middle-income earners without workplace pensions, those already participating in a comparable workplace pension plan would not be required to enroll in the ORPP.
The ORPP would be introduced in 2017 to coincide with the expected reductions in Employment Insurance premiums.

Are You Taking Advantage of the Pension Income Tax Credit

Are You Taking Advantage of the Pension Income Tax Credit
Are You Taking Advantage of the Pension Income Tax Credit?
Written by Jim Yih
As many Canadians can attest, it’s not always what you earn that counts, it’s what you get to keep. This is especially true if you are currently retired or are planning to retire in the near future. To make the most of your retirement income, it makes sense to become familiar with the numerous tax credits that are made available through the Canada Revenue Agency (CRA). One of those tax credits is the Pension Income Tax Credit.
What is the Pension Income Tax Credit?
The Pension Income Tax credit is available to you if you are 55 years of age or older. Basically, it enables you to deduct, from taxes payable, a tax credit equal to the lesser of your pension income or $2,000.00. Depending on which province you live in, this equates to $440-$720 in actual tax savings each year.
The pension income tax credit is non-refundable and may not be carried forward each year. In other words, you need to use it or lose it.
In order to claim the credit, the taxpayer must be in receipt of certain specified income. The definitions of “pension income” are therefore important.
What is eligible pension income?
Eligible pension income depends on your age. If you were 65 or older in the year, pension income includes:
1.       Income from a superannuation or pension fund
2.       Annuity income out of a RRSP or a Deferred Profit Sharing Plan (DPSP)
3.       Income from a Registered Retirement Income Fund (RRIF)
4.       Interest from a prescribed non-registered annuity
5.       Income from foreign pensions
6.       Interest from a non-registered GIC offered by a life insurance company.
If you are younger than 65 for the entire year: Pension income includes:
1.       Income from a superannuation or pension plan
2.       Annuity income arising from the death of your spouse under a RRSP, RRIF, DPSP
What is not eligible pension income?
·         Investment income from market based investments
·         Interest income from GICs with banks, trust companies and credit unions
·         OAS and CPP
·         Lump sum death benefits
·         Lump sum withdrawals from RRSPs
·         Retiring allowances
Tax planning strategies involving the pension income credit
If you are over the age of 65 and you are not part of a superannuation or pension plan, you may be able to create qualified pension income to save taxes.
1.       Transfer RRSP to a RRIF. At age 65 transfer $12,000 to a RRIF and take $2000 out per year from age 65 to 71(inclusive). This essentially allows you to get $2000 out of your RRSP tax-free for 6 years. Whether you need the income or not, it is an opportunity you do not want to miss.
2.       Transfer Locked-in Retirement Account (LIRA) assets to a Life Income Fund (LIF) and then annuitize. In most cases, you can transfer your LIRA to a LIF or LRIF once you reach the age of 55. To make the most of this strategy, you must transfer the LIRA to the LIF and then to an annuity in order for the income to be reported as eligible pension income. If you purchase the annuity directly from the LIRA, the annuity is considered a RRSP annuity, which only qualifies for the pension income credit after age 65.
3.       Buy a GIC from a life insurance company. If you do not have any qualifying pension income, are age 65 or over, and do not want to draw down your registered assets at this time, there is a relatively easy way to make a GIC qualify for the Pension Income Tax Credit. Simply purchase a GIC through a life insurance company because it is considered eligible pension income. To determine how much principal you would require to be able to claim the full credit, divide $2,000 by the applicable interest rate for the term you want. For example if you wanted a 5-year term and the current annual rate was 4.0% you would need to invest $50,000 (2000 divided by 4.0%=$50,000).
4.       Transfer of Unused Credit to a Spouse. Unused pension income credit is transferable to a spouse or common-law partner. The ability to transfer this credit should be explored in circumstances where one spouse is earning pension income in excess of $2,000, and the other spouse is not otherwise fully utilizing his or her pension income credit.
If you are over the age of 65, take a look at line 314 in your tax return to see if you are taking advantage of the Pension Income Tax Credit. If not, consider one of these tax savings strategies.

Make RRSP Savings One of Your Financial Resolutions

Make RRSP Savings One of Your Financial Resolutions
Make RRSP Savings One of Your Financial Resolutions
Written by Jim Yih0 Comments
Last week, I shared three financial resolutions to think about. This week, I continue on with another three for consideration.
4. Boost retirement savings.
The savings rate in Canada has been under 5% for the past 15 year.  I am always amazed at how few people buy RRSPs given the tax benefits and the pressures to self-fund your own retirement income. Most people who filed tax returns were far from maxing the total room available to them. In fact, 91% of the total RRSP room is unused. The median contribution across Canada is only $2,600.
Related article:  The online Guide to RRSPs
0If you are part of this group with unused RRSP contribution room, it might be the perfect time to develop a plan to start getting money into RRSPs. If you have not started contributing to RRSPs, start a monthly contribution plan, it will be the easiest way to start.  If you’ve already got a monthly contribution set up, see if it’s feasible to increase your contributions.  If you have a Group RRSP plan through work and are not taking advantage of employer matching and the ease of having contributions deducted from your paycheque, it’s a great time to enrol in that plan.
5. Update your will
You should update your will at least every five years or whenever there is a major change in your circumstances. In the interim, mark your calendar as a reminder to reread your will once a year, perhaps on the anniversary of the date you signed it. This exercise may spark some personal reasons for updating your will.
What follows is a partial list of technical matters which may have a bearing on your will review. This is a general guide only and if you have any questions you should consult your lawyer.
·         Will was written before 1982 and contains a limited marital deduction clause.
·         You want to add or remove a beneficiary.
·         You no longer keep in touch with your executor
·         Your marital status has changed, or a member of your family’s marital status has changed.
·         There has been a birth or adoption of children or grandchildren since the last will review.
·         There has been a change in your health or a family member’s since the last will review.
·         There has been a change in the value of your estate.
·         One or more assets has appreciated or depreciated greatly since the last review.
·         There has been an acquisition or change in the ownership of life insurance, pension plans, or other retirement benefits since the last review.
·         There has been a significant change in a business situation. -You want to change/add/or delete a guardian, executor, or a trustee since the last review.
·         You’ve moved to another province since the last will review.
·         There has been a change in the form of property ownership since the last review.
·         You’ve acquired property in another country or province since the last will review.
·         There have been significant tax law changes since the last will review.
6. Take stock and simplify.
In the health industry, weight is one of the universal benchmarks to understand your level of health and fitness. In the financial industry, your net worth is the benchmark to use to measure your financial fitness.
If you do not know what your net worth is, take a piece of paper and start figuring it out right now. On the left hand side of the page, list all of your assets. These would be primarily your financial assets as opposed to your personal assets. On the right hand side of the page, list all of your debts or liabilities. On the bottom of the page or the backside, take your assets and subtract your liabilities and you should have your net worth statement.
Related article:  Calculating your net worth
Once you have this figure, you should try to make sure you are going in the right direction where your net worth is increasing year after year. Increasing your net worth can be accomplished by either accumulating more financial assets or paying off debt.
Whatever the case may be, it will be much easier knowing if you are making progress if you keep track of your net worth on an ongoing basis. I suggest annually as a minimum

Income Splitting Strategies in Retirement

Income Splitting Strategies in Retirement
Income Splitting Strategies in Retirement
Written by Jim Yih
Income splitting is not an easy strategy to accomplish in Canada. We live in a tax system where every individual must report their personal income and pay tax individually.
Income splitting is a strategy where couples try to move income from a spouse in a higher tax bracket to a spouse that is in a lower tax bracket. The government has been tough on income splitting because it would mean much lower tax revenues to them. For example, an individual who makes $70,000 per year would pay considerably more tax than a couple that earned $35,000 each.
Although couples are not allowed to pool their income and report it in a split fashion, there are income splitting strategies for Canadians. In this article, I will share with you three income splitting opportunities for retirement.
Pension Splitting
As of January 1, 2007 individuals who are 65 years of age or older can allocate for tax purposes up to a maximum of 50% of the annual income received from a lifetime annuity, registered pension plan, RRSP annuity, registered retirement income fund (RRIF) or deferred profit sharing plan annuity to a spouse (or common-law partner or same-sex partner). Although the actual income is still received by the individual, the splitting for tax purposes is done via the tax return. The receiving spouse is not required to be 65 years of age or older to receive an allocation, and the amount allocated can be changed each year for the benefit of the couple. This is great news for senior couples.
For those individuals under age 65, pension splitting only applies to those who receive lifetime annuity payments from a registered pension plan. RRIF income cannot be split under age 65.
Spousal RRSPs
With the new changes to pension splitting, spousal RRSPs are not as beneficial for those over the age of 65. However, they still make sense for income splitting under the age of 65. Spousal RRSPs simply allow a spouse that is in a higher marginal tax rate to contribute to a spousal RRSP in the name of the lower income spouse. For example, my spouse Liz is in a lower tax bracket than me so conventional thinking is I should contribute to Liz’s spousal RRSP instead of my personal RRSP. That way, when she withdraws the money, she pays the tax instead of me (as long as she we follow the 3 year attribution rules).
The key to benefiting from spousal RRSPs is planning ahead and looking down the road to retirement. A 60 year old cannot arbitrarily assign some of his or her RRSPs to a spousal RRSP. It has to be done at the time of contribution. Don’t wait to plan when it might be too late. Start early.
Canada Pension Plan splitting
Similar to pension splitting, couples can split their CPP retirement benefits. The only reason you would do this is if the spouse with the higher CPP is in a higher tax bracket than the lower CPP earner. Unlike pension splitting, both spouses must be over the age of 60 and both must be collecting CPP. Also, the split between spouses must be 50-50 and no other fashion. For example, if the higher income spouse earns $700 per month and the other spouse earns $300 per month, CPP allows each spouse to take $500 per month ($700 plus $300 divided by 2).
Although the government is tough on income splitting, there are strategies for Canadians to lower the tax bite. Next week, we will look at other income splitting strategies beyond just retirement.

Understanding Government Benefits

Understanding Government Benefits
Understanding Government Benefits
Written by Jim Yih
Government benefits represent the cornerstone of the Canadian Retirement Income System. If you are nearing retirement or in retirement it is important for you to understand how these government benefits play a role in your retirement income. In this article we will touch on the key components of the Canadian Government Benefits.
Canada Pension Plan (CPP)
CPP is a contributory plan. If you have made at least one payment into the CPP plan, you qualify to collect a benefit. The benefit you receive is based on how much, and for how long, you contributed to the Plan. The pension is designed to replace about 25% of the earnings on which you paid into the Plan
In 1998, the average Canada Pension Plan retirement pension taken at age 65 was $408.55 per month. The maximum for that year was $744.79 per month. Here are the maximum CPP amounts since then:
·         2012 – $986.67 per month
·         2011 – $960.00 per month
·         2010 – $934.17 per month
·         2009 – $908.75 per month
·         2008 – $884.50 per month
·         2007 – $863.75 per month
·         2000 – $762.92 per month
You can collect the CPP as early as age 60 but at a reduced amount. The reduction amount is being increased from 0.5% for every month you take CPP before your 65th birthday to 0.6% and will be phased in over a 5 year period from 2012 to 2016.
·         2012 – 0.52% reduction
·         2013 – 0.54% reduction
·         2014 – 0.56% reduction
·         2015 – 0.58% reduction
·         2016 – 0.60% reduction
Finally, it is important to note that CPP does not come to you automatically, you must apply for the CPP benefit.You can get an estimate of your Canada Pension Plan retirement pension, by checking your Statement of Contributions, or call 1 800 277-9914. The closer you are to the date on which you want to begin your pension, the more accurate the estimate will be.
Related articles:
·         New changes to CPP
·         The new CPP Breakeven points
Old Age Security (OAS)
The Old Age Security program is one of the cornerstones of Canada’s retirement income system. Benefits include the basic Old Age Security pension, the Guaranteed Income Supplement and the Spouse’s Allowance. After briefly describing the program’s history and overall features, each of the specific benefits is described in turn. Unlike CPP, the Old Age Security program is financed from federal government’s general tax revenues.
The Old Age Security pension is a monthly benefit available, if applied for, to anyone 65 years of age or over. Here are the maximum benefits:
·         2012 – $540.12 per month
·         2011 – $524.23 per month
·         2010 – $521.62 per month
·         2009 – $516.96 per month
Old Age Security residence requirements must also be met. An applicant’s employment history is not a factor in determining eligibility, nor does the applicant need to be retired. Old Age Security pensioners pay federal and provincial income tax.  In 2012, The government announces changes to the age of eligibility of Old Age Secutiry moving to from age 65 to 67.  This change will be phased in 2023.
Higher income pensioners also repay part or all of their benefit through the OAS clawback.  The clawback for starts at
·         $69,562 for 2012
·         $67,668 for 2011
·         $66,733 for 2010
·         $66,335 for 2009
Related articles:
·         Minimizing OAS clawback
·         Three big changes to OAS
The Guaranteed Income Supplement (GIS)
The Guaranteed Income Supplement is a monthly benefit paid to residents of Canada who receive a basic, full or partial Old Age Security pension and who have little or no other income.
Recipients must re-apply annually for the Guaranteed Income Supplement benefit by filing an income statement. Thus, the amount of monthly payments may increase or decrease according to reported changes in a recipient’s yearly income.
Unlike the basic Old Age Security pension, the Guaranteed Income Supplement is not subject to income tax. To receive the Guaranteed Income Supplement benefit, a person must be receiving an Old Age Security pension. The yearly income of the applicant or, in the case of a couple, the combined income of the applicant and spouse, cannot exceed certain limits.
Currently the maximum GIS benefit for 2012 is $738.96 per month for a single person and $489.98 for a married person.
For more information on GIS, visit the government website
The Allowance and Allowance for the Survivor
The allowance provides a benefit for low-income earners between the ages of 60 to 64 if still married. The allowance for the survivor occurs if the spouse is deceased. After age 64, the OAS replaces the spouses allowance.
While many people believe the government will take care of them in retirement, we can see from the numbers that this is far from the truth. Government benefits will help retirees but it will not provide adequate levels of retirement income. You must continue to invest in RRSPs, pension plans, or investments to ensure a safe and happy retirement.
That being said, be sure to incorporate the government benefits into your retirement plans.

Understanding GIS (Guaranteed Income Supplement)

Understanding GIS (Guaranteed Income Supplement)
Understanding GIS (Guaranteed Income Supplement)
Written by Doug Runchey
GIS (Guaranteed Income Supplement) is one of the “supplementary” benefits payable under the Old Age Security (OAS) Act. Other such supplementary benefits include the Allowance and the Allowance for a Survivor; they will be discussed in a future article.
GIS is a monthly non-taxable benefit that is paid to eligible pensioners, in addition to the basic monthly Old Age Security (OAS) amount.
Who is eligible for the GIS?
In order to be eligible for the GIS:
·         You must be receiving the basic OAS.
·         You must be resident in Canada.
·         Your income must be lower than the maximum allowed income levels.
0What are the maximum allowed income levels?
There are different maximum allowed income levels for the GIS depending on your marital status and whether your spouse is receiving the OAS or the Allowance. The four different marital status rates for GIS are known as:
Table 1 – Single, widowed or divorced OAS pensioner
Table 2 – Married or common-law OAS pensioner and spouse is also an OAS pensioner
Table 3 – Married or common-law OAS pensioner and spouse is not an OAS pensioner
Table 4 – Married or common-law OAS pensioner and spouse receives the Allowance
The maximum allowed income levels for these four different rate tables effective October 2013 through December 2013 are as follows:
Rate TableMaximum Allowed Income(combined income if a couple)Maximum monthly GIS1$16,704$747.112$22,080$495.393$40,032$747.114$30,912$495.39
These income levels and maximum GIS amounts change quarterly, based on increases in the Consumer Price Index. For the current amounts, see:
What is considered as income for GIS purposes?
For the most part, income for GIS purposes is the same as your net income reported on your Income Tax return (excluding OAS). Here is a link that provides more detail:
What year’s income is used for GIS purposes?
Normally, GIS entitlement for any payment year (July through June) is based on income for the previous calendar year. For instance, GIS entitlement for the period of July 2013 through June 2014 is normally based on your income for the 2012 calendar year.
I say “normally”, because there is a provision under the GIS where your payment can sometimes be based on your current year’s income instead. This occurs when you have had a loss or reduction in some type of regularly recurring income (for example, employment earnings, pension income or Employment Insurance benefits). If this applies to you, contact Service Canada at 1-800-277-9914 and ask them to mail you a form for estimating your income for the current year.
How is my GIS payment calculated?
For the most part, your GIS payment is reduced from the maximum payable by 50 cents for every dollar of other income that you have.
The actual amount of GIS is determined using a set of complex rate tables, available at:
How do I apply for GIS?
When you first apply for OAS, a question on the application form asks if you also want to apply for GIS. If you answer “Yes,” you will be mailed a separate application for GIS.
If you were not eligible for GIS when you first applied for OAS but become eligible later, contact Service Canada to request an application for GIS.
Once you are receiving GIS, you renew your benefit automatically each year simply by completing your income tax return.
Can I receive GIS outside of Canada?
As mentioned previously, GIS is payable only if you reside in Canada. Under the OAS Act, residing in Canada means that you “make your home in Canada and normally live in Canada.”
Having said that, GIS is payable for temporary absences from Canada, up to six months in duration. 
Are there other reasons why I won’t be eligible for GIS?
Some other reasons why you might not be eligible for GIS include:
·         If you are a sponsored immigrant, GIS is not normally paid during the period of sponsorship.
·         If you are incarcerated in a federal penitentiary for two years or longer, your GIS eligibility will be suspended.
GIS is intended for low-income seniors who are receiving the OAS pension. It is not welfare, however, and there should be no stigma attached to receiving GIS. If you are eligible for GIS and aren’t receiving it, apply today!
Indeed, nearly one-third of all OAS recipients in Canada qualifies for and receives GIS.
If you have any questions about your eligibility for GIS, call Service Canada at 1-800-277-9914 or check out their website at:

Creating Retirement Income with Buckets of money

Creating Retirement Income with Buckets of money
Written by Jim Yih
Interest rates have played a big role in changing the retirement landscape.  I’ve always said, the best time to retire was back in 1981 when interest rates were at the peak. If you retired back then, you could take all of the money you saved and plunk it into a good old-fashioned GIC and earn 12% to 21%.  If you think about it, most retirees could easily live off the interest and keep their capital 100% secured.  Unfortunately, those good old days are long gone.
Since 1981, we have seen a massive decline in interest rates and today retirees can get 1%, 2% or 3% if they really shop around.  It’s tough now for the retiree to live on less than 3% interest in a safe environment.  So instead of low returns in a safe environment, most investors have moved money to riskier places in a quest to do better.  If you think about it, this has created a new set of problems for the retiree or the soon-to-be-retiree.
How many of you know people who delayed their retirement because of the stock market and what a correction did to their portfolio?  How many of you know people who retired but then had to go back to work because a stock market correction caused them to lose too much money?
Variable returns can work against you
One of the problems of return projections in the financial industry is that most of the math is modeled on a straight line. For example, the math on a 7% average return really assumes that you make 7% per year each and every year.
The real problem is most portfolios don’t move in a straight line anymore.  Instead the move up and down with peaks and valleys.  What if you did the math of withdrawing income on and investments that fluctuates with variable returns as opposed to an investment that moved in the path of a straight line?  Would the results be different?
Avoiding the risk of bad timing.
One of the new risks that retirees face is the risk of bad timing.  What happens if you retire just as the market is correcting?  What happens if you retire and then the market corrects shortly thereafter?  Some have coined this the retirement risk zone.
To prevent yourself from changing your timing of retirement because of something you can’t control or predict, you can use the bucket strategy to creating retirement income.
What is the Bucket strategy to retirement income?
Basically what you do is set up your investments in hypothetical buckets like in the diagram.  In one bucket you fill it with investments that are safe so that you can pay your self the necessary income you need from your portfolio for at least 5 years.  Then you fill another bucket with investments that might be a little riskier but with a time frame of 5 to 10 years in mind.  This might include some fixed income investments or even some income paying investments like REITS or Blue Chip Dividend paying investments..  The last bucket might contain some riskier investments to help combat inflation over the long run.
When the short-term bucket drains down because of income to the retiree, then you can fill it up with the next bucket.  And then the 5 to 10 year bucket drains down, you can fill it up with the last bucket.  In theory, the older you get, the more conservative your portfolio becomes.
The main idea of the bucket strategy is that short-term volatility in the markets does not affect your ability to create income in the short term.  The bucket strategy can take away some of the stress of market swings.

Are you receiving as much CPP as you should be?

Are you receiving as much CPP as you should be?
Are you receiving as much CPP as you should be?
Written by Doug Runchey
You might think that the answer must be “Yes.” Why would your Canada Pension Plan (CPP) amount ever be less than it should be?  Isn’t CPP based on the contributions that you have made? Well, you might be surprised to learn that many people are being underpaid by CPP!
Of the CPP audits that I have conducted in the past six months, almost half of the clients were receiving less than they were entitled to. Sometimes these underpayments were less than $1 per month, but one client was being underpaid more than $50 per month. The average underpayment has been about $12 per month..
Why are CPP pensions being underpaid?
The main cause of the underpayments that my CPP audits have identified, is that not all earnings are being included in the pension calculation.
The amount of a CPP retirement pension is 25 percent of your “average lifetime earnings,” adjusted for inflation, but providing for certain “dropout” periods. If some earnings aren’t being included in your pension calculation, this could reduce your average lifetime earnings and result in you receiving less CPP than you are entitled to.
If you’re interested in the steps of the detailed calculation, check out my article on How to calculate your CPP Retirement Pension.
Why aren’t all earnings being included in the calculation?
It’s easy to see why this is happening if you understand how CPP earnings and contributions are tracked.
Service Canada doesn’t receive your earnings information directly from your employer; they receive it from Revenue Canada after your tax return is processed. That means, for example, that if your pension started early in 2013 they probably wouldn’t have received your 2012 earnings details yet and they definitely won’t receive your 2013 earnings details until some time in 2014, when your 2013 tax return is processed.
That’s why all CPP benefits are initially approved as what they call “interim amounts,” with the expectation that the amounts will be recalculated the following calendar year, when Service Canada has received all of the relevant earnings information from Revenue Canada. At that time, all pensions approved the previous year should normally be recalculated and any underpayments should automatically be issued. It is this recalculation process that appears to have broken down, or at least in many cases.
Is there a pattern to the CPP pensions that are being underpaid?
So far, this issue seems to mostly involve retirement pensions that started between 2008 and 2012, where the person was working in the year that their CPP started or in the previous year.
What should I do if my situation fits the above pattern?
Some clients have been successful simply by calling Service Canada at 1-800-277-9914, and asking them to ensure that their pension calculation includes their earnings for those last two years. However, other clients who tried calling have been told simply, “Of course we’re paying you the correct amount,” even when this wasn’t always the case.
I can help by doing a calculation for you so that you know whether you are being underpaid on your CPP before you call Service Canada, or I can handle everything on your behalf, including contacting Service Canada.
If either of these options interests you, check out my CPP audit services
Are there any other reasons that I might be receiving less than I should be?
While the missed earnings issue seems to be the main cause of underpayments identified, other reasons include:
·         Missed or incorrectly applied child-rearing provision opportunities
·         Missed credit-splitting opportunities
·         Simple data entry errors
While underpayments for these other reasons are less common, they tend to create larger underpayments.
My CPP audit services can also help identify and correct these other underpayment situations.

RRSPs, HBP, Taxes and Your First Home

RRSPs, HBP, Taxes and Your First Home
RRSPs, HBP, Taxes and Your First Home
Saving for that first home can seem daunting for first-time buyers. But it can be done

The Down Payment

Regardless of where you live in Canada or the territories, buying a home is costly, especially for first-time buyers. Because the Bank Act forbids banks from making mortgage loans in excess of 80% of the value of a residential property, anyone wishing to purchase a home must put down at least 20% of the purchase price or appraised value (whichever is less) to qualify for a conventional mortgage from a bank. Given that the national average home price in Canada in July 2013 was $382,373, according to the Canadian Real Estate Association, a first-time buyer of an averagepriced home would have to come up with $76,475 to satisfy a lender providing a conventional mortgage. In addition to the 20% down, most lending institutions have guidelines suggesting purchasers should use no more than 32% of their gross family income for payments of mortgage principal and interest, property taxes and heating; the total debt load (including consumer loans, etc.) should not exceed 40% of the gross family income.

Clearly, first-time home buyers need all the help they can get to maximize the down payment and therefore reduce the principal amount borrowed and the monthly mortgage payments.

Most Down Payments Come from Personal Savings

Sometimes, parents, other relatives or even friends may be a source of a loan or a gift, but for most firsttime buyers, the down payment has to come from personal earnings. Those who have to save funds need a long-term strategy to determine the length of time it will take to save the 20% down payment and the best means of achieving that goal. The following example may provide guidance for those who think saving the "down" is next to impossible. But first, you need to consider how much your first home will cost before you can determine what that 20% amount will be. A local realtor should be able to help you come up with a realistic price range for the type of housing that will suit your needs and means.

How to Save a Down Payment

(The calculations in this article, including those in the accompanying table, are a schematic projection based on the known source deductions and tax rates for 2012.)

Assume the first-time buyer is single, lives in Ontario, is working at their first job, has personal expenses (for example, rent, clothing, food, car payments, etc.) of approximately $20,000 per year and a reported 2012 income of $40,000, which is likely to remain close to that level until 2017. Assume also that the goal is to save $76,475 (20% of $382,373) for a down payment on that average Canadian house and the purchase will be made in 2018. Because the potential buyer is working at their first job, they cannot make a contribution to their RRSP for the first year of employment. The table below shows that the total saved at the end of 2012 is $11,722.

Without RRSP Savings

If the buyer makes no RRSP contributions in any of the following five years, total savings over the six-year period will be only $70,332 ($11,722 x 6 years).

With RRSP Savings

As the chart below shows, contributing to an RRSP provides an additional $7,200 in deferred-tax savings annually for a total RRSP savings of $36,000 for the five years between 2013 and 2017. The after-tax savings for 2012 ($11,722), plus five years of RRSPaffected after-tax savings (5 x $6,157), would total $42,507. The total of RRSP and after-tax savings ($36,000 + $42,507) would be $78,507 by the end of 2017. By making RRSP contributions for five years, the total amount accumulated exceeds the amount accumulated without RRSP contributions by $8,175 ($78,507 - $70,332). In other words, by making annual RRSP contributions, the required down payment of $76,475 can be saved; without RRSP savings, the amount would fall short by $6,143 ($76,475 - $70,332).

The calculations above show that a couple could conceivably contribute as much as $157,014 (2 x $78,507) toward their first purchase, if both persons were in the financial situation described in the table.

$25,000 can be withdrawn from your RRSP as a down payment.

Using the Home Buyers' Plan (HBP)

The HBP allows a first-time buyer to borrow up to $25,000 from their RRSP for use as a down payment. Because only $25,000 of the total RRSP savings of $36,000 can be withdrawn under the HBP, the accumulated savings available is only $67,507 ($42,507 + $25,000). The remaining $8,968 ($76,475 - $67,507) required to make the down payment may also be withdrawn from the RRSP, but it will be subject to income tax in the year withdrawn. If the first-time buyer purchases the home jointly with another firsttime buyer such as a spouse or common-law partner, each party to the purchase is entitled to borrow $25,000 from their individual RRSPs. If, however, either person has owned and occupied a home as a principal residence within the last five years, neither person is considered to be a first-time home buyer and neither is therefore entitled to the HBP.

This $25,000 amount must be repaid to the RRSP over a 15-year period, or an amount equal to 1/15 of the amount borrowed is added to the income of the buyer each year and is subject to taxation. The repayment period starts in the second year following the year in which you made the withdrawal(s).

(Due to space restrictions, the terms of the HBP have been somewhat simplified. Please check the CRA website: rrsp-reer/hbp-rap/cndtns/frst-eng.html for complete details.)

Naturally, there are other life factors and income tax considerations that may impact the ability to accumulate personal savings, but the example establishes that a savings plan that combines personal savings with RRSP contributions can help you reach your downpayment goal.

Additional Benefits of a High Down Payment

Building an RRSP in conjunction with savings provides positive benefits beyond tax savings:
1.     Lenders will see that you are a responsible borrower and a good credit risk for a mortgage.
2.     The higher the down payment, the lower the amount of mortgage principal required. Over time, the lower principal requires less interest to be paid on the mortgage.
3.     The higher down payment allows faster reduction of the principal amount. Thus, when it is time to renew the mortgage and interest rates have increased, the ability to continue to meet regular payments will be less of an issue.
4.     A lower mortgage loan allows "wiggle" room to obtain additional funds in the event of unforeseen expenses that require additional credit.

Seek Advice from a Professional

Anyone thinking about buying their first home should consider spending time with their CPA to discuss their current earnings and map out a strategy that will combine personal savings with tax savings to make that home a reality.

How to Save $76,475 in Six Years
 2012*20132014201520162017RRSP SavingsTotal SavingsT4 Income40,00040,00040,00040,00040,000 40,000  RRSP Contribution 07,2007,2007,2007,2007,20036,000 Taxable Income40,00032,80032,80032,80032,80032,800  Source Deductions8,2786,6436,6436,6436,6436,643  After-Tax Income31,72226,15726,15726,15726,15726,157  Cost of Living20,00020,00020,00020,00020,00020,000  Annual Savings11,7226,1576,1576,1576,1576,157 42,507        78,507
*First year of employment, thus no RRSP contribution

Reverse Mortgages: Getting money out of your home in retirement

Reverse Mortgages: Getting money out of your home in retirement
Reverse Mortgages: Getting money out of your home in retirement
Written by Jim Yih
When people think about getting money out of their paid off homes in retirement, reverse mortgages are usually the first thought that comes to mind.
A reverse mortgage is simply a loan that is secured by the equity you have in your home. It is designed for retirees who want to access some of the equity in their home to supplement their retirement lifestyle.
Essentially, a reverse mortgage lender gives you a lump sum of money based on an appraisal of your home. The amount of loan will likely be 25% to 40% of the value of your home depending on a number of different factors like your age, the appraised value of your home, and the location of your home (is it in a big city or rural?).
Instead of making payments on that loan, the interest costs simply accrue and grow. The reverse mortgage lender assumes that the value of the house will also grow in value, which ensure there is always equity in the home. The loan eventually gets paid off when you die or when you sell the home.
Having seen a few quotes, I think retirees need to tread carefully when it comes to reverse mortgages. Sure it’s appealing that you do not have to make payments but the costs in terms of fees and interest should make you think twice.
Line of credit
One alternative to a reverse mortgage is to use a home equity line of credit (HELOC) to achieve the same thing. With a line of credit, you can access up to 75% of the value of your home but the big difference is you will have to make payments of at least the interest. You will only have to make payment but only on the amount borrowed.
With a line of credit, you will have so much more flexibility in terms of how you use the line of credit, when you use the money, and how much money you can access. You are also likely to pay less fees and get a lower rate of interest on the loan.
The problem is it requires a little more management and involvement than the reverse mortgage. I would draw some parallels to the RRIF and annuity options as retirement options for the RRSP.
When it comes time to retire and convert your RRSPs to income, you can choose between a RRIF or an annuity. The annuity is kind of like the reverse mortgage from the perspective that it requires very little management and decision making. The RRIF is like the Line of Credit in that you have maximum flexibility and more control over your money and assets.
In the end, I think the numbers will give you the best option. If you are looking to get equity out of your home in retirement, get a reverse mortgage quote and compare it to the option of a line of credit.
When it comes to RRIFs and annuities I would estimate that 95% of retirees choose the RRIF over the annuity. When you look at the reverse mortgage versus the line of credit, I think the numbers will likely lead more people to the line of credit. That being said, the reverse mortgage still has it’s place just likne the annuity will always have it’s place.

What to Consider When Preparing Your Estate Plan

What to Consider When Preparing Your Estate Plan
What to Consider When Preparing Your Estate Plan
Posted: September 30, 2013
To everything there is a season, and for many, understanding the tax consequences of death on personal and family net worth is a crowning achievement that allows for a powerful wealth transition. This type of preparedness, unfortunately, is rare.
While no personal wealth management plan can be completed without a plan for transferring assets to the next generation, the majority of Canadians are reluctant to discuss the transfer of their assets with family members and many don’t have a will. But to paraphrase Benjamin Franklin, death and taxes are perhaps the only two constants we can count on from the moment of birth… and it pays well to be prepared for the inevitable.
You can plan to transfer your assets on a tax-efficient basis throughout your lifetime, to take advantage of the highs and lows in economic cycles, and to preserve most of your wealth at your death. Without those plans, however, you could lose half of it.
A lifetime of complicated personal relationships makes the transition of wealth more difficult. That’s why we look to significant legal documents—your will, power of attorney, and health care directives as well as your significant financial documents—the personal net worth statement, tax returns and your financial plans, for guidance.
Whether you are already alone or preparing to be alone, protecting your assets at the time of death is an important obligation to your family as well as society. Consider the following checklist for starting an estate plan:
Objectives for Starting an Estate Plan
·         Identify financial institutions. Where are your  assets  held? Include key contacts.
·         Identify advisors. Who are your professional advisors including banker, accountant, lawyer, stockbroker, insurance agent and what is their contact info?
·         Identify proxies. Who will exercise Power of Attorney if you become disabled or cannot direct your own personal affairs?
·         Identify heirs. List exact contact information, as well as their relationship to you. In the case of singles, these heirs could include your favorite charity. Discuss options for the transfer of assets and funds during your lifetime and at death.
·         Identify gifts. Sketch out what you wish for each of your heirs to receive.
·         Identify needs. Will any of your heirs require assistance with ongoing income?
·         Identify executors. Prepare a list of possible executor(s) and make approaches.
·         Identify guardians. Prepare a list of those to whom you would trust the care of your minor children, as well as those who should not have that responsibility.
·         Identify business succession plans. How should your business interests be distributed, and who should step in to run the show?
·         Plan for probate fees and capital gains taxes at death. Review life insurance policies that may be used for those purposes.
·         Identify capital assets and their fair market value annually.
·         Identify asset transfer instructions. Which assets should be transferred during your lifetime, and which should be transferred only upon your death?
·         Make plans for safekeeping. Keep all important documents in a safety deposit box and identify the location.
·         Deal with debt. Cleaning up spilled milk is no fun for anyone… especially if it’s been there for a while. List debt obligations and the order they should be repaid. Make a list of ongoing financial obligations that should be cancelled on death.
·         Draw up your will. Tell your lawyer where it is to be kept.