I’ve been asked many times about the taking your Canada Pension Plan (or CPP) early. It’s one of the issues facing seniors and income management of their retirement funds, my conclusion is that it makes sense to take CPP as early as you can in most cases. Again there are a number of factors that can determine this process and they should be considered. We can help you understand which makes the most sense for you. Contact us at Henley Financial & Wealth Management.
In seeking the answer of when to take your CPP – ask yourself these five questions…
1) When will you retire?
Under the old rules, you had to stop working in order to collect your CPP benefit. The work cessation rules were confusing, misinterpreted and difficult to enforce so it’s probably a good thing they are a thing of the past.
Now you can start collecting CPP as soon as you turn 60 and you no longer have to stop working. The catch is that as long as you’re working, you must keep paying into CPP even if you are collecting it. The good news is that paying into it will also increase your future benefit.
2) How long will you live?
This is a question that no one can really answer so assume Life Expectancy to be the age factor when considering the question. At present a Male has a life expectancy of 82 and a female has a life expectancy of 85. These vales change based on lifestyle and health factors but it gives us a staring point.
Under the old rules, the decision to collect CPP early was really based on a mathematical calculation of the break-even point. Before 2012, this break-even point was age 77. With the new rules, every Canadian needs to understand the math.
If you qualify for CPP of $502 per month at age 65, let’s say you decide to take CPP at age 60 at a reduced amount while instead of waiting till 65 knowing you will get more income by deferring the income for 5 years.
Under Canada Pension Plan benefits, you can take income at age 60 based on a reduction factor of 0.6% for each month prior to your 65th birthday. Therefore your benefit will be reduced by 36% (0.6% x 60 months) for a monthly income of $321.28 starting on your 60th birthday.
Now fast-forward 5 years. You are now 65. Over the last 5 years, you have collected $321.28 per month totalling $19,276.80. In other words, your income made until age 60 was $19,276.80 before you even started collecting a single CPP cheque if you waited until age 65. That being said, at age 65 you are now going to get $502 per month for CPP. The question is how many months do you need to collect more pension at the age of 65 to make up the $19,276.80 you are ahead by starting at age 60? With simple math it will take you a 109 months (or 9 years) to make up the $19,276.80. So at age 74, you are ahead if you start taking the money at age 60, you start to fall behind at age 75.
The math alone is still a very powerful argument for taking CPP early.
So, “How long do you expect to live?”
3) When will need the money?
When are you most likely to enjoy the money? Before the age 74 or after age 74, for most people, they live there best years of their retirement in the early years. Therefore a little extra income in the beginning helps offset the cost of an active early retirement. Some believe it’s better to have a higher income later because of the rising costs of health care and this is when you are most likely to need care. Whatever you believe, you need to plan your future financial security. It is hard to know whether you will become unhealthy in the future but what we do know is most of the travelling, golfing, fishing, hiking and the things you want to do and see are usually done in the early years of retirement.
4) What happens if you delay taking your CPP?
Let’s go back to age 60 you could collect $321.28 per month. Let’s you decide to delay taking CPP by one year to age 61. So what’s happens next? $3,855.36 from her CPP ($321.28 x 12 months), but chose not to, so you are able to get more money in the future. That’s fine as long as you live long enough to get back the money that you left behind. Again, it comes back to the math. For every year you delay taking CPP when you could have taken it, you must live one year longer at the other end to get it back. By delaying CPP for one year, you must live to age 75 to get back the $3,855.36 that you left behind. If you delay taking CPP until 62, then you have to live until 76 to get back the two years of money you left behind.
Why wouldn’t you take it early given the math? The only reason I can think of is that you think you will live longer and you will need more money, as you get older.
Any way the math adds up… you can always take the money early and if you don’t need it put it in a TFSA and let it make interest. You can use it later in life if you choose.
A tax-free compounding account… In your portfolio that may have been over looked – $52,000 for each spouse to be exact, start planning now!
The tax-free savings account (TFSA) is starting to grow up.
Introduced in the 2008 federal budget and coming into effect on Jan. 1, 2009, the TFSA has become an integral part of financial planning in Canada, with the lifetime contribution limit now set to reach $52,000 in 2017.
Start taking advantage of this savings today.
Remember when you thought $5,000 did not amount to much as an investment. If you had taken advantage of this program you could have another $60,000 to $70,000 for each husband and wife invested in savings today. That’s $120,00 -$140,000 of Tax free Value based on the average market return since 2009.
Used correctly the TFSA can supplement income lowering your tax base during retirement. The gain made in a TFSA is tax-free, and therefore so are withdrawals — Did you know? That the money coming out of the account does not count as income in terms of the clawback for Old Age Security, which starts at $74,780 in 2017.
The TFSA has also become a great vehicle for dealing with a sudden influx of wealth. For people who downsize and sell their house or receive an inheritance, this money is already tax-free. Do not make it taxable in the hands of the government again.
Contact me for more information regarding this and other investments that have been overlooked. It never hurts to get a second opinion regarding your future.
A person sacrifices his/her health to make money. Then they sacrifice money to recuperate their health. They become so anxious about the future that they do not enjoy the present; the result being that they do not live in the present or the future; they live as they are never going to die, only to die never really lived. Dalai Lama
So when I’m asked what I do?
The answer is simple! I help you take care of the future so you don’t have worry, thus allowing you to live for today and tomorrow. I help you succeed!
According to the Dalai Lama, “a person sacrifices their health to make money”. So what if I told you I can help you protect your money so you don’t have to sacrifice your health.
When creating our wealth we are often confronted with the risk of not accumulating enough for our future. During the accumulation phase of life (accumulation phase – is when we earn money) it is critical that we save for the future, so we can continue to enjoy a comfortable lifestyle into retirement. Our lifestyle ambitions requires us to earn our dreams. In some cases we tend live beyond our earning potential. Saving for retirement is often complicated, difficult and a time-consuming task for many. We often see people delay saving for the future because they want more now. This is where I can help you succeed. I work with you to help give you that future so you can live today, within your earning potential, and not worry about tomorrow. I help make your life simple through planning.
If I could…
Take the volatility out of the market would you be interested?
Help you protect your assets would you be interested?
Help you protect your earning power would you be interested?
Help you protect your earning potential would you be interested?
If you answered yes, to any of these questions above, it’s time for us to start planning together. Plan for your future so you can live in the present…let me do what I do best.
I can help you find money that you did not know you were losing willingly or unknowingly by taking the volatility out of the markets. In doing so I will help you Protect Your Assets through Wills, Health Benefits, Estate planning, and Long Term Care. I will help you Protect Your Earning Power through Living Benefits. Finally, I will help you Protect Your Earning Potential with the use of Life Insurance.
This is what I do! I help you plan for the future so you can live in the present. I help you succeed!
So is the Dalai Lama right? Do we have to sacrifice health for life style?
As long as we do what we love and love what we do! We know that life is good. We must enjoy the present as we never know what lies ahead. So live for today and plan for tomorrow. If done correctly we will not have to sacrifice our health for lifestyle.
Do you have to sacrifice your money to recoup your health?
In life we are sometimes thrown a curve ball, and our ability to deal with any health issue that comes our way is vital to our recovery. If planned correctly you will never have to sacrifice the future for the present. Depending on the health issues you will have a plan in place so that the road to recovery is all that you will have to concern yourself with.
Although the Dali Lama says that people don’t enjoy today because they worry about the past and the future. I believe that if you plan your personal and families financial security with a vision and purpose you can indeed live worry free to enjoy today.
Unfortunately, we all will die at some point, as it is the cycle life we know. Live life, enjoy your present and future.
The purpose of our life is to be happy. Dali Lama
Start planning today and be happy tomorrow.
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If interested contact me @ http://www.henleyfinancial.ca
A tax-free compounding account… In your portfolio that has been overlooked.
Check us out… Henley Financial and Wealth Management
The tax-free savings account is starting to grow up.
Introduced in the 2008 federal budget and coming into effect on Jan. 1, 2009, the TFSA has become an integral part of financial planning in Canada, with the lifetime contribution limit set to reach $52,000 in 2017, provided you were 18 at the time it came into existence.
Remember when you thought $5,000 did not amount to much as an investment. You would have another $60,000 to $70,000 for each husband and wife if you have been maximizing their contribution and based on the market’s return since 2009.
Used correctly the TFSA can supplement income lower your tax base during retirement. As the gains made in the TFSA are tax-free, and so are withdrawals —Did you know that the money coming out of the account does not count as income in terms of the clawback for Old Age Security, which starts at $74,780 in 2017.
The TFSA has also become a great vehicle for dealing with a sudden influx of wealth. For people sell their house or receive an inheritance. That money is already tax-free you don’t want to make it taxable in the hands of the government again.
With that in mind, and the new year limit increase upon us, here are eight things Canadians need to know about TFSAs.
How did we get to $52,000?
The first four years of the program, the annual contribution limit was $5,000 but that increased to $5,500 in 2013 and 2014 under a formula that indexes contributions to inflation. The Tories increased the annual contribution limit to $10,000 in 2015 but the Liberals quickly repealed that when they came into power and reduced annual contributions to $5,500 for 2016, still indexed to inflation. The annual number increases in increments of $500 but inflation was not riding high enough to boost the annual figure to $6,000 for 2017 so we are stuck at $5,500. That brings us to the current $52,000. The good news is even if you’ve never contributed before, that contribution room kept growing based on the year in which you turned 18.
For the most part, whatever is permitted in an RRSP, can go into a TFSA. That includes cash, mutual funds, securities listed on a designated stock exchange, guaranteed investment certificates, bonds and certain shares of small business corporations. You can contribute foreign funds but they will be converted to Canadian dollars, which cannot exceed your TFSA contribution room.
As the TFSA limit has grown, so has the unused room in Canadians’ accounts. A poll from Tangerine Bank in 2014 found that even after the Tories increased the annual limit, a move that ended up as a one-time annual bump, 56 per cent of people were still unaware of the larger contribution limit. In 2015, only about one in five Canadians with a TFSA had maximized the contribution room in their account, according to documents from the Canada Revenue Agency.
Withdrawal and redeposit rules
For the most part, you can withdraw any amount from the TFSA at any time and it will not reduce the total amount of contributions you have already made for the year. The tricky part is the repayment rules. If you decide to replace or re-contribute all or a portion of your withdrawals into your TFSA in the same year, you can only do so if you have available TFSA contribution room. Otherwise, you must wait until Jan. 1 of the next year. The penalty for over-contributing is 1 per cent of the highest excess TFSA amount in the month, for each month that the excess amount remains in your account.
Is the Canada Revenue Agency still auditing TFSAs?
The Canada Revenue Agency continues to investigate some Canadians — less than one per cent — who have very high balances in their accounts. Active traders in speculative products seem to be the main trigger. Expects an appeal of the current rules regarding TFSA investments to be heard in February.
Be careful on foreign investments
If a stock pays foreign dividends, you could find yourself subject to a withholding tax. While in a non-registered account you get a foreign tax credit for the amount of foreign taxes withheld, if the dividends are paid to your TFSA, no foreign tax credit is available. For U.S. stocks, while, there is an exemption from withholding tax under the Canada-U.S. tax treaty for U.S. dividends paid to an RRSP or RRIF, this exemption does not apply to U.S. dividends paid to a TFSA.
What are people investing their TFSA in?
People are still heavily into cash and close to cash holdings. A study from two years ago, found 44 per cent of holdings in TFSAs were in a high-interest savings accounts. Another 21 per cent were in guaranteed investment certificates. If you want to see your money grow you also have to respect your risk tolerance. You may want to look at your investment horizon.
TFSA vs RRSP
It’s hard to generalize which is better for a typical Canadian. RRSPs are generally geared towards reducing your taxable income when your marginal rate is high and then withdrawing the money in retirement when your income will theoretically be much lower. The answer is easy if you make $10,000 a year and you’re a young person — the TFSA is better — but the deduction you get from RRSP contributions are only part of the equation. It also depends on the flexibility that you are looking for. Once you get to the higher marginal rate that deduction is attractive but nothing stops you from taking that deduction and putting it in a TFSA and getting the benefit of both.
It’s that time again Labour day has come and gone the kids are back in school meaning that summer has unofficially ended. We are back and will have some helpful insights for you to read over the next few months. All the best from Henley Financial and Wealth Management. www.henleyfinancial.ca
Over the last year, I have been dealing with my mother who has decided that she would like to see my father again. The problem is he died 30 years ago. Yes he left us at the age of 52, the loss was hard but at that time my mother had lots of friends to entertain and years later I started a family. So she always busy and felt needed. Up until a few years ago, my mother was needed as she helped with my children. That has all changed, the girls are now teenagers and don’t even want my help and her friends have passed or moved on so she has been left feeling as though she is no longer needed. A few years ago, I was telling everyone that she would outlive me. But things changed, life changed, she took her final trip, a trip she had asked me to go on when I was a teenager and of course I refused. It was at a time when I was involved in sports and could not leave my teammates behind. She has traveled extensively but this was her dream destination a month-long trip to China.
She has always been a good saver and lives minimally, as she gets older, you can see she is overwhelmed by the costs of things. Her generation is very concerned about finances it is the way they have come through life. Most people over 75 have filled out forms that are 20 pages in length, or do their own income taxes, they live on small incomes, there are Guaranteed Income Supplement forms to fill out, and in her case, a small pension my father left her.
As it turns out I have found to maintain their independence, older seniors like my mom need a lot of help with their finances—even if they have healthy savings. Home-care services need to be paid for, bill payments need to be set up, and investments need to be managed. It’s a balancing act and the process is time-consuming, but it needs to be done if you want your parents to age comfortably. Unfortunately, my mother is not aging comfortably as she is suffering from kidney failure and a poor heart. She would not go to the doctor when she was sick she did not think it was necessary… she felt she is no longer needed.
Handling elderly parents’ finances is made even tougher by the awkward role reversal. Aging parents are often reluctant to even share financial information with their children, let alone relinquish control. My mother is that in a nutshell. She continues to refuse help on any level. In many cases, you may have no choice but to pick a neutral person to oversee a parent’s finances.
That’s why it’s important to do some advance planning before your parents become incapable of managing their money themselves. Every family should have a plan to safeguard their elderly parents’ finances when the time comes.
If your parents are having trouble handling their finances, don’t expect them to come to you for help. If they’re like most parents, they don’t want to be a burden. So be on the lookout for subtle signs they may be having problems. Can’t remember if they paid a bill or think they did pay the bill. If they repeat things often, or forget conversations you recently had. I do that to on occasion I guess that comes with age but you will start to notice the signs.
Ideally, communication between parents and siblings should start well before a parent needs help. The best time is when parents are starting to talk seriously about retirement. It’s just an intellectual activity then. The longer you leave it, the harder it will become.
Understand that total trust doesn’t happen overnight, I have not always had a good relationship with my mother but as an only child there is not much choice. In many cases, it’s hard for siblings to work well together. One often feels another is taking advantage. The key to making it work is transparency on all fronts.
Have frequent family gatherings or communicate by email or phone constantly speak candidly about retirement and old age. It will happen it’s not a secret. You should also talk about what happened in the meeting that transpired with lawyers, accountants, and advisors. Then you will be able to understand the process in the future.
Find out where your parents keep their safety deposit box and important documents. Make a list of their bank accounts and investment accounts, insurance documents, wills and the names of their accountant, lawyer, and financial advisor.
Open a joint bank account with your parents, deposit their CPP and OAS checks into it, and take over all bill payments. You should also find out where your parents’ income comes from, including government and employer pensions as well as RRIF withdrawals and any income from their investment portfolio. Find out who their beneficiaries are, what their financial wishes are, and how they want funeral arrangements handled.
Get legal power
While both parents are alive, make sure all non-registered accounts are held jointly: otherwise the surviving parent will need a will and death certificate to access those accounts. Also, ensure your parents have an up-to-date will and estate plan. A loss of capacity either suddenly, such as through a stroke, or gradually as with Alzheimer’s, may mean they never have the opportunity to clarify their intentions.
That’s why it’s also key to know if your parents have in place a power of attorney (POA) for health care as well as for finances and property. A POA will often name a child as a substitute decision maker. That person can sign documents, start or defend a lawsuit, sell a property, make investments, and purchase things for the parent, the POA usually comes into effect as soon as it’s signed and witnessed, but a parent can put a clause in saying it doesn’t come into effect until they’re incapacitated.
More than one person can be named as a POA: that way no one can act opportunistically and without accountability. If you’re concerned about mismanagement of funds, make sure your parents include a clause in their POA document that requires the decision maker to submit periodic financial statements to your parents’ accountant, adviser or lawyer.
10 key questions to ask your aging parents
You can start by asking your parents these key questions to ensure your family is prepared for the road ahead.
- Where do you keep your important papers—wills, investment account statements, life insurance policies, and others?
- Do you have a current will? Where do you keep it and when was the last time you updated it?
- Have you prepared a power of attorney (POA) documents? A POA designates who will take care of your affairs if you are unable to do so because of illness or cognitive decline. Your parents can designate one person to handle health decisions and another for financial decisions, or they can designate one person for both roles.
- Do you have a safety deposit box? If so, at which bank, and where do you keep the key?
- Where are your bank accounts? If you are incapacitated, where would I find the PIN and account information?
- Do you have credit cards and if so, who are they with? Have you been paying the balance off every month?
- Do you have a financial adviser, lawyer or accountant, and what is their contact information?
- Do you have life insurance policies? Who is the contact agent?
- Do you have any debt and if so, with whom? How much do you owe?
- Does anyone owe you money and if so, who?
Hopefully, this will help you start that conversation. I know from experience that once they get sick they have no interest in sharing information.
Most people are concerned about having enough money to meet their obligations at or in retirement. Using traditional planning methods such as buy term and invest the difference, and live off the earnings and retain capital are the most common methods used today.
This type of planning only works if you follow a regimented plan and you don’t spend the difference. If you fail to invest the rest… it lessens the quality of life that one should be able to enjoy in the active years of retirement! It is upside down and backwards!
With our low-interest rate environment, it’s difficult to find sustainability in your portfolio. One way to extend the life of your capital is to consider equities in the form of dividend earning stock.
This tends to be a source of hedging against tax, inflation, fees and other wealth transfers, however, using equities means taking more risk.
Who wants to take more risk leading into retirement?
If you would like advice on reducing the risk, or with what type of investment vehicle may be best for your situation please contact us at info@Henleyfinancial.ca
Visit us at at Henley Financial and Wealth Management
If indeed you are investing in equities please understand the risk involved within your investable assets. Investing in equities will depend on your risk tolerance and the reality of the situation. During retirement, you should lower the amount of Equities within your portfolio to protect you against the volatility of the markets. Leading up to retirement Equities can help build your portfolio but you must be able to accept the risk of volatility which the markets will provide.
Guaranteed Lifetime Withdrawal Benefit products offer a guaranteed income bonus and can provide a stable environment for investments moving forward with the option of a guaranteed lifetime income. This takes the guess work out the planning and provides you with a pension like asset.
Another strategy is to have adequate permanent life/asset insurance that frees up other assets such as non-registered savings, investment property equity or retained earnings in a business.
Having enough life insurance allows one to spend down taxable savings RRSP’s or RRIF’s during early/active retirement years (age 60-75) whereby you’re actually reducing the tax burden overall.
By deferring the use of RRSP’s and RRIF’s the tax on these assets is actually growing as invested capital. By using the funds sooner, rather than later, (yes you are paying more tax now) but you are paying a known tax, you have control over what the tax amounts are. If you wait long enough the government dictates the amount of tax owed yearly. Meaning if you defer too long, one conceivably can pay a much greater tax than ever saved by using the registered plan strategy!
Access equity sitting dormant in your paid off or very low debt home could also be a strategy that you could use during retirement. The reverse mortgage has been a component of retirement planning over the last few years based on the low-interest rates on borrowed money. Again this strategy requires some professional advice.
Life insurance lowers the pressure of the capital to perform and lessens market volatility risk. It also lessens government control risk. Meaning, by using a registered plan strategy you absolutely are in a partnership with the government. RRSP and RRIF products are very much a controlled revenue source for the C.R.A. your strategy will dictate the how much income they will receive on your behalf.
If you are interested in creating more spendable income during the early retirement years without fear of running out of money we can show you how. For the most part, we can increase your spendable income into and during retirement without any additional out of pocket expense!
If we can recover 1%-5% of gross income from dollars that are unnecessarily being transferred away from you through tax, fees and other opportunity costs which can be redistributed to your retirement plan and increase lifestyle along the way. Would you be interested?
Let us provide you with an overall review of your entire investment and financial plan. We will do this with no obligation from you to move forward with any recommendations we may have, or we may find that you are well on your way and continue on that path. Either way, a second opinion never hurt anyone.