Are you Missing out?

Are you Missing out?

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 The Tories increased the annual contribution limit to $10,000 in 2015 but the Liberals quickly repealed that when they came into power and reduced annual contributions to $5,500 for 2016, still indexed to inflation.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.

Eligible investments

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.

Unused 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.

 

The past does not predict the future…

The past does not predict the future…

After the last debate for the presidency of the United States of America, it’s hard to imagine that these are the best two candidates to lead a world power for at least the next four years. You would think with all the people in the political ring you would have someone who cares about our future generations and not about what happened 20 years ago and how that makes you unfit to lead. If having a skeleton in the closet means you will be called out when you run for office. Then you would never have a leader in the free world as we have all done something that would consider us unfit to lead a country.

Henley Financial and Wealth Management brings you this article with consideration of what might happen moving forward.

Predicting what will happen in the stock market is hard. Nope, scratch that. It’s pretty much impossible. But in light of the looming November vote, I took a look at what happened in the markets over the past few decades in relation to US presidential elections. However, before I get to that, I would like to emphasize that when it comes to markets, the past does not predict the future. And so I am not making any predictions here about what will happen on  November 9, 2016, the morning after.

What happens in the markets during the lame duck session between an election and the inauguration of the new president? The performance of the stock market between Election Day and Inauguration Day might be taken, in part, as a statement of investor confidence — or lack thereof — in the incoming administration.

The line of thinking is that Republicans are better for the markets because they tend to push for more pro-business policies, such as lower taxes and less regulation. However, the stock market has historically performed better under Democratic presidents. American presidents since 1945 show the average annual gain under the blues (Democrats) was 9.7%, while under the reds (Republicans)  was 6.7%.

The only two presidents who saw negative market returns during their tenure were Republicans: Richard Nixon, who was in office during the Arab oil embargo, and George W. Bush, who closed out his second term as the Financial Meltdown in 2008.

Taking it a step further, both poor and good stock performance in the year before or after an election had less to do with the president’s party and more to do with what was going on in the actual economy.

As for Obama, he took office the year after stocks lost nearly 40%. And notably, days before stocks touched their lowest in March of 2009, the president stated, “What you’re now seeing is profit and earnings ratios are starting to get to the point where buying stocks is a potentially good deal if you’ve got a long-term perspective”. Stocks are up by about 209% since he said that. Is it because Obama was a great president and his policies changed the world?

No the strong performance of the market from 2009, was not due to the election of President Obama and retention of a Democrat-controlled Congress in 2008. It resulted instead from a recovery in the economy after the Great Financial Crisis.

So what does this mean for November 8?

The result of that election is unlikely to have a major bearing on the performance of the US stock market.

The markets don’t like uncertainty, as the market sees it, Hillary Clinton is a known player whose policies are expected to be largely a continuation of the current administration.

Trump and his economic positions, however, are less predictable and do not always follow the party, he is for tax cuts and deregulation, but against free trade. Thus, he is perceived as more of a political risk in the market.

That sort of emotional response to a political shock is actually quite typical of investor and, more broadly, human behavior. Unexpected and potentially destabilizing political events tend to make traders and investors nervous, which then sometimes leads to volatility in financial markets. But as history has shown time and time again, these events generally do not have a sustained impact on markets.

Yes, investor sentiment in the immediate aftermath of the election can affect the market. And, yes, presidential policies affect the economy, which then, in turn, can affect the markets.

However, there are a bunch of other factors not wholly connected to presidential policies — such as oil-price shocks, productivity shocks, and things like China’s devaluation of its currency — that all influence what happens with the stock market. In any case, perhaps the most telling historical debate with respect to the relationship between presidents and the stock market (or lack thereof) is the following. Stocks saw their best gains under Republican Gerald Ford — but he wasn’t elected president, and he wasn’t even the original vice president on Richard Nixon’s ticket in 1972.

So whoever wins this circus act called the US presidential election of 2016, the markets will continue to perform based on solid economic performance until that performance is upended by a real economic event.

Growing Old is Inevitable, Growing up is Optional! But we do have to deal with it…

Growing Old is Inevitable, Growing up is Optional! But we do have to deal with it…

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.

 

Gather information

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.

  1. Where do you keep your important papers—wills, investment account statements, life insurance policies, and others?
  2. Do you have a current will? Where do you keep it and when was the last time you updated it?
  3. 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.
  4. Do you have a safety deposit box? If so, at which bank, and where do you keep the key?
  5. Where are your bank accounts? If you are incapacitated, where would I find the PIN and account information?
  6. Do you have credit cards and if so, who are they with? Have you been paying the balance off every month?
  7. Do you have a financial adviser, lawyer or accountant, and what is their contact information?
  8. Do you have life insurance policies? Who is the contact agent?
  9. Do you have any debt and if so, with whom? How much do you owe?
  10. 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.

 

Do you have a plan?

Do you have a plan?

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.

Helping you understand… How RRSP’s Work!

Helping you understand… How RRSP’s Work!

How RRSPs work

A Registered Retirement Savings Plan (RRSP) is an account, registered with the federal government, which you use to save for retirement. RRSPs have special tax advantages.

3 tax advantages

  • Tax-deductible contributions – You get immediate tax relief by deducting your RRSP contributions from your income each year. Effectively, your contributions are made with pre-tax dollars.
  • Tax-sheltered earnings – The money you make on your RRSP investments is not taxed as long as it stays in the plan.
  • Tax deferral – You’ll pay tax on your RRSP savings when you withdraw them from the plan. That includes both your investment earnings and your contributions. But you have deferred this tax liability to the future when it’s possible that your marginal tax rate will be lower in retirement than it was during your contributing years.

How much you can contribute

Anyone who files an income tax return and has earned income can open and contribute to an RRSP. There are limits on how much you can contribute to an RRSP each year. You can contribute the lower of:

  • 18% of your earned income in the previous year, or
  • the maximum contribution amount for the current tax year: $24,930 for 2015.

If you are a member of a pension plan, your pension adjustment will reduce the amount you can contribute to your RRSP.

You can carry forward unused contributions

If you don’t have the money to contribute in a year, you can carry forward your RRSP contribution room and use it in the future.

Investments you can hold in an RRSP

Investments that can be held in an RRSP are called qualified investments. They include:

  • Cash
  • Gold and silver bars
  • Gic’s
  • Savings bonds
  • Treasury Bills
  • Bonds(including government bonds, corporate bonds and strip bonds)
  • Mutual funds (only RRSP-eligible ones)
  • ETF’s
  • Equities (both Canadian and foreign stocks)
  • Canadian mortgages
  • Mortgage-backed securities, and
  • Income Trusts

Investments you can’t hold in an RRSP

  • Precious metals
  • Personal property such as art, antiques and gems
  • Commodity futures contracts

As of March 22, 2011, you also can’t hold any of the following investments in your RRSP:

  • Prohibited investments – Examples: debt you hold, investments in entities in which you hold an interest of 10% or more.
  • Non-qualified investments – Examples: shares in private holding companies, foreign private companies and real estate.

If you buy these investments for your RRSP, you will be charged a tax equal to 50% of their fair market value. You may apply for a refund if you dispose of the investment from your RRSP by the end of the year after the year the tax applied.

Understand the risks

The value of your RRSP may go down as well as up, depending on the investments it holds.

How long your RRSP can stay open

You must close your RRSP in the year you turn 71. You can withdraw your RRSP savings in cash, convert your RRSP to a RIFF or buy an Annuity.

Where to open an RRSP account

  • Banks and trust companies
  • Credit unions
  • Mutual fund companies
  • Investment firms (for self-directed RRSPs)
  • Life insurance companies

Henley Financial and Wealth Management  We are here to help you create financial security. Contact us for more information regarding your RRSP.

You may also contact us at the following Info@henleyfinancial.ca

Our next article we will discuss RRSP or TFSA?

How much money will you need to retire the way you want?

How much money will you need to retire the way you want?

We talk of retirement when you put away your cares and worries, kick back and enjoy the wealth you’ve worked so hard to accumulate over the years.

Retirement for many is an exercise in calculating odds and balancing one probability against another. Should we go on vacation? Or should we stay at home because we need the money years from now to pay for a nursing home? Should we invest aggressively to increase our chances of growing our nest egg? Or play it safe and take as few chances as possible?

The problem is that we are living longer with new technologies and drugs thus increasing our life span. Back in the 1920s, a newborn Canadian could expect to live for less than 65 years. Today, a baby born in Canada can expect to live to 84, that is a 19-year difference and means more money is needed. Our parents and grandparents didn’t spend a lot of time thinking about retirement! Why? They had a pension plan that would take care of them. Well we all know where those pension plans are going, in many cases they no longer exist or have been taken away as cost saving measure for the employers. Meaning you now have to budget and plan for those years after retirement.

A lot can go wrong over time, we don’t have a crystal ball to predict the future. Even if you set things up perfectly for a nice retirement, fate has an odd sense of humor. After years of planning, you may die young—or live long, long past your best before date.

Most people do believe they will live to life expectancy. What you need to know is the average life expectancy is just the median in a huge range of possibilities that the actuary calculates on your behalf.

Life expectancy figures are usually expressed in terms of what a newborn child can expect. It assumes there will be a steady number of deaths at every age along the way—a few people will die in childhood, a few others in adolescence, and so on. Those early deaths drag down the overall figure. So if you’ve dodged disease and accidents and made it to 65, your life expectancy is considerably greater than the average for a newborn would suggest. Someone who is 65 today has a better than even chance of living to 84 and past.

The problem, from a financial perspective, is that there are no guarantees. A 65-year-old man who retires today faces an 10% chance of dying before he turns 70. He also faces the same 10% chance of living past 95. So how do we plan for that discrepancy?

So what if our 65-year-old man may expect to die relatively young. He may burn through his cash and treat himself to lots of expensive indulgences— only to find that, Oops, he has to live the last quarter century of his life trying to make ends meet on a meager budget.

On the other hand, he could play it safe and save his money to ensure he will have enough to last until he meets his maker in years and years to come. But finds himself in a hospital bed at 68 or 69, with a life threatening diagnosis, and cursing because he did not enjoy life more when he had the chance. We all know someone who was waiting to retire to go out and explore and they never made the trip.

So how must you approach retirement?

A smart approach is to think of your retirement plans as consisting of two separate figures: one for things you must have, the other for things it would be nice to have.

The first and most important part of retirement planning is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital.

You can estimate this figure by adding up how much you spend in all areas, then deducting the expenses that will disappear in retirement— no more mortgage payments, no more child care or tuition payments, no more retirement savings. You should also deduct any luxuries that you could live without in retirement, such as eating out frequently or having a second car.

The amount that’s left represents what it would cost you to maintain the essentials of your current lifestyle in retirement—and that figure is probably a lot lower than you think. Most middle-class couples are delighted to discover that they arrive at a must-have figure that amounts to just $40,000 to $50,000/ couple a year in after-tax income.

What will you do in retirement?

We all have dreams and you need to budget for them. Maybe you want to golf every day, or winter down south. How much will it cost to retire with these dreams? Figure that out as the second part of your budget for retirement planning.

Remember when assessing your dream list, age takes its toll. Right now you may dream of travelling all the time. Once you’re past your early 70s, however, the lust to travel maybe diminished. Similarly, you may find that golfing every day is no longer a pleasure once you’ve hit 75. So might I suggest when budgeting for luxuries, it may make sense to set a larger budget for your early retirement years, and a smaller one for the later years.

Will the Government contribute?

Yes Canada Pension Plan (CPP) will be around for a while to come. Old Age Security (OAS) will also be around, although OAS benefits have been delayed until age 67 for those born after 1962. If you’ve worked in Canada all your life, you and your partner are each eligible to receive approximately $18,000 a year from those two sources, this will depend on what you earned during your working years, and how early you start collecting your pension. You can start collecting reduced CPP as early as age 60. That money will keep pouring in as long as you live, with no particular planning required on your part.

You should compare what government will provide you with and what you figure your minimum retirement needs will be. If you and your spouse estimate you can maintain the needs parts of your current life, of $50,000 a year, the good news is that retirement becomes a very affordable proposition. You and your partner may have to add only $32,000 a year in after-tax income from corporate pensions or savings to ensure the key components of your retirement plan.

Pensions and RRSPs

You may be fortunate enough, if you’re a public servant or work in the right industry, to be the recipient of a defined benefit pension. If so, you can simply contact your employer’s human resources department to find out the size of the monthly retirement cheque you can expect.

If that amount is enough to bridge the gap between government stipends and your retirement needs, then congratulations—your retirement planning is largely done. You may still want to contribute to an RRSP to finance luxuries, to provide you with a buffer against inflation, and to guard against the possibility that your employer will go bust and renege on its pension promises, but, in all probability, those contributions will simply increase your security, not determine your retirement lifestyle.

Maybe you don’t have a pension plan. Or perhaps your employer’s pension plan is a defined contribution plan that only promises how much your employer will contribute each year you work, but leaves the actual investing up to you. Or maybe your employer’s defined benefit payouts aren’t enough to bridge the gap between government pensions and what you need. In any of those cases, you’re going to have to deal with uncertainty.

What is your risk tolerance?

No portfolio, though, can guarantee a given return. What makes planning during retirement so difficult is that you’re drawing down your portfolio at the same time as the markets are moving up and down. The first few years of your retirement are particularly crucial. If you have the bad luck to retire at just the moment that the markets head into a bear market plunge—as they did in late 2008— your withdrawals combined with market losses could put a hole in your portfolio from which it will never recover. On the other hand, if you retire at the same moment the markets decide to go on a tear, the surging market returns may more than cover your early withdrawals. You may actually end up increasing your net worth in retirement. Unfortunately, this is something you can’t control.

If you want to make your money last for 30 years, count on withdrawing no more than 5% of its initial value each year, adjusted for inflation. You should begin your retirement by withdrawing $5,000 a year for each $100,000 you start with. If inflation were running at 2% a year, you would withdraw $5,100 the next year, $5,202 the following year, and so on.

The 5% figure comes as a shock to many people, who assume that they can count on their portfolio for 10% or more in the way of annual payouts. At such an aggressive withdrawal plan you would need to assume more risk in your portfolio to make up for any shortfall that may happen during the retirement years. This may not be advisable, as you would have to time the market well to support a continued 10% rate of return.

You will require balance.

Here’s where individual preferences become important. While a 5% withdrawal rate gives a well-balanced portfolio an excellent chance of surviving 30 years. Chances are that things will turn out better than the worst case scenario. If they do, you will be leaving behind a small inheritance. Your heirs will no doubt like this arrangement, and if you want to leave them something, that’s fine—but it’s probably not the optimal deal for you. In fact, if you apply the 5% withdrawal figure to your entire portfolio, you’re probably living on a lower income than you could during your retirement years.

An alternative idea is to treat the needs and wants of your portfolio in different ways. When it comes to your needs portion, play it safe and count on a 5% withdrawal rate. If you calculate, for instance, that you’re going to need $30,000 a year on top of CPP and OAS to provide you with the necessities, you should accumulate at least $600,000 in RRSP savings, or the equivalent in corporate pension plans. That $600,000 should be able to fund an inflation-adjusted withdrawal rate of $30,000 for as long as you live.

If you don’t want to worry about the volatility of the market, you can use some of your needs savings to purchase an annuity that will provide you with a guaranteed payout for the rest of your life. Be sure to compare annuities from different companies to get the best possible deal. Look at all the different options available—some annuities pay your heirs a lump sum if you die early; some are inflation-protected; some cover both you and your spouse.

Once you’ve built a fortress around the needs component of your portfolio, you can treat the wants portion with more freedom. You can and should plan to run through a chunk of your wants budget in the early years of retirement, when you’re going to be most active. By the time you turn 75, your appetite for luxuries is likely to diminish, and by the time you hit 85, many of your discretionary expenses will have dropped away completely. If your wants money is running low at that point, so be it—you will have extracted maximum value from your wants money when you were still healthy enough to enjoy it, while protecting your future by ensuring that your needs are well covered.

contact us at http://info@henleyfinancial.ca

Note: The numbers used in this illustration are for the purpose of easy calculations. We do not suggest that these numbers are hard facts but just guidelines to show you how you should think about your retirement and accumulation. The value of your portfolio is directly related to how much you want to save and what your needs and wants will be in the future.

How much money will I need to retire the way I want?

How much money will I need to retire the way I want?

We talk of retirement when you put away your cares and worries, kick back and enjoy the wealth you’ve worked so hard to accumulate over the years.

Retirement for many is an exercise in calculating odds and balancing one probability against another. Should we go on vacation? Or should we stay at home because we need the money years from now to pay for a nursing home? Should we invest aggressively to increase our chances of growing our nest egg? Or play it safe and take as few chances as possible?

The problem is that we are living longer with new technologies and drugs thus increasing our life span. Back in the 1920s, a newborn Canadian could expect to live for less than 65 years. Today, a baby born in Canada can expect to live to 84, that is a 19-year difference and means more money is needed. Our parents and grandparents didn’t spend a lot of time thinking about retirement! Why? They had a pension plan that would take care of them. Well we all know where those pension plans are going, in many cases they no longer exist or have been taken away as cost saving measure for the employers. Meaning you now have to budget and plan for those years after retirement.

A lot can go wrong over time, we don’t have a crystal ball to predict the future. Even if you set things up perfectly for a nice retirement, fate has an odd sense of humor. After years of planning, you may die young—or live long, long past your best before date.

Most people do believe they will live to life expectancy. What you need to know is the average life expectancy is just the median in a huge range of possibilities that the actuary calculates on your behalf.

Life expectancy figures are usually expressed in terms of what a newborn child can expect. It assumes there will be a steady number of deaths at every age along the way—a few people will die in childhood, a few others in adolescence, and so on. Those early deaths drag down the overall figure. So if you’ve dodged disease and accidents and made it to 65, your life expectancy is considerably greater than the average for a newborn would suggest. Someone who is 65 today has a better than even chance of living to 84 and past.

The problem, from a financial perspective, is that there are no guarantees. A 65-year-old man who retires today faces an 10% chance of dying before he turns 70. He also faces the same 10% chance of living past 95. So how do we plan for that discrepancy?

So what if our 65-year-old man may expect to die relatively young. He may burn through his cash and treat himself to lots of expensive indulgences— only to find that, Oops, he has to live the last quarter century of his life trying to make ends meet on a meager budget.

On the other hand, he could play it safe and save his money to ensure he will have enough to last until he meets his maker in years and years to come. But finds himself in a hospital bed at 68 or 69, with a life threatening diagnosis, and cursing because he did not enjoy life more when he had the chance. We all know someone who was waiting to retire to go out and explore and they never made the trip.

So how must you approach retirement?

A smart approach is to think of your retirement plans as consisting of two separate figures: one for things you must have, the other for things it would be nice to have.

The first and most important part of retirement planning is taking care of things you must have. You want to ensure you have enough to live on without feeling deprived of anything vital.

You can estimate this figure by adding up how much you spend in all areas, then deducting the expenses that will disappear in retirement— no more mortgage payments, no more child care or tuition payments, no more retirement savings. You should also deduct any luxuries that you could live without in retirement, such as eating out frequently or having a second car.

The amount that’s left represents what it would cost you to maintain the essentials of your current lifestyle in retirement—and that figure is probably a lot lower than you think. Most middle-class couples are delighted to discover that they arrive at a must-have figure that amounts to just $40,000 to $50,000/ couple a year in after-tax income.

What will we do in retirement?

We all have dreams and you need to budget for them. Maybe you want to golf every day, or winter down south. How much will it cost to retire with these dreams? Figure that out as the second part of your budget for retirement planning.

Remember when assessing your dream list, age takes its toll. Right now you may dream of travelling all the time. Once you’re past your early 70s, however, the lust to travel maybe diminished. Similarly, you may find that golfing every day is no longer a pleasure once you’ve hit 75. So might I suggest when budgeting for luxuries, it may make sense to set a larger budget for your early retirement years, and a smaller one for the later years.

Will the Government contribute?

Yes Canada Pension Plan (CPP) will be around for a while to come. Old Age Security (OAS) will also be around, although OAS benefits have been delayed until age 67 for those born after 1962. If you’ve worked in Canada all your life, you and your partner are each eligible to receive approximately $18,000 a year from those two sources, this will depend on what you earned during your working years, and how early you start collecting your pension. You can start collecting reduced CPP as early as age 60. That money will keep pouring in as long as you live, with no particular planning required on your part.

You should compare what government will provide you with and what you figure your minimum retirement needs will be. If you and your spouse estimate you can maintain the needs parts of your current life, of $50,000 a year, the good news is that retirement becomes a very affordable proposition. You and your partner may have to add only $32,000 a year in after-tax income from corporate pensions or savings to ensure the key components of your retirement plan.

Pensions and RRSPs

You may be fortunate enough, if you’re a public servant or work in the right industry, to be the recipient of a defined benefit pension. If so, you can simply contact your employer’s human resources department to find out the size of the monthly retirement cheque you can expect.

If that amount is enough to bridge the gap between government stipends and your retirement needs, then congratulations—your retirement planning is largely done. You may still want to contribute to an RRSP to finance luxuries, to provide you with a buffer against inflation, and to guard against the possibility that your employer will go bust and renege on its pension promises, but, in all probability, those contributions will simply increase your security, not determine your retirement lifestyle.

Maybe you don’t have a pension plan. Or perhaps your employer’s pension plan is a defined contribution plan that only promises how much your employer will contribute each year you work, but leaves the actual investing up to you. Or maybe your employer’s defined benefit payouts aren’t enough to bridge the gap between government pensions and what you need. In any of those cases, you’re going to have to deal with uncertainty.

What is your risk tolerance?

No portfolio, though, can guarantee a given return. What makes planning during retirement so difficult is that you’re drawing down your portfolio at the same time as the markets are moving up and down. The first few years of your retirement are particularly crucial. If you have the bad luck to retire at just the moment that the markets head into a bear market plunge—as they did in late 2008— your withdrawals combined with market losses could put a hole in your portfolio from which it will never recover. On the other hand, if you retire at the same moment the markets decide to go on a tear, the surging market returns may more than cover your early withdrawals. You may actually end up increasing your net worth in retirement. Unfortunately, this is something you can’t control.

If you want to make your money last for 30 years, count on withdrawing no more than 5% of its initial value each year, adjusted for inflation. You should begin your retirement by withdrawing $5,000 a year for each $100,000 you start with. If inflation were running at 2% a year, you would withdraw $5,100 the next year, $5,202 the following year, and so on.

The 5% figure comes as a shock to many people, who assume that they can count on their portfolio for 10% or more in the way of annual payouts. At such an aggressive withdrawal plan you would need to assume more risk in your portfolio to make up for any shortfall that may happen during the retirement years. This may not be advisable, as you would have to time the market well to support a continued 10% rate of return.

You will require balance.

Here’s where individual preferences become important. While a 5% withdrawal rate gives a well-balanced portfolio an excellent chance of surviving 30 years. Chances are that things will turn out better than the worst case scenario. If they do, you will be leaving behind a small inheritance. Your heirs will no doubt like this arrangement, and if you want to leave them something, that’s fine—but it’s probably not the optimal deal for you. In fact, if you apply the 5% withdrawal figure to your entire portfolio, you’re probably living on a lower income than you could during your retirement years.

An alternative idea is to treat the needs and wants of your portfolio in different ways. When it comes to your needs portion, play it safe and count on a 5% withdrawal rate. If you calculate, for instance, that you’re going to need $30,000 a year on top of CPP and OAS to provide you with the necessities, you should accumulate at least $600,000 in RRSP savings, or the equivalent in corporate pension plans. That $600,000 should be able to fund an inflation-adjusted withdrawal rate of $30,000 for as long as you live.

If you don’t want to worry about the volatility of the market, you can use some of your needs savings to purchase an annuity that will provide you with a guaranteed payout for the rest of your life. Be sure to compare annuities from different companies to get the best possible deal. Look at all the different options available—some annuities pay your heirs a lump sum if you die early; some are inflation-protected; some cover both you and your spouse.

Once you’ve built a fortress around the needs component of your portfolio, you can treat the wants portion with more freedom. You can and should plan to run through a chunk of your wants budget in the early years of retirement, when you’re going to be most active. By the time you turn 75, your appetite for luxuries is likely to diminish, and by the time you hit 85, many of your discretionary expenses will have dropped away completely. If your wants money is running low at that point, so be it—you will have extracted maximum value from your wants money when you were still healthy enough to enjoy it, while protecting your future by ensuring that your needs are well covered.

Note: The numbers used in this illustration are for the purpose of easy calculations. We do not suggest that these numbers are hard facts but just guidelines to show you how you should think about your retirement and accumulation. The value of your portfolio is directly related to how much you want to save and what your needs and wants will be in the future.