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.
You may soon find yourself with a tax refund.
- How should you spend it?
- What is the right answer for you?
- Would you be interested in a value added idea?
Presented by Henley Financial & Wealth Management – please continue to read you may find this of some value.
The average individual tax refund is between $1,500 and $3,000. Not everyone will get a tax return essentially a return means that you paid the government too much in tax during the year and now they want you to have it back… For the chosen few people that do lend the government their own money to invest during the year on a tax free basis, that’s the biggest chunk of discretionary income they’ll see in a year. There’s a lot of temptation to spend this cash as is not readily accounted for so it’s essentially free money.
What would you do with that cash if was suddenly given to you?
Hmm, A Trip, Newest Phone, Clothes, Shoes, Dinner and Drinks (well more drinks than dinner), Raptors Tickets, Concert Tickets and a host of many other ideas come to mind.
Once you see the cheque or the deposit in you bank account a spending rush will come over you. Earning 1% in a high yield savings account does not seem very appealing. Investing in your portfolio for future returns that cannot be seen for years to come does not give you that warm and fuzzy feeling.
You could take a trip of a lifetime. How could that be a bad investment? The experience alone is worth a lifetime of memories. This will subside next month when you realize that you spent the return and then some and have to pay for those memories. Hopefully you took some beautiful pictures to share with your face book and instragram friends. Those will more than make up for the sticker shock price of the trip.
The other items or ideas mentioned are all short term memories but definitely worth the time spent if that’s what you want. Just remember there is a difference between needs and wants.
So what should you do with your tax return? Here is an idea that will work but isn’t sexy at all. Double up on a mortgage payment. Or Pay down a credit card bill as it is the highest interest debt that you are carrying. Either is a good choice…
If you think about it paying down your mortgage with your return you are one month closer to paying off the principle on your house. This is one of the biggest assets you own in your portfolio especially with today’s housing market. Since mortgage rates are historically quite low, you could potentially make more money by investing that return in the market but as we know the market can be very volatile.
In any case it’s just a thought and the value to you in the long run is a great basic investment in yourself and your family.
The greatest compliment we receive is being introduced to family, friends and co-workers. Let us know if you would like to introduce someone to Henley Financial and Wealth Management. Contact us Henley Financial & Wealth Management.
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.
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.
Ask yourself these 10 questions? They will help you decide if you are ready…
1. When do you want to retire?
2. What percentage of your current income do you expect to need in retirement?
3. How do you plan to spend your money in retirement?
4. Have you considered your lifestyle needs in retirement?
5. What guaranteed sources of income can you count on in retirement?
6. Do you plan to work part-time or full-time in retirement?
7. How do health and wellness factor into your retirement plan?
8. Are you ready for the unexpected events in life?
9. How will you keep your money working in retirement?
10. Do you plan to leave a legacy?
Like everyone around you saving has become second nature. You have saved wisely and built a sizeable retirement fund to provide for your retirement. The next question is one that will confuse many… Are you ready?
Think about how you will keep your money growing. Talk to a financial security advisor about investment solutions for retirees.
Let us help you at Henley Financial & Wealth Management.
Contact us at email@example.com for more information regarding investment solutions.
Above are 10 questions… Questions that need answers so that you can retire into the lifestyle that you have become familiar with living. Studies show us that you spend more money on the weekends (or days off) because these are generally the days you have time to spend your hard earned money. So consider this in retirement every day is a weekend or a day off.
When do you want to retire? This is a personal question with many variables being attached for each individual. How much money do you have saved? Do you like your job? Are you healthy? When we change over from a saving to spending cycle the timing of your retirement is crucial to building a fund and assessing how long you will need it to last. If you like your job you may want to work longer as a consultant, this will help fund your retirement income. Although health will be the biggest factor to your retirement date, many workers are forced into retirement, not because of age but health issues. I guess it comes down to want to retire or need to retire hopefully the decision is yours to make.
What percentage of your income today will you need in the future to retire? This is a number that needs to be calculated into the retirement plan. Most financial advisors will show you a figure of 75% of today’s income going forward. To be honest that is a generous figure. Most of your big-ticket items will have been paid for by this time. You must remember however that you will are likely to make the most income in your lifetime during the last 5 years of employment before you retire. So your final valuation is something that must be continually updated while planning for the future.
What are your current spending habits? Are you a saver or a spender? Because these habits will not likely change in retirement, and as always you must plan for the unexpected events which will be out of your control. It goes without saying savers are more likely to save more and have more than the spenders, so spenders must work to save more now to have more in retirement. This is a common sense approach but you would be surprized by the lack of respect for compounding interest and how it works in your favor over time.
How many days a year will you travel or play golf? If you retire at age 65 and live till the age of 90… meaning you will have less than 10,000 days or 9,125 days to be exact. That would be a fair amount of travel and golf for anyone; some planning will have to be involved regarding the answer to those questions. I believe these answers to be the top answers to the question of… what do you want to do when you retire? So to live that lifestyle you will have to plan for future expenses that you may not already have. If you buy a condo in Florida you will have to account for the condo fees and associated upkeep costs of two homes to allow for the travel and golf adventure you have planned. If you plan to travel the world you will have to account for the currency exchange rates and the costs associated with travel to the exotic locations you want to visit.
Calculate how much income you’ll receive during retirement – from sources such as Canada Pension Plan (CPP), Quebec Pension Plan (QPP), and Old Age Security (OAS) payments. Then, determine how much additional income you’ll need and where this will come from. While investment income is a nice bonus, you shouldn’t rely on it to pay for necessities.
When you consider retirement planning, make sure to account for unpredictable events – both financial and personal. As we said before plan for the unexpected. Make sure your retirement savings are strong enough to support you through a future economic downturn, and a rise in the cost of living and a long life.
If you plan for the future you will be able to enjoy life to the fullest, if you fail to plan for the future it will get away from you and your plans will have to be alterred. The choice is yours choose wisely.