CPP & RRIF Income: Thinking Outside the Box

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By Erin Gendron, May 20, 2021

Most new clients coming into our practice hold two very common assumptions about retirement income.

The first is that any time you can defer paying tax, you should, and that means holding off on converting your RRSP into a RRIF until the statutory deadline – the end of the year you turn 71. If this is not possible, you should minimize your RRIF payments to the greatest possible extent by relying on other sources of income.

The second is that as soon as you qualify for Canada Pension Plan (CPP) payments – age 60 – you should start taking them.

While this approach may be suitable for some, for many people – particularly those with significant savings and potential for longer-than-average life expectancy – acting on these assumptions would mean leaving a surprisingly large amount of retirement income on the table.

Bucking conventional wisdom

Instead of taking CPP payments early and RRIF income late, many would benefit from doing the exact opposite: delaying CPP until age 70 – or as close to age 70 as possible – and starting RRIF payments well in advance of the conversion deadline to meet cash flow needs.

When you take CPP before age 65, your benefits get cut by 0.6% a month, or 7.2% per year. This means that if you start taking CPP at age 60, you’ll see a total reduction of 36%. By contrast, if you start taking CPP after age 65, your benefits increase by 0.7% a month, or 8.4% a year, which means that delaying for as long as possible – to age 70 – boosts your CPP payments by a startling 42%.

A recent study put a dollar figure on this difference, explaining that “an average Canadian receiving the median CPP income who chooses to take benefits at age 60 rather than age 70 is forfeiting over $100,000 (in current dollars) worth of secure lifetime income.” Despite this, over the past decade most Canadians began taking CPP at age 60, with fewer than 1% holding off until age 70.

Let’s take a look at a hypothetical, but very typical, example to illustrate how this powerful insight can be integrated into a tailored, holistic retirement income plan.

Case Study: Bob & Judy

Long-time neighbours Bob and Judy both plan to retire at age 60 after decades of hard work and diligent saving. In addition to a $30,000 annual pension, they each have $500,000 in RRSP savings and both are eligible for $1,100 in monthly CPP payments at age 65. A $4,500 net monthly income ($54,000 annually) would allow them to live the retirement lifestyle they each envision for themselves.

Bob and Judy have nearly identical financial circumstances, apart from one very important detail: Judy has an Investment Advisor, while Bob does not.

CPP: Worth the wait

Bob begins taking his CPP benefits as soon as he retires. Like most people, he’s focused on the short term and concludes that since he’s eligible to have that extra money in his pocket, he may as well take it. He receives $704 per month ($8,448 annually), which is well below the $1,100 he would have received had he waited until age 65 and less than half of the $1,562 he would have pocketed had he waited until age 70.

Bob enjoys a very fulfilling retirement and passes away at the end of his eighty-seventh year. Overall, he collected $312,000 in CPP income (pre-tax) over his 27 years of retirement.

Judy takes a very different approach. At the suggestion of her advisor, who always encourages long-term thinking, she delays her CPP payments until age 70. For the income she needs until that time, she makes withdrawals from her retirement savings. Once Judy turns 70, she begins collecting $1,562 in monthly CPP benefits ($18,744 annually), which her advisor points out is 42% higher than what she would have received had she started taking CPP at age 65.

Like Bob, Judy enjoys a fulfilling retirement and passes away at the end of her eighty-seventh year. Over the course of her 27-year retirement, she collects $487,000 in CPP income (gross).

Bob’s lifetime loss for taking CPP early is $175,000 (the difference between Judy’s $487,000 and his $312,000). This loss becomes particularly important when we consider that Bob had a 45% chance of living to age 95, which would have significantly increased his cash-flow needs.

RRIFs, death & taxes

Judy had to rely on higher RRIF withdrawals to meet her income needs in her early retirement years, while Bob took more modest withdrawals to meet his after-tax income goal. What impact does this have over the long term?

Assuming equal rates of return, at age 70, Bob’s RRIF is valued at $444,000, while Judy’s is $336,000. Importantly, however, at age 70, Judy’s income needs are met with her increased CPP income, and as a result her RRIF withdrawals can be saved in her TFSA and non-registered account for future use.

Fast-forward to age 87, Bob’s RRIF is now worth $256,000. Approximately $137,000 in taxes will be payable on this amount by his estate, leaving a net estate value of $119,000.

At age 87, Judy’s RRIF is worth $222,000, while her TFSA and non-registered account have grown to $85,000, for a total of $307,000. Estate taxes of $117,000 leave a net estate value of $190,000, which is $71,000 more than what Bob was able to leave to his loved ones.

Final thoughts

As is often the case in life, the most common way of doing things isn’t necessarily the best way. And so it is with retirement income planning.

For many, delaying CPP and relying more on RRIF withdrawals during the early years of retirement can result in more income overall, a lower lifetime tax bill, and a larger bequest to loved ones and charities.

As with all aspects of wealth management, your best course is to speak with a specialist – an Investment Advisor with expertise in holistic financial planning – to learn which approach to retirement income is most appropriate for your personal financial circumstances.

Erin Gendron, CFP® is an Investment Advisor and Financial Planner at CrossPoint Financial, iA Private Wealth in Ottawa, Ontario. She can be reached at (613) 228-7777 or erin@crosspointfinancial.ca

This article is a general discussion of certain issues intended as general information only and should not be relied upon as tax or legal advice. Please obtain independent professional advice, in the context of your particular circumstances. iA Private Wealth Inc. is a member of the Canadian Investor Protection Fund and the Investment Industry Regulatory Organization of Canada. iA Private Wealth is a trademark and business name under which iA Private Wealth Inc. operates.

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Understanding Fees

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By iA Private Wealth, May 27, 2021

Many people invest because they believe it’s a good way to achieve their financial goals. They also know that getting professional financial advice can help them invest better.

If you’re working with a financial advisor (or considering it), you should understand how advisors are compensated. The topic of fees can be complicated, but we’ll stick to the basics.

There are three main forms of advisor compensation: a commission-based model, a fee-based model or by salary.

Commission-based. Advisors working in this structure receive compensation when their clients buy or sell an investment (e.g., mutual funds, exchange-traded funds or stocks). The commission they earn may depend on the investment type, the dollar value of a trade or other variables. Advisors may also receive ongoing compensation from fund companies in relation to the funds their clients hold (more on that later).

Fee-based. Advisors working in this structure earn a fee based on the value of assets they manage on a client’s behalf. Even if a client makes many trades and frequently uses certain advisory services, the fee charged remains a prearranged percentage (e.g., 1%) of the value of assets being managed. Sometimes the fee percentage declines as a client’s assets increase.

Salary. An advisor working for a bank or credit union will often earn an annual salary plus a performance-based bonus. Salaried advisors provide value to clients but may not hold the same industry licencing as commission- or fee-based advisors, which may narrow the range of services they can offer.

Some advisors are compensated through a mixed structure. For example, they may charge a flat fee for creating a financial plan and earn commission on trades they execute for your account.

Management expense ratio (MER)

If you invest in mutual funds, segregated funds or ETFs, you’ve likely heard about MERs. They’re calculated as a percentage (e.g., 2%) of fund assets and deducted from the value of your investment. MERs are used to compensate fund managers and dealers, and to pay related taxes.

Fund manager. This is the firm that operates the fund you invest in. They set the fund’s strategy and objectives, and employ portfolio managers who decide what (and when) to buy and sell, in order to help enhance fund returns and manage risk. They also provide administrative duties like recordkeeping, as well as legal, accounting, audit and custodial services. For these important duties, fund managers earn a portion of the MER.

Dealer. This is the firm where your advisor is registered. Dealers maintain account records, produce and deliver account statements, and provide the technology for online account access. Dealers also ensure their investment advisors meet all regulatory requirements. Part of a dealer’s MER allocation (also called a “trailer fee”) typically goes to the advisors responsible for client-oriented tasks like planning, portfolio construction and monitoring, and trade execution.

Taxes. A portion of the MER is used to cover federal and provincial taxes charged on fees and services related to the fund manager and dealer.

Client Relationship Model 2 (CRM2)

Implemented in 2017, an industrywide initiative known as CRM2 obliged dealers to provide clients with a personalized annual report that summarizes charges and compensation related to a client’s account. This report is designed to be transparent and is written in straightforward language. For a better understanding of fees (e.g., what you pay and where the fees go), check your personalized annual report.

To learn more about the costs of investing, speak with an iA Private Wealth Investment Advisor.

Create a will and protect your beneficiaries

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By iA Private Wealth, May 17, 2021

Although financial advisors, lawyers and estate specialists always stress the importance of having a will, many people don’t bother. Common reasons include not wanting to think about death, not knowing how to create a will, not thinking it’s urgent (“I’m still young!”) and not believing they have enough assets.

However, since the onset of the global pandemic, there has been a notable increase in adults of all ages looking to create a will. People have become more concerned about the uncertainty of life and are comforted by the certainty that a will can offer.

What is a will?

As part of your estate plan, a will (also known as a last will and testament) is a legally recognized document that spells out your wishes regarding how you want your property and assets distributed after you die. You can also appoint the executor of your will, who is responsible for managing your estate affairs and carrying out your final wishes.

When you die intestate (i.e., without a will), the courts will decide how your assets are distributed. This process may be costly, time consuming and emotionally difficult for the beneficiaries – and ultimately may not align with your wishes.

If you’re married or divorced, have children or own a business, property, investments and other valuable assets, you need a will to protect and take care of your beneficiaries. Without the clarity that a will can provide, confusion and discord among family members may result.

Power of attorney

While an executor carries out your wishes after you die, you may also want to consider naming powers of attorney (POAs) to look after your interests when you’re still alive. POAs are legal documents that allow someone you designate (called an “attorney” but not necessarily a lawyer) to make decisions on your behalf should you become incapacitated and unable to act rationally on your own. Examples include decisions related to your finances and your physical or mental well-being. When you die, POAs are no longer valid and your will takes effect.

Beneficiary designations

Through your will, you can make beneficiary designations to keep certain funds from being included as part of your estate. This allows your beneficiaries to receive those funds without going through probate, which is a process where your estate assets are assessed by the court and will be subject to probate tax, leaving a smaller inheritance for your beneficiaries (and making them wait longer to receive it). If you fail to make beneficiary designations, these assets will form part of your estate and will enter the probate process.

You can make beneficiary designations on registered plans such as TFSAs, RRSPs and RRIFs, as well as other plan assets including segregated funds and life insurance policies. If you have a spouse and don’t want your RRIF or TFSA assets transferred as a lump sum to his or her account, you have the option to name your spouse as a successor annuitant (for RRIFs) or successor holder (for TFSAs) and keep your current plans intact. Common-law partners may also qualify for this successor provision.

Having a valid will is a crucial component of estate planning. An iA Private Wealth Investment Advisor can work with your legal counsel to create an estate plan that will ensure your final wishes are respected and executed, while helping your loved ones avoid potential stress and family conflict in the future.

Preserve Wealth and Reduce Taxes with a Family Trust

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By iA Private Wealth, April 27, 2021

High-net-worth families want to protect their wealth, and one proven way to achieve that goal is through a family trust. And while high-net-worth families may reap the greatest benefits from trusts, other families – especially those who own a business – can make good use of family trusts as well.

A family trust is a legal entity that allows family members to protect assets, control the distribution of assets, transfer wealth among family members and split income in a tax-efficient manner. Before we look at these benefits in more detail, it’s important to understand the three key parties involved in family trusts: settlors, trustees and beneficiaries.

The settlor is typically a family member or close friend who establishes and funds the family trust on behalf of the trustees and beneficiaries. Trustees are the people who manage and administer the trust, and are often parents or a reliable business advisor. Beneficiaries are the people who will receive financial benefit from the trust, and can be children, grandchildren, siblings, nieces, nephews, etc.

Family trusts may set up as either testamentary (e.g., arising after the death of a trustee) or inter vivos (e.g., implemented while the trustee is alive).

Why create a family trust?

Now that we know who’s involved in a family trust, let’s look at four of the most common reasons for creating one:

  1. Protect assets. A family trust can protect the beneficiaries from claims for payment made by creditors. Assets held in the trust typically cannot be seized in the event of a lawsuit or bankruptcy.
  2. Control the distribution of assets. Trustees decide which beneficiary receives what – and when – based on the factors they have documented. Also, let’s say a child is disabled or not careful with money. The family trust can distribute assets in a way that ensures the child has enough money to help meet their lifetime needs.
  3. Transfer wealth among family members. An estate freeze is a strategy that allows a business owner to lock in the value of their business at its current valuation as part of the family trust. Any future growth of the business is considered a capital gain and the beneficiaries can use their lifetime capital gains exemption to help shelter these gains from income tax. Estate freezes are also used in other tax-mitigation strategies and for certain estate planning and business succession purposes.
  4. Split income in a tax-efficient manner. A family trust allows trustees to distribute earned income to family members who are in a lower income tax bracket, so the income (e.g., capital gains, dividends) is taxed at a lower rate. By sharing income, the overall family tax burden is reduced, leaving more wealth available.

Family trusts offer many benefits, but may also be costly and complicated. We can help you determine if establishing a family trust is suitable for your family’s unique financial situation. Find out more by contacting an iA Private Wealth Investment Advisor.

Why Everyone Needs an Estate Plan

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By Josh Sheluk, April 19, 2021

Pop legend Prince passed away in 2016 at the young age of 57. Despite fame, fortune, a wardrobe filled with raspberry berets, and a lineup of royalty-generating music, the man made a critical mistake that too many Canadians seem intent on copying – he didn’t have a will.

An Angus Reid Institute poll finds that 51% of Canadians do not have a will, while only 35% have one that is up to date. If you want to mimic Prince’s fabulous personal style, that’s one thing; but following in his footsteps by dying without a will is not something we recommend.

An estate plan isn’t just for the wealthy, and it involves much more than a will. Consider a few real-life scenarios that may hit a bit closer to home than the story of an international pop star.

Scenario 1

A single father has two minor children. He has a well-paying job and has accumulated assets: an RRSP, a TFSA, and the family home. He also has a life insurance policy that would pay out upon his death. He would like to have the assets managed professionally for his children until their 25th birthdays.

The case may be obvious, but our father is in dire need of a proper estate plan. Upon his death, there are tax consequences for the RRSP, a formal trust needs to be set up by a lawyer, a trustee needs to be appointed, and assets need to be liquidated. The only proper way to do any of these things is with the help of a will.

Scenario 2

A married couple has two young children. They have some debt but do not have much in the way of savings. There is a modest life insurance policy through the wife’s employer, but with the absence of personal wealth and with money tight, they are not yet considering creating a will.

Personal wealth does not determine the need for an estate plan. Importantly, a proper estate plan covers the guardianship of minor children. Without explicit directions from the parents, the guardianship could end up in court. With family members who don’t get along, the only ones who win are the lawyers.

Scenario 3

Your friend’s mother passes away. Your friend’s half-sisters would like their mother to be buried next to their father, who passed away 50 years ago. Your friend, of course, would like her mother to be buried next to her father, who was the deceased’s current husband of 45 years.

A proper estate plan involves a final directive, which is direction to those left behind on what should happen with one’s remains. It’s often difficult to foresee what problems or contentions may arise upon your passing, which is why a properly structured and well-thought-out plan is crucial.

So, should you have an estate plan? The answer, in our experience, is almost certainly “Yes”. And that estate plan should almost certainly include a will, appointment of a power of attorney, and final directive. Not only should you have a plan, you should also revisit it regularly, as it’s likely you’ll change your mind as circumstances change over time.

If you’re having difficulty figuring out where to begin, talking to a professional would be worthwhile. A financial advisor or lawyer who focuses on wills and estates would be a good place to start.

Josh Sheluk, CFA, CFP®, CIM®, is a Portfolio Manager at White LeBlanc Wealth Planners, iA Private Wealth, in Burlington, Ontario.

Do You Need a Prenuptial Agreement?

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By iA Private Wealth, April 16, 2021

If you’re getting married, it’s an exciting time. You’ve got many things to do before the big day – is a prenuptial agreement one of them? It’s usually not top of mind for couples entering marriage, but it’s worth considering.

A prenuptial agreement (also called a prenup or marriage agreement) is a written, legally binding document that a couple signs before they marry. In the event of divorce, a prenup determines the rights of entitlement (e.g., how assets are divided).

People often hesitate to sign a prenup. They feel it assumes the relationship is headed for divorce or treats marriage as a business arrangement. That’s not necessarily the case.

Think of it as a form of insurance. When you buy home insurance, you’re not assuming your house will burn down. When you buy disability insurance, you’re not assuming you’ll suffer a major accident. You just want peace of mind knowing that you’re protected if something bad happens.

Benefits of a prenup

A prenup encourages open communication before marriage regarding important life issues. You will disclose financial circumstances (good and bad), major goals, approach to childrearing, etc. You’ll learn what’s important to your partner and what needs and concerns he or she may have.

Here are eight more reasons to sign a marriage agreement:

  1. You want to protect your existing assets (e.g., a home, investments, insurance policies, jewelry or other possessions with monetary/sentimental value) and future inheritances.
  2. There’s a significant imbalance in the value of assets each person brings to the marriage.
  3. You own or have an ownership stake in a business (especially a family business).
  4. One partner (or both) is carrying a large amount of debt into the relationship.
  5. You want to uphold an existing estate plan so your assets are distributed according to your wishes when you die.
  6. One partner (or both) is already divorced and/or has children who may be receiving financial support.
  7. A prenup can make divorce less contentious, facilitate a smoother settlement (which may mean lower legal fees) and ensure a fair distribution of assets.
  8. Divorce is a common cause of financial hardship and bankruptcy, potentially jeopardizing long-term financial health and stability.

In Canada, the laws regarding prenuptial agreements vary by province, so be aware of the parameters and limitations that apply to your province of residence.

Postnuptial (postnup) and cohabitation agreements

Like a prenup, a postnup is legally binding and stipulates how a couple’s assets are distributed in the event of divorce. But as its name suggests, a postnup is signed after getting married. Courts often treat a postnup carefully to ensure validity of the reasons why the couple made this arrangement after they exchanged vows.

Cohabitation agreements differ slightly. Without a prenup, a divorcing couple typically splits their assets equitably. This default action doesn’t apply to common-law couples with no cohabitation agreement. For example, you’re not automatically entitled to 50% of the shared home, even if you’ve been making 50% of the mortgage payments and covering 50% of home maintenance costs.

Keep all receipts and other documentation regarding home-related expenses, and ensure your name appears on the title of the home. Alternatively, a cohabitation agreement can clearly (and legally) spell out how you deal with financial issues when together, and what happens to your assets should the relationship end.

If you’re engaged or thinking about moving in with your partner, an iA Private Wealth Investment Advisor can work with your legal counsel to create a marriage agreement that is fair and protects your assets.