Planning Your Retirement

by Jatinderbir Singh Bajwa, Insurance Broker


Retirement Planning

You've worked hard through the years and saved so that someday you can retire. As you get closer to retirement, the next few years are just as important. A financial advisor can help you identify gaps in your retirement plan by assessing your expected expenses versus the savings you currently have.

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A tailored Retirement Plan that includes planning for the expected, preparing for the unexpected and positioning your portfolio for both specific to your needs. Planning for Retirement can not only be a tedious task but also a stressful one. Everyone has different expectations of what their retirement will be, as well as how to spend in retirement. This is why planning for your Retirement is super important.

 

The first step of understanding what's important to you and your family to help you set and reach your financial goals is critical. We know that the key to putting a strong retirement plan in place starts with answering these five basic but important questions:

  • Where are you today?
  • Where would you like to be?
  • Can you get there?
  • How do you get there?
  • How can you stay on track?
  • Unexpected events, such as living longer than expected and experiencing a dramatic market decline, could possibly derail even the most carefully constructed spending strategy. That’s why you need to be prepared for such events by budgeting for them in your plan or insuring against them. If you’re going to insure against these events, two primary types of guaranteed income solutions to consider are An Immediate Life Annuity and a segregated fund with a Guaranteed Minimum Withdrawal Benefit (GMWB).

What Is an Immediate Life Annuity?

An immediate life annuity is a contract between you and an insurance company. You pay the insurance company a lump sum, and in return you receive guaranteed income for life. In addition, an immediate life annuity provides:

  • Guaranteed income – You can receive regular income payments on a monthly, quarterly, semi-annual or annual basis.
  • Payment guarantees – You can ensure that payments continue to yourself or your beneficiaries in case you die prematurely.
  • Tax-advantaged income– A portion of each payment represents taxable interest, and the other portion is a tax-free return of principal. Income from an annuity will qualify for the pension income tax credit and pension income splitting for those over age 65.
  • Liquidity – When you purchase an annuity, you cannot alter or cancel it. You will receive payments, as stipulated by the contract, for as long as you live.

What Is a Segregated Fund with a GMWB?

A segregated fund with a Guaranteed Minimum Withdrawal Benefit(GMWB) can provide a guaranteed income stream for life. You usually would consider purchasing a segregated fund with a GMWB around the time you’re nearing or in retirement. At the time of purchase, you contribute a lump sum and then select the appropriate investments within the segregated fund. Typically you receive a 5% withdrawal amount, but it could be higher or lower depending on your age.The guarantee is that if the market value of the GMWB goes to zero, the guaranteed income stream continues. While unlikely, there is the potential to increase the withdrawal if the market value has increased at the time of a reset (typically every three years). When you receive a payment, the amount is withdrawn from the initial investment

 

The Canadian Retirement Income System

To help you better plan for your retirement, it is important to understand the Canadian retirement income system. There are three main sources of retirement income that you may be able to draw from:

  • your personal savings and investments;
  • government pension benefits;
  • andemployer pensions.

Government pension benefits provide a modest base on which to build your retirement income. To maintain their pre-retirement lifestyle, most Canadians will require most of their retirement income to come from personal savings and investments and/or employer pensions.

 

Personal savings and investments

The savings and investments you accumulate during your working years can include:

  • Money in savings accountsinvestments in stocks and bonds
  • Registered Retirement Savings Plans (RRSPs) and Registered Retirement Income Funds (RRIFs);
  • Tax-Free Savings Accounts.

You may also have accumulated property such as your home, or financial and business assets. You can consider using your property or business assets as sources of retirement income.

 

Government pension benefits
The Government of Canada provides these pension benefits:

  • the Canada Pension Plan (CPP) retirement pension;
  • the Old Age Security (OAS) pension;
  • the Guaranteed Income Supplement (GIS);
  • the Allowance and the Allowance for the Survivor.

Employer pensions

  • Many employers sponsor a registered pension plan to help their employees save for retirement. There are two main types of registered plans:
  • Defined benefit plans provide you with a pre-determined percentage of your working salary when you retire.
  • Defined contribution plans provide you with a pension benefit based on the accumulated contributions and investment income.
  • Once contributions are made to one of these types of plans, you should receive a statement from the plan administrator that tells you the balance of your investment in the plan or how much you can expect to receive as retirement income.

If you participate in a pension plan that is integrated with the CPP, the amount of pension benefits you receive from the plan is reduced when you qualify for CPP retirement benefits. Other types of retirement savings plans that employers sponsor include deferred profit-sharing plans and group Registered Retirement Savings Plans. If you have contributed to one of these types of plans, contact your employer to find out what type of benefits you can expect to receive from the plan.

 

Life Insurance and Retirement

Life insurance can play an important role in helping to provide your family comfort and support if you or your spouse dies. It offers simple solutions that help avoid unnecessary financial hardships by providing funding to cover needs, such as funeral expenses or replacing income to maintain your spouse’s and/or children’s current lifestyle. These are securities that are necessities when planning for retirement. Life insurance is not just a way to protect your family from financial hardship. You should also consider it as part of your overall financial picture that can help meet your long-term goals. Another avenue to contribute to a fantastic Retirement Plan would be utilizing the RRSP or TFSA vehicles provided by the government. It can include various investment products in a government plan to shelter tax and encourage saving. Unlike RRSPs, but similar to a TFSA, you do not get a tax deduction when you contribute, but there is no tax withheld when you withdraw the money.

 

What is Registered Retirement Savings Plan or RRSP

An RRSP is a deferred tax savings vehicle. Generally, you are allowed to put money into an RRSP and claim a deduction on your taxes in that year (or a future year) for your contribution. A Registered Retired Savings Plan (RRSP) is an investment vehicle into which investors can make tax-deferred contributions to be used towards retirement savings. The funds remain in a tax shelter until retirement and are then taxed as they are withdrawn, at which point the contributor is normally in a lower tax bracket. Contributions will accumulate with investment income tax free. When the money is taken out of the RRSP it is taxed as income. Money may be withdrawn at any point, but generally it is accumulated until retirement and an annuity or RRIF is purchased.

 

For years, Registered Retirement Savings Plans (RRSPs) have been helping Canadians save for their retirement. They allow contributions to grow on a tax deferred basis until they are withdrawn and provide contributors with a useful deduction on their taxes. The RRSP contribution deadline is around the corner once again, but many of the issues involved in planning for retirement fall outside the January to February time-frame. Here are some important questions and answers to consider.

 

How much can you contribute?

You can contribute up to 18 per cent of your earned income from the previous year, less any pension adjustment amounts, to your RRSP. However, this amount cannot exceed $14,500 through the 2003 tax year. The maximum RRSP contribution amount rises to $15,500 for 2004 and to $16,500 for the 2005 taxation year. Any unused contribution room can be carried forward indefinitely. In order for any new RRSP contributions to be tax deductible they must be made during the tax year or within 60 days of the year following the tax year.


PLAN FOR RETIREMENT BY SAVING WITH A TAX FREE SAVINGS ACCOUNT

The Tax-Free Savings Account (TFSA) is a flexible, registered, general-purpose savings vehicle that allows Canadians to earn tax-free investment income to more easily meet lifetime savings needs. The TFSA complements existing registered savings plans like the Registered Retirement Savings Plans (RRSP) and the Registered Education Savings Plans (RESP).

 

How the Tax-Free Savings Account Works
As of January 1, 2013, Canadian residents, age 18 and older, can contribute up to $5,500 annually to a TFSA. This is an increase from the annual contribution limit of $5,000 for 2009 through 2012 and reflects indexation to inflation.

 

  • Investment income earned in a TFSA is tax-free.
  • Withdrawals from a TFSA are tax-free.
  • Unused TFSA contribution room is carried forward and accumulates in future years.
  • Full amount of withdrawals can be put back into the TFSA in future years.
  • Re-contributing in the same year may result in an over-contribution amount which would be subject to a penalty tax.
  • Choose from a wide range of investment options such as mutual funds, Guaranteed Investment Certificates (GICs) and bonds.
  • Contributions are not tax-deductible.
  • Neither income earned within a TFSA nor withdrawals from it affect eligibility for federal income-tested benefits and credits, such as Old Age Security, the Guaranteed I
  • ncome Supplement, and the Canada Child Tax Benefit.
  • Funds can be given to a spouse or common-law partner for them to invest in their TFSA.
  • TFSA assets can generally be transferred to a spouse or common-law partner upon death..