Wednesday, February 19, 2014

Getting where you want to be financially

Whether you’re approaching retirement or just starting out in the working world, it pays to know if your financial plan is on the right track. Solut!ons can help inspire you to build a plan that will help you get where you want to be financially.

This edition of Solut!ons magazine highlights the value of periodically reviewing your financial plan with a professional to ensure your short and long-term needs are covered. Here’s a glimpse of some of the great information you’ll find in this issue.

  • Gain access to the world’s largest market highlights reasons to consider diversifying your investment portfolio to take advantage of emerging growth opportunities in the U.S.
  • Unexpectedly single illustrates the importance of reviewing both your retirement plan and insurance protection needs when a significant life event occurs.
  • Real retirement questions answered by real retirees demonstrates that with the right planning and perseverance, everyday Canadians can overcome the hurdles that often stand in the way of saving for a comfortable retirement.
  • Finding your balance helps you identify your level of comfort with investment risk – a key factor in selecting the right mix of investment products for your retirement plan. 
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I hope you enjoy this issue of Solut!ons. If you’d like to discuss your financial future, or want more information on a topic you read in the magazine, let’s talk. Together, we can determine the steps you need to take to reach your retirement with confidence.                                

Tuesday, February 11, 2014

The Insured Annuity strategy: Maximize your lifetime income and leave a legacy

If you want to get a guaranteed income for life at a rate of return that is significantly higher than GICs, and still leave an inheritance behind when you pass away, then the insured annuity is a strategy you should consider. 

First let me explain how an annuity works:  When you establish an annuity, you are purchasing a lifetime income. Examples of annuities are the Canada Pension Plan, Old Age Security, or your retirement pension from your former place of employment.  You transfer a specified amount of money to an insurance company and in exchange they will pay you a specific amount of money (typically either monthly, quarterly, semi-annually, or annually) every year for the rest of your life.  Because the bulk of the payment is principal, your taxable income will be reduced. However, payments may stop at death and no capital will pass to your heirs.

In the insured annuity strategy, life insurance is used to replace this capital upon death. Even with the added expense of the life insurance premium, this strategy can significantly increase your after-tax income and guarantee it for life while at the same time, preserve capital for your heirs.

How it works: An example

Step one is to buy life insurance.  For example, a 65-year-old healthy male non-smoker would be able to purchase $250,000 of life insurance for about $633 a month.  The insurance premium is payable for life and ensures that you will leave $250,000 tax-free to the beneficiaries you name. 

Step two is to purchase an annuity for $250,000 using non-registered funds.  This would yield an income of $1,435.63 a month to our 65-year old male (about 6.9% annually for life).  This payment represents both a principal portion of your capital which is totally tax free and a prescribed interest portion which will remain the same each and every year and will be the amount you will include in your income. Annuities can help greatly in reducing tax and increasing retirement income.

The difference between the premium for the life insurance and the income received from the annuity is $803 per month on your $250,000 annuity.  Your net return on the $250,000 is therefore 3.85% annually for life.  Because of the favourable tax treatment, however, your 3.85% may be the equivalent of having a GIC at over 6% depending on your marginal tax rate.  And you leave your original $250,000 behind tax and probate-free. 

For those who are not concerned with capital preservation to their heirs, you can simply purchase the annuity, which will greatly increase your annual after tax income for life.

Advantages of Insured Annuities over Traditional Interest-Bearing Investments:

• Increased After-Tax Income – The insured annuity will give a significant increase in after-tax income compared to traditional interest bearing investments such as GICs or Government of Canada Bonds.

• Lower Taxable Income – Taxable income is lowered significantly as most of the annuity income is a tax-free return of principal. The annuity is established on a prescribed taxation basis which spreads out the income portion of the annuity over the lifetime of the annuitant. The T4A that the annuitant receives each year will be the same for their lifetime.

• Possible Reduction in Old Age Security (OAS) Clawback - As mentioned above, the majority of the payment received from a non-registered Prescribed Annuity is a tax free return of principal. This will lower your annual taxable income each year and if you are experiencing clawback on your OAS payments, this can reduce (or possibly eliminate) this clawback.

• No more re-investment risk – With an insured annuity, you don’t have to worry anymore about how long to lock your money in with a GIC or a bond. Or better yet, no more rolling over those 1-year GICs each year waiting for the interest rate to go up.

• Fully guaranteed income – Annuity income is guaranteed 100% up to $2,000 per month of income. This is insured by Assuris which is the equivalent to the bank’s CDIC coverage. You can find out more about this at the Assuris website.

• Lifetime guarantee – no matter how long the annuitant(s) live, the income will pay them for their lifetime regardless of how long that is. If desired, the annuity can be structured to have a minimum guarantee payment period in order to recoup some or all of the principal regardless of when the annuitant(s) die.

• Creditor proof – financial products with insurance companies are protected from creditors in the event of insolvency or a law suit when you have a designated beneficiary named on the policy. As long as you were solvent at the time of establishing the plan, the funds are protected from creditors.

• No probate, legal or other administration costs – At death, as long as there is a named beneficiary on the plan, these funds will pass directly to the named beneficiary without forming any part of the estate. This will then bypass all probate, legal, trustee, and any other administration costs associated with winding up an estate.

• Prompt Payment to Named Beneficiary(s) – When there is a named beneficiary on an insurance policy,  payments are paid directly to them without having to wait for the estate to be settled. This gives the beneficiary(s) the funds immediately so that they can use them as they see fit. These funds will be paid usually within 10 business days of the proper claim forms being submitted. With traditional bank-held GICs, beneficiary(s) of an estate normally have to wait for the will to be probated and the estate to be settled before receiving the funds.  This can normally take a minimum of 6 months.

• Pension Tax Credit – If you’re over 65 and you don’t have any other qualifying income vehicles, annuities qualify for the pension tax credit which means that you’re first $2,000 of income is tax free.

• Guaranteed Level Life Insurance Premiums – The premiums for Term-100 life insurance are fully guaranteed and will remain level for life, hence the name Term-100. If the insured person lives to age 100, normally premiums will stop but the coverage will continue for the life of the insured.

To find out more or to see how this strategy might work in your particular case, please contact us at or call us at 416-230-2703 or 705-798-0062  or visit 

Wednesday, February 5, 2014

The retirement income gap: How much can you expect in CPP and OAS?

Fewer Canadians will contribute to their Registered Retirement Savings Plans this year (or plan or save for retirement at all).  A Scotiabank survey finds that just 31 per cent of Canadians plan to contribute this year, compared with 39 per cent last year.

Canadian households spend about $1.65 for every dollar earned, according to Statistics Canada, a ratio among the highest of any country belonging to the Organization for Economic Cooperation and Development.  The median household after tax family income in Canada was $76,000 – more than $6,000 a month.  The median individual income was about $30,000.  Median is the point where half earned more and half earned less.  

Canada Pension Plan (CPP*)  

You may be able to count on up to $1,038 a month from the CPP at age 65 if you qualify for the maximum.  If you take your CPP at age 60, that amount is reduced to approximately $664 per month.  Many people will not qualify for the maximum if their earnings during their working years were less than the yearly maximum pensionable earnings.  In fact, the average CPP benefit paid out in 2013 for new CPP beneficiaries at age 65 was $594 per month.  If a spouse dies, the other spouse is entitled to 60% of their late spouse’s benefit amount.  (*all figures used in this article are at today’s rates in today’s dollars)

Old Age Security (OAS*)

You may qualify for up to $551 per month at age 65 if you qualify for OAS.  You need 40 years of residence after age 18 in Canada to qualify for the maximum.  OAS will be gradually scaled back to begin benefits at age 67 between 2023 and 2029.  So if you are 56 or younger now, you will have to wait longer to collect your OAS.  If your individual net income is above $70,954 for 2013, your monthly Old Age Security (OAS) pension payment amount will be reduced or “clawed back” by 15% for every dollar over that amount, beginning in July 2014. If your income is $114,815 or above, your entire OAS pension will be “clawed back”.

Guaranteed Income Supplement (GIS*)

If your individual income from all sources is less than $16,700 or your combined income is less than $22,000 you may qualify for the GIS.  This amount could be between $500 and $1,000 per month depending on your situation.  

Adding it all up

Adding these programs up, the approximate amount a median Canadian could expect from government is between $500 and $2500 per month.  Most Canadians will fall somewhere between those two numbers – say $1000 per month depending on their eligibility, age at which their pensions are taken, and other factors.  

Will a couple used to living on $6,000 per month with little or no retirement savings be able to live on $2000 or less per month (A single person on half that amount)?  

Filling the $4,000 per month gap

The accepted wisdom is that you will not need as much to live on when your kids are gone, you don’t have to commute to work, you don’t need as many new clothes, you may downsize your house, etc.  Offsetting some of those things, however, is an increased desire to travel, dine out and socialize, and the probability of increasing health care costs as you age.  So let’s say you could live on $5,000 a month.  

To generate the additional $3000 per month would take about $600,000 in savings (using a joint last-to-die annuity for a 65 year-old couple – or about a 6% return).  If the income comes from inside a registered plan (RRSP or RRIF), you will have to pay tax on the full amount of income you take out.  For those who plan to continue working, it may be a viable solution for a while, but there is the issue of deteriorating health that may make it impossible for you to continue working.  And of course, what if one or both or you gets sick or needs long-term care in your later years?  

So what can you do?

• Review your budget and put together a financial plan.
This isn’t necessarily fun, but it’s necessary. You’ll be surprised at where your money is going. Financial advisors can help you begin your financial planning for free. 

• Make your savings automatic.
One of the advantages of an RRSP is that once the money goes in, it’s not so easy to take it out. If you take money out of your RRSP before retirement, there’s paperwork and the government takes a withholding tax.

• Start saving as early as you can.
Optimally, start as soon as you have an income and file a tax return. If you are starting late, there is still hope, but see a financial advisor to determine your most optimal saving and investing strategy.  

• Consider other tax-saving programs, such as the TFSA (Tax Free Savings Account).
You can put funds into both an RRSP and a TFSA; with the latter, the money can grow in the account and will not be taxed again. Individuals can contribute up to $5,500 this year to a TFSA, and if you’ve never opened one, you can contribute for the years you’ve missed since the program was started in 2009.

Thinking ahead is hard work for some.  If you want to enjoy the last third of your life, take action now.  The examples used in this article are general in nature and not intended to be used as specific to any one case.  For an accurate diagnosis of your personal situation, please contact us.  Our consultations are complimentary.