Archive for the ‘Retirement’ Category

Retirement Planning – Did I practice what I preached?

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As accounting and tax professionals helping clients with their challenges, we don’t often think about our own situation all that much.  It’s the old “the cobbler’s children go shoeless” situation.  And I find myself in that position now as I go into retirement.

If you don’t have a clear idea of what retirement actually means for you, then how could you possibly plan for it?  And furthermore, if you are supposed to start “planning early” – like when you are a younger person starting to make money, how could you possibly plan for a stage of life that you can’t really even put your head around.  I would admit to suffering from this difficulty right up to and including the present.

We need new terminology…

At the risk of being a little bit contrarian, I am going to suggest that we need new language around all of what professional advisors call “retirement planning”.  The term is just not helpful and most of us can’t really get started on the planning. It seems there are two main components as I see it – financial aspects and life stage aspects. Unfortunately, the two aspects are intertwined, and this makes it messy. 

On the financial side, I believe the objective is financial security and independence/freedom and the lingo should reflect that. And once the lingo reflects that, then perhaps we can be more settled in how to go about it.  How about “Post Work Financial Model”?  It’s a mouthful, but a financial model can be tweaked as the future real life events unfold, generally not according to plan. What you need is flexibility to re-set and re-forecast.

On the life stages side of things, you alone have to figure this out with relevant family members etc. How about calling this the “Post Work Lifestyles Plan”?  If you are not clear on what this looks like (THAT WOULD BE ME!), you will not be in a position to bring data to the table that is a necessary part in completing the financial side.  Most of us are a little fuzzy on what exactly our post working lifestyle will be and the related spending and costs through to “the end” (of your life!).

Where to start?

  • You have to at least try to start with the Post Work Lifestyles Plan.  I’m personally finding that a little tricky, but if you can articulate this with some degree of certainty, then you are off to the races.  But let’s assume you only have a vague notion of what this looks like – you would be in good company!
  • If you cannot bring any detail to the Post Work Lifestyles Plan, then in my view, you have to make an assumption that nothing will change on the spending side of things. Spending will therefore be the same in the post work years as they were in the year(s) before retirement.  Many will object to this approach.  If you say, “my spending will be less, but I’m not sure how much less”, you are introducing conjecture into the next part of the exercise, namely the Post Work Financial Model. There should be minimal conjecture permitted into that model.  So if you are not comfortable assuming that the post work spending will remain the same, the you must loop back and do a better job of fully flushing out the Post Work Lifestyle Plan and the related costs. To be frank, most of us cannot do this with any degree of precision – not even close.  So let’s assume we take the easy route.

Now it looks like this….

  • You don’t have a well defined Post Work Lifestyles Plan,
  • You now must assume post work spending and financial requirements are identical to the most recent years of normal spending, and
  • You are ready to start the Post Work Financial Model.

What is the first step to completing the Post Work Financial Model

You have to figure out how much you are spending on an annual basis, and then plug in any major “out of the ordinary” expenditures like possible family weddings, and other major capital purchases you know are coming up or might come up.

The good news about that first step…

  1. I have rarely seen a client who knows what the family spending is, much less what they spend it on.  I have seen all manner of spreadsheets and tracking documents.  All estimates and calculations brought to me are suspect in my view.
  2. Even though I have been tracking my own family spending on Quickbooks for 20+ years, I personally still don’t know the numbers off the top of my head – I need to look at the data.  So don’t feel bad that this whole spending thing is a mystery.  And I don’t recommend tracking things in as much detail as I do on Quickbooks, unless you are obsessed about it or an accountant…
  3. But here’s the good news:  There is a simple and inescapable way to figure out the family spending – in less than a few hours. You may not like to see the $ results, but it’s pretty much fool-proof.
    1. Calculate your gross earnings.
    2. Figure out your total final income taxes that you had to pay.
    3. Both a. and b. can be taken off your recent tax returns – hard cold facts!
    4. Calculate how much money you saved:  Start with what you sent to your investment advisor, or the funds you bottled up in bank accounts during the year in question.  Perhaps you opened a new savings account and the balance increased over the year by $28,000.  Or you sent a total of $57,000 to your investment accounts for RRSP and non-registered account investing.  Mortgage principal paydown is also a savings item to be added into this total, and so is any other type of debt reduction.
    5. Now make this simple calculation:  a-b-d = How much $ you spent.
    6. Sorry folks it’s just that simple:  What you earned, less the taxes you pay, less what you saved equals what you spent.  Most people are not happy with the resulting figures (it’s impossible!!), but there is no way around this simple calculus.

Then it’s simple

From this point onward it’s easy sailing.  Your advisor can make a calculation of the income you could expect in retirement based on pension income, investment income etc., and by making assumptions about rates of return, life expectancy and all sorts of other VERY SIGNIFICANT variables that can skew the financial model wildly back and forth.  That’s the “dark art” component of the Post Work Financial Model.  But at least the spending part of the model will be based in reality and can be tracked back to hard facts.

Then these income streams and rates of return are merged with the spending and bingo – you find out if and when you will be running out of money.  How comforting is that?  Hmmm, maybe that’s why few people have the stomach for this Post Work Financial Model/Post Work Lifestyles Plan exercise!

But those that are brave enough to give a good try are rewarded with a little bit of guidance and a really useful tool.  It can easily be updated from time to time as better information comes in about that not-so-well-done Post Work Lifestyle Plan.  If you can do some of the heavy lifting on this, you will no longer be running blind in an area of your life that really does require a little clarity!

WILL AND BENEFICIARY DESIGNATIONS: Are they current?

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RRSP designations

A May 10, 2021 CBC article demonstrated the importance of reviewing RRSP beneficiary designations. The article discussed the unfortunate cascade of events where, in 2018, a 50-year-old individual went to the hospital for stomach pain and was diagnosed with cancer. He passed away three weeks later, leaving a spouse and a child. It appeared as if the deceased had not reviewed the designated beneficiary on his $685,000 RRSP, which remained his mother from the time when he had originally set it up while single. Not only did this mean that the surviving spouse and child would not receive these savings, but also that they were effectively liable for the tax on the RRSP funds. Although the will included a clause making the spouse the 100% beneficiary of the estate, this did not override the RRSP beneficiary designation. While the spouse and mother were able to settle and cover the tax bill with the proceeds of a life insurance policy, the case serves as a good reminder to review whether insurance and registered account beneficiary designations match the current intent of the parties.

Wills

In a March 16, 2021 Ontario Court of Appeal case, a dispute arose over the interpretation of a will regarding how proceeds from the sale of a cottage were to be distributed. As the deceased’s daughters held a life interest in the cottage, the cottage was not sold until more than 40 years after the original owner’s death. The proceeds from the sale of the cottage were to go to the grandchildren. However, within the 40-year period, one of the grandchildren passed away. At issue was whether the proceeds should be split among the four surviving grandchildren, or in five parts, with the deceased grandchild’s estate and beneficiaries receiving a fifth. The court used the “armchair rule,” which seeks to interpret the will using the same knowledge that the testator had when making the will, and determined that it should be divided into four.

Retirement Planning – Be Future Ready!

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Contrary to popular belief, retirement planning should begin as soon as you start working. However, even if you are middle-aged or older, it’s never too late to start taking control of this important planning.

2020 is a sobering reminder of how unsettling not being prepared can feel. While we cannot prepare for everything life throws at us, there is much that is in our control. Retirement planning is a good example.

Here are some simple, yet important, questions to think about now as you plan for your retirement:

What is your retirement vision? Have you set goals?

  • What will you do with your new freedom?  Have you thought of short-term or long-term goals? Do you have a dream list? 
  • If you want to semi-retire, what part-time work makes sense for you? How much extra income would you like, or need, to make?
  • What post-retirement responsibilities will you have? Will you be supporting children, aging parents, or other family members?

Now for the elephant in the room: “How much money will you need?”

  • Consider your current lifestyle. What are your ACTUAL expenses monthly and annually? If you’re uncertain, start tracking them now – you may be surprised.
  • When budgeting, don’t forget the details – everything from vacations, to car purchases, to clothing.
  • Factor in inflation. 2020 is a good example of how prices rise each year.
  • Scope out big family events – upcoming weddings, anniversaries, etc.
  • Plan for unexpected costs, such as dental work, home and car repair, etc.
  • How is your present health? How long do you expect to live?

What will be your sources of income?

  • Consider whether you will be eligible for CPP, OAS, or employer-sponsored pension.
  • Review your existing investment portfolio such as RRSP/RRIF, TFSA, non-registered investment accounts and personal savings. Maximize savings now by investing early to take advantage of compound earnings.
  • If you are a business owner, how long will you be able to draw salaries or dividends from your corporation?

Tax planning questions

  • How can you minimize taxes during your retirement? Are your investments and other sources of income structured in the most tax-efficient manner?
  • Do you understand the differences between an RRSP, RRIF and TFSA, as well as their tax treatment in retirement?
  • When should you apply for benefits under CPP and OAS? Keep in mind, the age you start to receive CPP benefits will impact the amount of payment you will receive.
  • Are there specialized tax credits or tax planning available upon retirement?  For example, depending on your situation, you may be able to share CPP and split pension income with your spouse.

Wondering where to start, or how to move forward?

Feeling confused is totally understandable! During this COVID crisis investment portfolios were severely impacted, but then bounced back strongly. Many who had plans to retire may have decided to postpone their plan, while others were forced into retirement due to layoffs. Other Canadians are simply not ready because of large debts, or insufficient savings. Even Canadians who have been diligent savers simply don’t know where to begin when it comes to retirement planning.

Have no fear – SYC is here! We have been providing retirement planning services for years. So if your goal is to be “future ready”, don’t delay! Call one of our team members and take the first step.

Seniors – The Good, The Bad, and The Blogs

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So, you’ve finally entered your “golden years”. It’s a time to enjoy the perks of turning 65 – senior’s days, passes and discounts. You now have more time to spend either with your family, in your garden, or mastering what was once only a hobby. To be realistic though, it’s not all golden.

Among other things, changes in health, technology and finances can add an element of stress that can easily tarnish your golden years. For example, financial predators prey on the trusting nature of seniors and view them as easy targets. Also, declining health coupled with rising healthcare costs can impact your retirement budget. These and other challenges can lead to frustration and stress – something we’d all like to minimize!

How can you minimize health care costs, keep up with technology risks, and keep one step ahead of financial predators? At Scarrow Yurman & Co., we empathize with your struggles and regularly provide timely support for seniors’ issues in our monthly blogs. Below are some of our past blogs that you may remember.

Disability Tax Credit – Are You Eligible?

Travel Expenses for Medical Expense

Medical Expenses

Fraud – It’s Rampant

Passwords Made Easy

CRA / IFRS Fraud Alert – Part 1

CRA / IFRS Fraud Alert – Part 2

Cyberattacks – Are You at Risk

We appreciate our seniors and benefit greatly from their wisdom and experience. To continue to give back to our senior community, we invite you tell us what other related topics you’d like us to blog about. Proactively keeping informed can help minimize stress and puts you in a good position to enjoy your retirement. So let us help you, and go for the gold!

TFSAs – Do You Have Room?

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In November 2016, we blogged about Tax Free Savings Accounts. Since inception, CRA has been auditing TFSA accounts and this has resulted in penalties to taxpayers who have unknowingly over-contributed. How can you be sure you have room for your TFSA contributions? Here are some tips.

Understand TFSA Withdrawals

Let’s say you’ve withdrawn funds from your TFSA. This has left room to re-contribute later, right? Not necessarily. If you withdraw funds from your TFSA, you must remember that this does not create corresponding contribution room until the next calendar year. If you contribute sooner – you could be penalized.

Ensure TFSA Transfers Are Done Correctly

If you wish to transfer funds from one TFSA to another, the transaction should be processed as a “direct transfer” by your financial institution. Otherwise, it could be viewed as a “funds withdrawn” and “funds contributed” scenario. When the latter happens, contribution room for the withdrawal will not be reinstated until the next calendar year. So, when funds are not transferred correctly, and you contribute too soon – penalties may also apply.

Keep Up-to-date with Changing TFSA Room Limits

You can have more than one TFSA at any given time, but the total amount you contribute to all your TFSAs cannot be more than your available TFSA contribution room for that year or you could get dinged with a penalty. It’s good to check each year to see if the annual limit has changed:

https://www.canada.ca/en/revenue-agency/services/tax/individuals/topics/tax-free-savings-account/contributions.html.

Always Be Aware of Your TFSA Balance

CRA has made it easy to ensure that we don’t over-contribute. Before you contribute, log into CRA’s My Account for Individuals  >  Click RRSP and TFSA tab  >  Contribution Room  >  Next.

This takes you to your TFSA page where you can find out your contribution room as of the current taxation year.

Following these simple tips can help you save money without worrying about unexpected penalties. Happy saving!

 

Why Your Retirement Plan Needs a “Checkup”

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Let’s face it, your annual physical may not be your idea of a good time. However, regular visits to a GP can help you assess your health, review what’s happening in your life, and guide you in making healthy choices and lifestyle changes with the goal of being as healthy as possible.

What about the health of your Retirement Plan? Can the same principles for physical checkups hold true? We think so. Here are some reasons why.

Why a check-up is necessary

Sometimes underlying medical conditions are not always evident. Similarly, your retirement plan may have some flaws that you’re not aware of. Just as early diagnosis of a medical condition can even be reversible with proper treatment, a professional assessment of your retirement plan can help pinpoint areas of concern that can be tweaked and/or revised to ensure you stay on track and reach your retirement goal.

Navigating the winds of change

Good or bad, life changes equal stress. As bad as stress can be for our health, it can also wreak havoc on your financial plan. For example, while starting a family, purchasing a home or moving are all exciting milestones, they could bring financial repercussions you may not be aware of. A financial advisor can help you navigate the road of change and prepare you for the effects to your retirement plan.

Expect the unexpected

Just as an unexpected event like an accident, natural disaster or sudden allergy can affect our health, unexpected changes in tax laws, interest rates and the housing market can all have an impact on your retirement plan. A financial professional is up-to-date with these changes and can keep you in the know. Being supported through these changes can go a long way in helping you move forward.

Search engine overload

So, we’ve all done it. Had a physical symptom and “Googled” our diagnosis only to find an overwhelming sea of information. Admittedly, search engines are great tools, but following advice on the Internet is not without risk. How many hours have you spent researching the best retirement strategies? Is it current information? What if you miss something important? Financial professionals have the software, publications and experience necessary to guide you through this information age with a minimal investment of your time and energy.

Whether it’s physical or financial health, we believe that “prevention is the best medicine”. We would be happy to sit down with you to assess the overall health of your retirement plan, review what’s happening in your life, and assist you to make the right choices to ensure your financial plan is on track. A little investment of your time and energy now can reap great rewards later. Call us today!

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