It's never too late to start

You are never too late to the game for retirement planning!

If things were ideal, you would start saving for retirement in your 30s or 40s, or possibly even sooner. But the reality of it is that, in today’s environment, for many it simply isn’t a possibility.

If one day you realize that retirement is far too close for comfort, you may wonder if it’s too late to start. I firmly believe that it’s never too late. For someone in their 50s, you could have 15 years or more to prepare. If you are willing to get serious about it, there is still time.

Your income level is likely at its high point in your career, ideally with some room to grow. You have unused RRSP and TFSA contribution room, and with some effort and creativity, I can help you fill those up. Fifteen or twenty years of tax-sheltered savings, and annual tax refunds, can go a long way in funding your retirement.

Your children should be on their way to some form of financial independence, and you should work toward paying down your mortgage. In the low interest-rate environment that we have been in for more than 10 years, this is somewhat less critical than it has been in the past, but the lower the mortgage you take with you into retirement, the better.

You just need to apply a bit of discipline to save and don’t give up. Despite the recent market ups and downs, a properly diversified portfolio will produce you consistent long-term returns.

Once you are in your 60s and 70s, there are additional challenges for retirement planning. You will want to be particularly careful about taking on too much risk in the hopes of a near-term windfall. There are other potential options to create an income stream that you may want to consider.

An annuity can provide you with income for the rest of your life. It can be a very effective product for people who are in good health and are worried about outliving their money. Life annuities purchased outside of a registered plan can receive favourable tax treatment, as only a portion of the income is taxable.

Any concerns with annuities regarding premature death resulting in leaving little or nothing for your family or heirs can be addressed by insuring the annuity for a period of time that you choose. With this option, it is possible to fully protect your original deposit into an annuity, allowing the original deposit to go to the heirs of your choice upon your death.

An all-to-common position for people at this stage of life is to be “asset rich” and “cash poor”. In these cases, you can potentially look at the equity in your home as a possible income stream. There are a number of ways to accomplish this including down-sizing your home, a secured line of credit (interest rates are currently very low), or a reverse mortgage (more expensive than a secured line of credit, but easier to obtain).

If you have a large permanent life insurance policy, it could also potentially be used as collateral for a secured line of credit.

The reality is that if you haven’t been saving, you may have to work longer, spend less, and budget more aggressively. But before you give up on your retirement dreams, book a meeting with me, and we can look at all of the options available to you. There may be more options than you realize.

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For more information, or to review (or start) your retirement plan, book an online meeting with me.

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Registered Disability Savings Plan (RDSP)

Common RDSP misconceptions

By: Jacqueline Power, assistant vice-president with Mackenzie Investments, March 3, 2020

Registered Disability Savings Plan (RDSP)

The Registered Disability Savings Plan requires proper planning

The Registered Disability Savings Plan (RDSP) launched more than a decade ago, but there’s still confusion about some of the more intricate details.

One of the RDSP’s largest benefits is the “free” money that beneficiaries can receive from the government up until the end of the year they turn 49.

The Canada Disability Savings Grant is a matching program based on family net income. Until the year the beneficiary turns 19, family net income is based on the parents’ incomes; afterward, it’s based on the beneficiary’s income plus their spouse’s income.

These rules hold regardless of who the account holder is, whether the beneficiary is dependent on someone or where the beneficiary lives.

If the beneficiary qualifies for the maximum grant (family income is $95,259 or less), an annual contribution of $1,500 will provide an annual grant of $3,500, up to a maximum lifetime grant of $70,000.

For low-income families, the government also offers the Canada Disability Savings Bond. If a beneficiary qualifies for the maximum bond (family income is $31,120 or less), they receive $1,000 annually up to a lifetime maximum of $20,000, with no contribution required.

What is the assistance holdback amount?

The government wants RDSP accounts to be long-term investments. To discourage early withdrawals, it established the assistance holdback amount (AHA).

If an RDSP account is collapsed, the AHA applies, which means all the grant and bond amounts deposited to the account in the 10 years prior must be repaid to the government.

For partial RDSP withdrawals, the account holder repays $3 of any grant or bond received in the 10 years prior for every $1 withdrawn.

This holdback amount is often misinterpreted. People generally assume they can access the grant or bond they received more than 10 years ago that it’s no longer subject to the AHA. This is not true. While the grant or bond received more than 10 years ago belongs to the beneficiary, they’re unable to access it unless the entire account is collapsed, or no grant or bond has been deposited to the account in the 10 years prior to the withdrawal.

When can an RDSP be collapsed?

If a beneficiary passes away or loses the Disability Tax Credit, an RDSP can be collapsed.

Many advisors and investors believe the RDSP account can be collapsed at any time, but this may not be the case.

If the account has more private contributions than government money, there’s no limit to the maximum amount that can be withdrawn.

If the RDSP is a primarily government-assisted plan (government grant and bond payments exceed private contributions), the maximum amount that can be withdrawn annually is the greater of 10% of the account or the lifetime disability assistance payment (LDAP) formula. Below is an example of the LDAP formula.

LDAP withdrawal = A ÷ (3 + B − C)

A = fair market value of the plan at the beginning of the year

B = greater of 80 and the beneficiary’s age at the beginning of the year

C = beneficiary’s age at the beginning of the year

If the beneficiary is age 60 and has $400,000 in the account at the beginning of the year, the LDAP withdrawal amount would be:

$400,000 ÷ (3 + 80 − 60) = $17,391.

In this case, 10% of the account is greater than the LDAP withdrawal amount.

Can a beneficiary designation be added to an RDSP?

It’s not possible to add a beneficiary designation to an RDSP account. When an RDSP beneficiary passes away, the RDSP is paid out to the beneficiary’s estate. As mentioned above, if the grant or bond was contributed to the account in the 10 years prior to the closure, it must be repaid to the government. The balance is paid to the beneficiary’s estate.

If the beneficiary has capacity and is age of majority, they would be well advised to write a will as a way to determine how the proceeds of the account will be distributed. This may also be a great time to discuss powers of attorney.

If they don’t have a will, account proceeds will be distributed as per the provincial rules of intestacy. Note that, since account proceeds are paid to the estate, it’s not possible to avoid probate on an RDSP account.

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Minority Government

The New Minority Government

Minority GovernmentWith the Liberal government re-elected, albeit with a minority, it’s time to consider how your taxes could be impacted by election promises.

Keep in mind that, because the Liberals are now managing a minority government, the implementation of potential tax changes is less certain.

Regarding corporations, consider the Liberals’ broad-based proposed changes. These include a promise to crack down on tax loopholes that allow companies to deduct debt from earnings to reduce tax.

We’ll have to wait and see what those changes actually are.

Also note the promise to cut corporate taxes by 50% for clean-tech companies, specifically those that develop and manufacture zero-emissions technology.

For personal taxes, several changes are in the works. What will impact the most Canadians is changes to the basic personal amount — the amount of income that any individual can earn that is not subject to tax.

That amount is currently $12,069 in 2019 and rises annually with inflation. The Liberals have promised to increase it by 15% over four years. According to this timeline, by 2023, it will reach $15,000.

The increase isn’t universal. It will not apply for those individuals who are described as being Canada’s wealthiest 1%. The amount will be reduced for those earning more than $147,667 — those in the second-highest federal tax bracket — and completely eliminated for those in the top bracket, which is $210,371 in 2019. Those in the top bracket will continue to receive the current basic personal amount, which will continue to be adjusted for inflation.

The Liberals also promised to boost Old Age Security (OAS) by 10% for seniors over age 75 who earn less than $77,580, and to raise the Canada Pension Plan (CPP) survivor’s benefits by 25%.

The change to OAS could mean an increase of $729 a year, according to the Liberals’ platform. It is anticipated that this will start in July 2020. With CPP, a spouse or common-law partner currently receives about 60% of what their deceased spouse or common-law partner received in benefits. The promised increase could mean an additional $2,080 per year.

Parents have been promised that their maternity and parental benefits, received through employment insurance, will be tax-exempt at source, starting in 2020. The result would be about $1,800 more annually for someone receiving EI benefits who earns about $45,000 annually. Adoptive parents could also see a change in their EI benefits, with the Liberals proposing a 15-week leave — the same length as for maternity leave.

The tax-free Canada Child Benefit is also slated for an increase for those with kids under one year old. The promise is to boost the benefit by 15%, resulting in an increase of up to $1,000. Starting in July 2020, the base benefit should be $7,750 for these children.

The Liberals proposed to immediately double the tax-free Child Disability Benefit. The benefit applies to families caring for a child with a disability who is under age 18 and eligible for the disability tax credit. The Liberal platform said the increase could result in more than $2,800, to $5,664 annually.

Other tax highlights include a new vacancy tax that would “limit the housing speculation that can drive up home prices,” the Liberal platform said. The residential tax would apply to vacant properties owned by non-resident non-Canadians.

Finally, the Liberals might move forward with two tax credits originally announced in the federal budget. The Canada Training Credit was proposed to start in 2020, to help cover up to half of eligible tuition and fees associated with training. The credit could accumulate a balance up to a lifetime limit of $5,000.

The second is a non-refundable 15% credit for eligible digital news subscriptions. The credit is for a limited time, for amounts paid after 2019 and before 2025, and is a maximum tax credit of $75 annually, to start in 2020.

Thinking of a reverse mortgage? Here’s how that compares with a HELOC

How does paying 6.59 per cent interest on a mortgage grab you? If that sounds high, it should, because Canada’s average five-year fixed mortgage is only 3.47 per cent.

Yet thousands of seniors will pay that higher 6.59 per cent in a reverse mortgage, a loan secured against home equity where you make no payments until you move or sell your home.

At those rates, a reverse mortgage doubles in size every 11 years. That’s why anyone who needs this kind of loan should first review the alternatives, particularly a home equity line of credit (HELOC), if they can qualify for one.

Rising rates aren’t making a dent

Five-year fixed reverse mortgage rates are up 160 basis points from their low of 4.99 per cent in 2016, but these escalating rates aren’t dissuading seniors. Reverse-mortgage sales are exploding.

This year alone, industry leader HomeEquity Bank projects to close more than $800-million worth, a record for the company and a 35-per-cent increase over last year. And it has just one direct competitor, Equitable Bank.

For cash-strapped seniors who want to stay in their home, can’t qualify for traditional financing and/or don’t want a monthly payment, 6 per cent-plus rates are the cost of doing business. That’s especially true for those struggling with medical or mobility issues, where a reverse mortgage might be their last option to avoid a long-term care facility.

Now, one would think that rising rates might turn people off of comparatively pricey reverse mortgages. The reality is, higher rates could make people even more reliant on reverse mortgages given that payments aren’t required and because they’re easier to qualify for than other loans.

“The reasons people need money don’t go away as rates rise,” says Steven Ranson, president and chief executive of HomeEquity Bank.

A third of HomeEquity Bank’s business comes from people having problems paying off mortgages and secured lines of credit. If mortgage – and reverse mortgage – rates shoot up two to three percentage points, “that problem is actually worse,” so higher rates “may actually help our business,” he says.

Strategies to lower interest expense

The thing most people don’t realize is that you don’t have to take all the money you’re approved for, Mr. Ranson says. If you qualify for $200,000, for example, you can take as little as $25,000 up front.

You can then pull out money in increments whenever you want, as little as $5,000 at Equitable Bank and $10,000 at HomeEquity Bank. That way you’re not incurring big interest on money you don’t use. It’s kind of like a line of credit in that sense.

Note that both HomeEquity and Equitable charge an annoying $50 fee each time you pull out more money after your initial draw. The former occasionally has promotions to waive this fee.

The HELOC alternative

HELOCs are another way seniors can get the cash they need at a much lower cost. HELOC rates are currently 3.7 per cent to 4.45 per cent. Compare that with a 5.99-per-cent variable reverse mortgage.

HELOCs are much harder to get, however, especially for seniors on a fixed income with high monthly expenses relative to their monthly cash flow.

If you’re contemplating a reverse mortgage, try a mortgage broker first. They can assess your debt ratios and credit, confirm whether you’d be approved for a HELOC and compare the most flexible lenders.

And when it comes to lending to older Canadians, not all HELOC lenders are created equal. Some are more seniors-friendly than others, case in point being Manulife Bank.

As a broker, I’ve seen lenders kibosh HELOC applications from elderly clients for reasons I can only explain as age-related. But not all lenders in the HELOC space underwrite the same. At Manulife, for example, “The age of the client essentially has no bearing,” says Jeff Spencer, vice-president of retail sales at Manulife Bank and a former reverse-mortgage executive at HomeEquity Bank. “A lot of clients who are at the retirement stage qualify with us.” That’s partly because Manulife makes it easier for people with 50-per-cent equity to qualify.

And if you don’t want to make payments, you can essentially borrow the minimum interest-only payment from Manulife’s HELOC itself. You just need to deposit some kind of income into the account each month, for example, your government benefits or pension.

And there’s another benefit of “all in one” HELOC providers such as Manulife and National Bank. Since your chequing and borrowing are combined into one account, any deposits immediately reduce your debt, saving wads of interest over time. Compare that with a typical zero-interest chequing account – which is akin to loaning your bank money for free.

The key to seniors and HELOCs

HELOC lenders technically reserve the right to limit your line of credit borrowing at any time. That rarely happens, if you are making payments on time.

New regulations or financial crises are cases where HELOC lenders have restricted or increased the cost of borrowing in the past, but again, very rarely.

Another risk is if your spouse dies. If or when a lender finds out, and you can’t prove you can afford the payments on your own, it has the right to call in – essentially to cancel – your HELOC.

If you’re a senior with limited free cash flow, no assets besides your home and you want to leave yourself with options in the future, remember one thing. Never get a HELOC for more than 80 per cent of what a reverse mortgage company will lend you. That is, unless you’re willing to sell the home when you deplete your HELOC credit.

Heeding this rule enables you to refinance your HELOC into a reverse mortgage if you run out of HELOC borrowing power –even if home values drop 20 per cent. That could be the difference between you staying in your home or not.

One last tip: If you think you might need a HELOC in retirement, do yourself a favour and apply for one before you retire. Other things equal, the higher your income, the easier it is to qualify.

Robert McLister is a mortgage planner at intelliMortgage and founder ofRateSpy.com. You can follow him on Twitter at @RateSpy.

Millennials not seeking financial help with inheritance: survey

Millennials are not inclined to get financial help or professional advice after receiving an inheritance, a survey from TD Bank says.

The survey found that 83% of millennials who have received or expect to receive an inheritance feel confident in their ability to manage the gift. But almost half of those (46%) who have received an inheritance wish they had received professional advice on managing it.

The “largest ever” intergenerational transfer of wealth is anticipated in the coming years, TD says.

“Managing an inheritance can be incredibly overwhelming, especially for those millennials who are typically not as well-versed in managing larger sums of money or assets,” said Jeet Dhillon, senior portfolio manager at TD Wealth, in a release.

Of those surveyed, four in ten (41%) expect to receive or have received an inheritance. Of that 41%, six in ten (60%) expect to receive cash, while slightly more than half (53%) anticipate inheriting a property or the proceeds from the sale of a property.

Methodology: TD Bank Group commissioned Environics Research Group to conduct a custom survey of 6,021 Canadians aged 18 and older. Responses were collected between February 20 and March 1, 2018. This report includes questions asked to 3,028 Canadians, of which 687 are Millennials, who have received or anticipate receiving an inheritance in the future.

The Difference between Segregated Funds and Mutual Funds

 

Segregated Funds and Mutual Funds often have many of the same benefits such as:

 

  • Both are managed by investment professionals.
  • You can generally redeem your investments and get your current market value at any time.
  • You can use them in your RRSP, RRIF, RESP, RDSP, TFSA or non-registered account.

 

So what’s the difference? Who offers these products?

 

  • Segregated Funds: Life Insurance Companies
  • Mutual Funds: Investment Management Firms

 

Why is this important?

 

  • Since Segregated funds are offered by life insurance companies, they are individual insurance contracts. Which means….
  • Maturity Guarantees
  • Death Benefit Guarantees
  • Ability to Bypass Probate
  • Potential Creditor Protection
  • Resets
  • Mutual Funds do not have these features.

 

What are these features?

 

Maturity and Death Benefit Guarantees mean the insurance company must guarantee at least 75% of the premium paid into the contract for at least 10 years upon maturity or your death.

Resets means you have the ability to reset the maturity and death benefit guarantee at a higher market value of the investment.

 

Bypass Probate: since you name a beneficiary to receive the proceeds on your death, the proceeds are paid directly to your beneficiary which means it bypasses your estate and can avoid probate fees.

Potential Creditor Protection is available when you name a beneficiary within the family class, there are certain restrictions associated with this.

 

What are the fees?

 

  • Segregated Funds: Typically higher fees (MERS)
  • Mutual Funds: Typically lower fees

 

I can help you decide what makes sense for your financial situation.

Retirement Planning

Survey reveals top financial fears of seniors

One-in-four seniors fear they might run out of money before they die

An alarming number of seniors are afraid as to whether they can afford long-term care and stretch their retirement savings, according to a national survey commissioned by the Financial Planning Standards Council (FPSC) and Credit Canada.

The Seniors and Money Report asked 1,000 Canadians over the age of 60 how they felt about debt, income, financial planning and work.

The survey revealed that nearly half of Canadians aged 60 and older say they have at least one financial concern.

For example, one-in-four seniors surveyed fear they might run out of money before they die, while an equal amount are concerned they won’t be able to pay for long-term care. Other fears include never being able to pay off their debt, not having enough money to retire, having to sell their house or needing to depend on children for financial support.

The report also discovered that Canadians are extending their working years. Specifically, one-in-five Canadians are still working past age 60, and 6% are working to age 80 and above.

The reasons for doing so include:

  • Three-in-ten can’t afford retirement (including 13% who say they’ll never afford retirement)
  • One-in-eight have too much debt
  • Approximately 28% don’t have enough savings
  • Twelve per cent are still helping their children financially
  • Nearly a third continue to work because they love their job

The report also demonstrates that fewer Canadians are able to reply on company pension plans. For example, 50% of Canadians 80 and older list a company pension plan as a source of income, while the percentage is 41% among those 60 to 69.

“Times are changing, and many seniors haven’t planned for or anticipated the life and financial circumstances they now are facing,” says FPSC’s consumer advocate Kelley Keehn, in a statement.

“Some seniors may feel embarrassed or that it’s too late to ask for assistance when it comes to their finances,” she adds. “Truthfully it’s never too late to get started.”

Additional findings from the study include:

  • Men are significantly more likely to be employed, have a company pension plan or have investments as their current source of income than women
  • Four-in-ten of those who have a company pension as a source of income also hold investments
  • Three-in-ten Canadians age 60 and older with children are supporting them financially (including 22% of those 80 and older)
  • Overall, Canadians aged 60-years and older are more likely to be supported by the government (73%) than any other form of income.