Retirement management notes PDF

Preview

Summary

Retirement Planning:Retirement planning refers to financial strategies of saving, investment and ultimately distribution of money meant to sustain one’s self during retirement. Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achiev...

Description

Retirement Planning: Retirement planning refers to financial strategies of saving, investment and ultimately distribution of money meant to sustain one’s self during retirement. Retirement planning is the process of determining retirement income goals and the actions and decisions necessary to achieve goals. It is ideally a lifelong process. You can start at any time but works best if you start early.

Rationale: Retirement planning is a main component of the financial planning process. It is important because it not only prepares you for life after paid work ends, but it prepares you for all aspects of life.

Retirement Planning • • •

• • •

As a retirement planner, your role involves more than analyzing a client's financial situation and economic needs. Many clients also need assistance in developing realistic retirement goals and lifestyles. Clients need to recognize and plan for the decisions and adjustments they will have to make There are many ways you can assist clients with retirement planning You can show clients who are in their early working years the benefits of identifying retirement goals and starting to save and invest early You can show clients who are in their peak earning years the importance of accumulating sufficient retirement resources and investing them appropriately What Is the Rule of 72? The Rule of 72 is a simple way to determine how long an investment will take to double given a fixed annual rate of interest. By dividing 72 by the annual rate of return, investors obtain a rough estimate of how many years it will take for the initial investment to duplicate itself.

•

•

You can counsel (проконсультировать)clients who are approaching(приближающихся) к retirement about the financial and other adjustments(корректировок) they will face at retirement You can provide expert advice to clients who have retired about distributions from retirement plans and liquidation of other assets to meet retirement living expenses

Many ways to assist client: • Early working years show the benefits of starting early • Peak earning years show the benefit accumulation and sound investment options

• •

Approaching retirement show the adjustments they will face in retirement Well into retirement show how intergenerational wealth transfer strategies, legacy foundations

Two Dimensions of Retirement Planning • For those who are already retired, it involves determining how to best make use of financial resources to support a desired and sustainable level of income • For those who are yet to retire, it involves sorting through retirement alternative and developing a plan to accumulate savings for retirement Rethinking Retirement Planning Calculus of Retirement : Longevity risk, Inflation risk, Market risk Longevity Risk (Риск долголетия) Probability an Average 65-year-old Canadian will live to age…

Age 70 75 80 85 90 95

Male 89.13% 73.99% 54.76% 33.44% 15.14% 3.34%

Female 93.94% 84.90% 71.42% 52.61% 30.60% 12.03%

Individual Aging Family Aging Population Aging The Impact of Longevity of Family structure At age 60 One parent alive 1900 – 7% 1940 -13% 1960 -24% 2000 -44%

Family Aging Sandwich Generation Empty Nest: Lots of Disposable $ Sandwich Generation: $ for parents & children

Joint 99.34% 96.07% 87.07% 68.47$ 41.11% 15.85%

Family Aging The majority of middle age people now have more parents that they have children. We know that as you age passed 75, the need for assistance in daily living activities increases Given that we now live in the sandwich generation the need for FP to account for this potential extra responsibility is very important. Children are also living at home longer, parents are helping with down payments etc. these are all factors that now go into retirement

Individual Aging: Activities for Daily Living Percentage Needing Assistance 75-85 years old • Bathing 7.0% • Dressing 5.0% • Transferring 4.8% • Toileting 3.9% • Eating 1.9%

Family Aging: Long-term care costs 183$ a day – average cost of a semi-private room in a nursing home 152% a day – average cost of a home health aide: $19 an hour, eight hours a day

Inflation Risk • • • •

Massive impact over time CPI vs. CPI-E Make it Personal CPI

Risk Management Define global objective

MARKET RISK Needs, Resources, Risk Tolerance, Required return Example 5,5% , Goals + Equity return 7.5%/fixed income return 3.5% = global objective 50% equity 50% fixed income

Shortfall Simulation Assumptions Portfolio Age

Accumulation Phase 40

Income payour phase 60

Investment Horizon Opening Balance Cash flow Target real return Strategic asset allocation Equity return Bond return Rebalance Time period

20 years $1000 000 Deposits $100 000 year Rolling 20 yr Real Return (4.8% year) 50/50 Portfolio Ibbotson US Large Stock Gov’t Bond Ibbotson us long-term Gov’t bond Monthly January 1928-present

40 years $1000 000 Withdraw $51000 year Rolling 40-ye real return (4.2% year) 50/50 portfolio Ibbotson US Large Stock Ibbotson US Long-term Gov’t Bond Monthly January 1928 - present

Canadian Retirement Market Reason Standard of Living Worse than expected in Retirement General expenses were higher than expected 38% Though government/private pension benefits would be higher 14$ Unable to find employment/lost employment Investments not doing as well as expected Other 18% Don’t know

Living in Retirement: Linear Education->work-> retirement Living in tretirement:cyclical

What Triggers Retirement Readiness (%selecting) Achieving financial freedom 18% Significant birthday (e.g. 55,60,65) 16% Ilness or health issue 15% Death of a family member or friend 8% Layoff or career setback 6% Emptynest when children leave home 6% Spouse or parent retired 6% Becoming a grandparent 4% Divorce 3% Maslow’s Hierarchy of Needs

Physiological (Physical survival needs – water, food , sleep , warmth) biggest Safety/Security )Physical safety, economic security, freedom from threats Social (Belonging) (Acceptance, be part of a group, identification with others Ego (Eastern) (Recognition from others, prestige and status Self-Actualization (Realization of potential, fulfillment) Retirement Income Solutions Pyramid Basic Expenses (Food, house, insurance,taxes)  CPP/OAS/ Employer Pension / Private Pension Annuity Security Expenses(Unexpected Events&Expenses) Cash/Insurance (Life/Disability/CI/LTC) Social Expenses(Hobbies/travel/gifts/entertainment) income from investments Esteem Expenses (Recreational Property/Boat) Sale of investments Legacy Expense (Estate / Philanthropy)  Remaining investment, insurance proceeds How much can I contribute? The current maximum contribution to an RRSO is: the lesser of the maximum annual RRSp contribution limit 26230 – for 2018 266500 for 2019 , thereafter adjusted for inflation Or 18% of your previous year’s earned income, minus any Pension Adjustment If, for a given tax year, you do not make your maximum RRSP contribution, you will have unused contribution , you will have unused contribution room that you can use in subsequent tax years

RRSP’s • • • • •

A Registered Retirement Savings Plan (RRSP) is a registered account that allows you to defer taxes on the growth of your investment. It is available to Canadians who have qualified earned income. Contributions are tax-deductible. The income earned and growth generated by the investments in your RRSP is tax sheltered until withdrawn. At age 71, you can transfer your accumulated RRSP into a variety of RRSP maturity options.

The longer your funds can remain tax sheltered the greater the effects of compounding benefits. The maximum contribution is 18% of earned income. The definition of earned income will be covered later RRSP

• • •

The longer your savings grow within a tax-sheltered structure like an RRSP account, the more you benefit from the effect of compound investment returns Contributions may be deducted in the calendar year that they year received Contributions made during the first 60 days of the calendar year may be claimed in the year made or previous calendar year

What type of RRSP account are available? Individual RRSP – associated with a single individual who is also the contributor Spousal RRSP -An RRSP in which the plan holder’s spouse makes contributions on behalf of the plan holder

Eligible Investments for RRSP • Investments that can be held in an RRSP are called qualified investments. They include: • Cash • Gold and silver bars • GICs • Savings bonds • Treasury bills (T-bills) • Bonds (including government bonds, corporate bonds and strip bonds) • Mutual funds (only RRSP-eligible ones) • ETFs • Equities (both Canadian and foreign stocks) • Canadian mortgages • Mortgage-backed securities, and • Income trusts What happens when I turn 71? • By the end of the year in which you turn 71, you are required by law to convert your RRSP into regular retirement income. • At that stage you may pursue one or a combination of options; • Withdraw RRSP funds • Purchase an annuity • Roll RRSP funds into an RRIF Special programs to withdraw RRSP funds Home Buyer’s Plan (HBP) Canadians can borrow tax-free up to $25,000* from their RRSP to purchase their first home. The loan must be repaid to the RRSP within 15 years after an initial 2 year grace period. *2019 Budget increased this to $35,000

Government of Canada Calculator https:www.canada.ca/en/financial-consumer-agency/services/retirement-planning/money-toretire.html Cost/Benefit of Downsizing home http://www.theglobeadnmail.com/real-estate/mortgages-and-rates/downsize-your-homeworksheet/article20320032/ Lifespan Calculator http://media.nmfn.com/tnetwork/lifespan/#0

Lifelong Learning Plan (LLP) l Similar to HBP except the money borrowed is to go to or return to a qualified postsecondary school. l Annual withdrawal limit of $10K per year to a maximum of $20K; No limit on number of times you can participate in the plan after you bring your balance to zero. l Must be repaid in 10 years. l Some restrictions on amounts you can withdraw – contributions you made to your RRSP during the 89-day period just before withdrawal. Extra info on HBP Even if you declare bankruptcy, you still have to make the annual repayment to your RRSP for each year remaining in your HBP participation period, until the full amounts withdrawn under the HBP is repaid. If you no not make the repayment for a year, you have to include it in your income for that year. Extra info on LLP You can find the amount owed for the year on your Notice of Assessment; 1/10th of amount outstanding each year Some restrictions on amounts you can withdraw – contributions you made to your RRSP during the 89-day period just before withdrawal Old Age Security (OAS) Under the new rules that come into effect on July 1, 1977, you would qualify for a full pension after 40 years of residence in Canada after attaining 18 years of age. If you do now qualify for a full pension, you still might be eligible for a partial or pro-rated pension after a minimum of 10 years of residence in Canada after attaining 18 years of residence in Canada after attaining 18 years of age. Old Age Security (OAS) Old Age Security (OAS) is a government program that provides all individuals who meet certain residency requirements with universal access to a basic level of retirement income regardless of their past employment or income.

The program includes three public pension benefits- Old Age Security (OAS), the Guaranteed Income Supplement (GIS) and the Allowance. • • •

•

The flat rate OAS pension is a pension benefit that is payable commencing at 52 years of age The Canada Revenue Agency increases it quarterly to match increases in the Consumer Price index. As of January 1, 2018, the flat rate OAS pension was $586.66 pr month or $7,039 per year, although the OAS pension is indexed quarterly and the annual benefit will change with this indexing. The OAS pension is taxable income to the recipient who must report it as such for income tax purposes

The OAS Clawback is a repayment of OAS benefits by high-income earners. The OAS clawbach rate is 15% The OAS threshold is the income at which the income tax act beging a pensioner’s oas benefits. CRA indexeas the OAS threshold to chacnes in the Consumer Price Index. For 2018 the OAS threshold is $75910 The amount of the OAS clawback is the amount calculated as (the greater of (0% and (net income before social benefit repayments 0 OAS clawback threshold ) X clawback rate))) The OAS income level cut-off is the amount of net income before social benefit repayments at which all a pensioner’s OAS benefits have been calwed back As of January 1, 2018, the OAS income level cut off is about $122,843

There are clawbacks based on the income you earn. The claw back rate is 15% and starts at apprax $75k in income. CPP The Canada Pension Plan (CPP) is a federally administered program designed to provide monthly pensions to qualified contributors in retirement, to disabled contributors and their children, and to the widows, widowers and orphaned children of deceased contributors. In addition, a lump sum death benefit is payable to the estate of a deceased contributor. Enhanced CPP On June 20, 2016, Canada's Ministers of Finance reached an agreement in principle to enhance the CPP. The governments will phase these changes in over 7 years, from 2019 to 2025, so that the impact is gradual. The deal will increase how much working Canadians will get from the CPP: from one-quarter of their eligible earnings, to fully one-third, with an increase to the earnings limit.

CPP Contributory earnings are all pensionable earnings above the year’s basic exemption up to the year’s maximum pensionable earnings (YMPE) The amount of your contributory earnings is the amount calculated as: The lesser of (pensioable earnings and year’s maximum pernsionable earning)) – year’s basic exemption The year’s basic exemption (YBE) is the basic exemption level below which earnings are not subject to contributions For 1998 and later years the year’s basic exemption (YBE) is frozen at 4500$...