Continuing Education for Financial Service Professionals
Retirement Income In Practice: Case Studies and Worksheets
Executive Overview In Retirement Income: Building Towards Answers we defined many of the issues facing retirees. We focused on the sources of income available to retirees and arrived at a theory of compartmentalizing costs to ensure funding will be available for all needs. We put this concept into the user-friendly idea of cookie jars. This course complements Retirement Income: Building Towards Answers because it goes the next step: into the practical application of the ideas. We will: briefly review some of the basics from Retirement Income:
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Building Towards Answers; provide the details on what is needed to achieve
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segmentation; -
illustrate our theory with three case studies;
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provide a set of worksheets for use by the advisor.
These are ideas that are open to your feedback and input. To contribute, please email info@clifece.ca. Thank you.
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Table of Contents KEY INFORMATION FOR PLANNING PURPOSES KNOWLEDGE REVIEW DOES THE COOKIE JAR THEORY HOLD UP CASE STUDY: JOAN AND JERRY CASE STUDY: JANE AND MICHAEL CASE STUDY: THOMAS AND BEV
5 10 20
CLIENT PACKAGE OF WORKSHEETS CONCLUSIONS
44 51
Retirement Income in Practice is copyright CLIFE Inc. 2012. All rights are reserved. That means no photocopying or scanning for the use of others, or file sharing with others. Permission is granted to reproduce or copy the Worksheets as desired. The information in this book is provided for educational purposes only; it should not be construed or interpreted as providing advice. Readers should seek guidance from their principals and compliance experts in regards to informing themselves about details of the products they sell, services they provide, and other considerations of their business.
Retirement Income in Practice provides continuing education credits for life agents and CFP professionals upon satisfactory completion of an online test.
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KEY INFORMATION FOR PLANNING PURPOSES Old Age Security (OAS) Old Age Security is the retirement pension received by every Canadian (excluding those who are serving time in a jail or prison for a sentence longer than two years) at age 65 who meets the criteria for residency. Beginning in 2023 the age at which OAS benefits will be available will begin to increase. By 2029, the benefit age will be increased to age 67.
Voluntary deferral of the OAS past age 65 is available and benefits max out at age 70. Deferral sees the benefit increase by 0.6% per month when the benefit is not received (7.2% annually or 36% over the full five-year period). Whenever the pension is started, the enhanced benefit applies to the balance of lifetime payments.
OAS Benefit Bonus Age Pension Begins 66
Monthly Increase for OAS Benefit 0.6%
Cumulative Pension Increase 7.2%
67
0.6%
14.4%
68
0.6%
21.6%
69
0.6%
28.8%
70
0.6%
36%
Canada Pension Plan (CPP) The CPP is also a monthly benefit and is paid to those who have contributed to the plan through their employer or on a self-employed basis. It can begin as early as age 60 on a reduced basis; at age 65 the full pension is received, and for every month after age 65 the pension is delayed it will be increased.
The amount of reduction or increase pre-/post age 65 had been set at a flat 0.5% per month or 30% for the full five years on either side of age 65. Changes were introduced in 2011 that boosted the amount the pension would increase by waiting. In 2012 the penalty for taking the pension before age 65 was increased. Both amounts are shown in this table:
CPP Benefit Bonus or Penalty Rates Year
Annual Equivalent
2014
Monthly Increase for CPP Benefits 0.70%
Annual Equivalent
8.4%
Monthly Decrease for CPP Benefits 0.56%
2015
0.70%
8.4%
0.58%
6.96%
2016
0.70%
8.4%
0.6%
7.2%
6.72%
The changes to the percentages, as shown in the table above, make a significant change in the total sum received as a pension. By 2016, the annual CPP benefit would be about $4,000 less than if it was started at age 60 and about $4,600 more if it was delayed until age 70. At age 90, the person who began CPP at age 70 will collect about $100,000 more from CPP than the retiree who began CPP at age 60. The reduction or the increase applies to every benefit for life.
In 2012 another change was introduced to the pension: contributors no longer have to stop working or significantly reduce earnings for two consecutive months to receive the CPP retirement pension before the age of 65.
INCOME TAX
Need to Adjust Income by Taxes All income received will be taxed and the income calculation should be expressed as (1-t)i. Income recipients do not own 100% of the income produced by their pensions or most other sources. It is only the after-tax amount that is available to them. The exception to this is the deposits in a TFSA.
Always Keep the Tax Component in Mind Income from every source is taxed (except TFSAs). Always bear this in mind when doing projections. The rates chart provider at the end of this section is a reminder and reinforces the importance of using the (1-t) formula for income.
How can income tax be reduced during retirement? 1. Defer tax. By deferring conversion of an RRSP as long as possible, tax on the value in the account is deferred. 2. Minimize withdrawals. Taking the smallest withdrawal from a RRIF will mean less tax has to be paid. Basing withdrawals on the age of the younger spouse is one way to lower the amount of withdrawal, and hence tax. 3. Split pension income. Income splitting occurs when income is received and it is apportioned between spouses so that some of the income is moved to a spouse who pays tax at a lower rate than the other. By putting income into the hands of someone who pays less tax, money is saved. INCOME TAX RATES IN CANADA (Source: Canada Revenue Agency) Federal Taxes (2015) 15% on the first $44,701 of taxableincome, + 22% on the next $44,700 of taxable income (on the portion of taxable income over $44,701 up to $89,401), + 26% on the next $49,185 of taxable income (on the portion of taxable income over $89,401 up to $138,586), + 29% of taxable income over $138,586
Provincial Taxes (2015) Newfoundland and Labrador 7.7% on the first $35,008 of taxable income, + 12.5% on the next $35,007 + 13.3% on the amount over $70,015
Prince Edward Island 9.8% on the first $31,984 of taxable income, + 13.8% on the next $31,985, + 16.7% on the amount over$63,969
Nova Scotia 8.79% on the first $29,590 oftaxable income, + 14.95% on the next $29,590 + 16.67% on the next $33,820 + 17.5% on the next $57,000 + 21% on the amount over$150,000
New Brunswick 9.1% on the first $39,973 of taxable income, + 14.82% on the next $39,973 + 16.52% on the next $50,029 + 17.84% on the amount over $129,975
Saskatchewan 11% on the first $44,028 oftaxable income, + 13% on the next $81,767, + 15% on the amount over$125,795
Alberta 10% of taxable income British Columbia 5.06% on the first $37,869 oftaxable income, + 7.7% on the next $37,871 + 10.5% on the next $11,218 + 12.29% on the next $18,634, + 14.7% on the next $44,408 + 16.8% on the amount over $150,000 Yukon 7.04% on the first $44,701 oftaxable income, + 9.68% on the next $44,700 + 11.44% on the next $49,185 + 12.76% on the amount over$138,586
Northwest Territories 5.9% on the first $40,484 of taxable income, + 8.6 % on the next $40,487 +
12.2% on the next $50,670 + 14.05% on the amount over$131,641
Quebec See Income tax rates (Revenu QuĂŠbec Web site). Ontario 5.05% on the first $40,922 of taxable income, + 9.15% on the next $40,925 + 11.16% on the next $68,153 + 12.16% on the next $70,000 + 13.16% on the amount over $220,000 Manitoba 10.8% on the first $31,000 of taxable income, + 12.75% on the next $36,000 + 17.4% on the amount over$67,000
Nunavut 4% on the first $42,622 of taxable income, + 7% on the next $42,621 + 9% on the next $53,343 + 11.5% on the amount over $138,586
RRIF MINIMUM WITHDRAWAL RATES
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