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Q. I have just turned 40, am single, and earn $86,000 a year. I also have zero debt. I just finished paying off my house, worth $315,000, and I would like to continue to put away my mortgage payment of $1,000 every two weeks as savings.
Because all money went to debt repayment, I’ve never really invested before, but I do have $20,000 in my RRSP that a family member manages for me. I also have a small amount in my TFSA. I will receive a pension upon retirement, but as I would like to retire early, I won’t receive the full amount, and the pension payments will not fully sustain my lifestyle. So some advice on how I should invest the $26,000 in annual disposable income would be appreciated.
A. Despite your lack of investing experience, Mara, your instincts are right on target. Most of us don’t want financial independence, which can easily be achieved by selling everything we own and buying a hut in an impoverished country; we want to achieve and maintain our desired lifestyle.
When you look ahead, what does your desired lifestyle look like? It appears that you may be postponing some of the things you’d like to do; why would you wait until retirement? Maybe because you don’t feel secure with your current or future finances? I think you would benefit from a lifestyle plan, which I will touch at the end of my reply.
First, let me try to answer your question about how best to invest, without knowing your desired lifestyle. Working with your numbers, an $86,000-a-year income is about $67,000 after tax, depending on your province of residence. You’re saving $26,000 annually, so that means you are maintaining your lifestyle on about $40,000 a year.
Using back-of-the envelope calculations, saving $26,000 a year for the next 15 years to age 55 will give you $390,000 plus investment growth. That will likely give you an indexed income of $40,000 per year to age 65.
At age 65, you will have Canada Pension Plan (CPP) and Old Age Security (OAS) benefits, which I’m guessing will be a minimum of $20,000 per year indexed, but will likely be more because of the new CPP enhancements. Plus, on top of the CPP and OAS, you will have your employment pension, which I will assume will be $20,000 a year or more. Based on those assumptions, you’ve got your $40,000 annually for life and will maintain your current lifestyle.
As a general guide, I would suggest you invest your money in this order:
RRSPs. Maximize your annual RRSP contributions. Check your notice of assessment to confirm the amount you can contribute. (In general, working Canadians can contribute 18% of last year’s income, but because you have a pension adjustment, the calculation is not as simple in your case.)
You will have past RRSP contribution room that you can use to make a larger lump sum investment into your RRSP. Take advantage of this, but keep an eye on your taxable income so you can maximize your tax refunds. An RRSP contribution reduces your taxable income by the amount of the contribution. If, after you make a contribution, you are still in the 30% tax bracket, then your refund will be 30% of the contribution. That’s good. But what happens if $10,000 of your contribution lands with the 20% tax bracket? That $10,000 will generate a 20% refund—or 10% less than the remainder of your contribution. Better to save that last $10,000 to contribute the next year, when it can generate a 30% refund. And never take your taxable income to zero with an RRSP contribution, because the last $12,000 of contribution will earn a $0 refund.
Contribute only enough to your RRSP to bring you down to the bottom of your existing tax bracket. Mara, for you that would be to a taxable income of about $45,000 depending on your province.
Contribute as much as you want to your RRSP, but when you complete your tax return, claim only just enough of your RRSP contributions to get you to the bottom of your existing tax bracket and defer claiming the remaining contribution to the following year or years ahead.
TFSA. Use your RRSP tax refund and remaining money to maximize your TFSA.
Non-registered investments. The traditional approach is to hold taxable preferred investments, like capital-gain and dividend-paying investments in non-registered investment accounts, and GICs* in an RRSP or TFSA.
Remember you also have your home equity, which you could draw upon at some future point. Mara, from a financial perspective you are doing really well. Congratulations!
I’d encourage you now to give some thoughtful consideration to what you’re saving for, and how you want to live now as well as when you retire:
As a starting point, look at your current lifestyle—the things you have and do. Think about your home, lifestyle, family and career. Then give some thought to the things you’d like in the future. This is lifestyle planning.
Now, record your assets, liabilities and current cash flow. This will allow you to identify any gaps between your current lifestyle and desired lifestyle. It also gives you the ability to experiment with different lifestyle choices and financial planning strategies you can use to close any gaps. This is financial planning.
Finally, with the help of an advisor, select appropriate investments to support your lifestyle plan. This is financial advising.
Now you have a draft lifestyle plan, which will always be a draft plan because you and everything around you will be constantly changing. However, if you update your progress each year, you will gain clarity in your numbers, become confident in your decision-making—and the doors to opportunity and freedom will swing wide open.
Allan Norman is a Certified Financial Planner and Chartered Investment Manager with Atlantic Financial Inc.
This commentary is provided as a general source of information and is intended for Canadian residents only. Allan offers financial planning services through Atlantis Financial Inc. and can be reached at email@example.com
These days, nearly all credit cards include some kind of travel insurance. Like purchase protection, it’s an easy add-on to entice customers, but savvy Canadians know that not all insurance is created equal. Most travellers really only need to consider a few kinds of coverage: emergency medical, trip cancellation or interruption, and theft or baggage loss. As to which travel credit card offers the right combination of features for you—that will depend largely on the type of traveller you are and the perks you’re most likely to use.
Flight delays are a fact of travel—an inconvenient and often expensive cost of being in transit. This card offers an attractive flight delay insurance package that lets you claim up to $500 in costs for accommodations, food, and even personal items after a delay of as little as four hours. If your delay is shorter, you’ll spend it in style and comfort with the card’s free airport lounge access. And, with no foreign transaction fees, the Passport Visa Infinite can save you even more on out-of-currency purchases. As part of the Scotiabank family, the Passport Visa Infinite allows you to earn Scotia Rewards, which you can redeem for travel or merchandise without blackout periods or other restrictions. And if you spend $1,000 in the first three months of card membership, you’ll receive 30,000 points which works out to $300 towards travel.
Annual fee: $139
Welcome bonus: 30,000 Scotia Rewards points when you spend $1,000 in the first three months
Earn rate: Cardholders earn 2 points on every eligible $1 spend, and 1 point per $1 spent on everything else. Eligible spends include grocery stores, dining, entertainment, and transit
Additional benefits: No foreign transaction fees, complimentary airport lounge access, flight delay insurance, plus Avis Preferred Plus car rental membership and Visa Infinite benefits
Canadians are privileged when it comes to healthcare, so it’s no surprise that we want to travel with the most robust medical insurance available. While many credit cards offer medical coverage of up to $1 million, the World Elite Mastercard doubles that. Coverage for you and your family to the tune of $2 million provides a lot of peace of mind, while your complimentary membership in Mastercard Airport Experiences will ensure comfort. You’ll receive VIP lounge access through LoungeKey, plus four annual complimentary passes.
Cardholders earn BMO Rewards points, which can be applied to travel, or to merchandise, cash redemption, or even a contribution to a BMO investment account.
Annual fee: $150—waived for the first year
Welcome bonus: 35,000 BMO Rewards points
Earn rate: Cardholders earn 3 points on every eligible $1 spend and 2 point per $1 spent on everything else. Eligible spends include travel, dining and entertainment
Additional benefits: Emergency travel medical insurance, trip disruption and car rental insurance, plus extended warranty and purchase protection
Canadians work hard all their lives, often with the idea that they’ll travel once in retirement or semi-retirement. The thing is, many insurance companies radically increase premiums or even refuse coverage to older applicants. Travellers with the National Bank World Elite Mastercard in their wallet have 15 days of emergency travel insurance included, even if they’re over 65 years old. The card’s inventive travel fee reimbursements system can cover you for travel-related costs like airport parking, seat selection, and checked baggage fees.
This card’s rewards program lets you earn points on purchases that can be redeemed for travel or merchandise, or used for financial products like RRSP or TFSA contributions, or mortgage or line-of-credit payments.
Annual fee: $150.00
Welcome bonus: Annual fee waived for the first year
Earn rate: This card has a tiered reward system that offers different point-to-dollar ratios depending on how much you spend, with a maximum of 2:$1
Additional benefits: Comprehensive travel insurance, emergency medical protection, travel discounts, travel reimbursements, lounge access at Montreal-Trudeau National Airport, purchase protection, and extended warranty
Lounge access and cabin upgrades mean nothing if you never set foot in an airport. Road trippers are travellers, too, with their own set of insurance concerns. And with the BMO Cashback World Elite Mastercard you get free and automatic basic membership in the BMO Roadside Assistance Program. This covers up to four annual service calls in Canada and the United States, and provides you with standard help like boosting your battery, changing a flat tire or fuel delivery, as well as tows up to 10 kilometres. In addition, this card gives cash back to the tune of 1.5% of every dollar spent without limit. Other travel insurance perks include membership in Mastercard Airport Experiences (which, among other things includes lounge access, for you when you do choose to fly), travel and medical insurance, and concierge service.
Annual fee: $120
Welcome bonus: Earn 5% cash back for the first three months
Earn rate: Cardholders earn 5% cash back on purchases made in the first three months and 1.5% afterwards
Additional benefits: Travel and medical insurance, enrolment in Mastercard Airport Experiences, basic membership in the BMO Roadside Assistance Program, concierge service, purchase protection, and extended warranty
If you’re looking for a no-fee card option that still offers protection, President’s Choice Financial World Elite Mastercard is an option to consider. While you can’t get liability insurance on any credit card (you must buy this at the counter), this one offers a robust policy for car rental loss and damage—31 days of coverage and a maximum value of $65,000. Additionally, cardholders earn PC Optimum points that can be redeemed for groceries, drugstore items, or even clothes at Joe Fresh. From campfire goodies to bug spray to swimming suits, this card will help get you out on the open road.
Annual fee: $0
Welcome bonus: None
Earn rate: Cardholders earn 45 points on every $1 at Shoppers Drug Mart, 30 per $1 at affiliated Loblaw grocery stores or Shoppers Drug Mart/Pharmaprix, and 10 per $1 spent everywhere else
Additional benefits: Car rental insurance, travel insurance, identity theft insurance and concierge service
Q. I started investing with the Couch Potato strategy two years ago. My question involves rebalancing. Would it be better or worse for returns to rebalance every month instead of once a year? I like being a hands-on investor and would not mind the extra time this would require, as long as there was the chance for a small increase in returns over 10 years or more. – Nicholas
A. Even the Couch Potato strategy requires a little maintenance. Your asset allocation—that is, the targets you set for the percentage of stocks and bonds in your portfolio—will drift as markets move. So, from time to time, you may need to sell some of the assets that have gone up in value and use the proceeds to prop up whatever has lagged. For example, after a sharp downturn in the equity markets, you can sell some bonds and use the cash to buy more stocks. This is called rebalancing, and it’s an important part of any disciplined investment process.
That said, rebalancing is often misunderstood. Its goal is not to boost returns; rather, it is primarily a risk management tool. Moreover, there is always a trade-off when rebalancing: It often incurs transaction costs and taxes, so rebalancing too frequently can be counterproductive.
Let’s unpack these ideas a little. Remember that over the long term, stocks have a significantly higher expected return than bonds. So during most periods, rebalancing will involve selling stocks and buying bonds, not the other way around. For this reason, rebalancing a portfolio of stocks and bonds is therefore likely to lower your returns, not increase them.
That said, you might expect a modest increase in returns when rebalancing asset classes that have a similar expected return, such as stocks from different countries. By occasionally selling high and buying low, there is a potential “rebalancing bonus.” But even this is likely to be modest.
To test this, I ran the data for a portfolio with equal amounts of Canadian, U.S. and international stocks (all in Canadian dollars) from 1980 until the end of April 2019. It turns out that if you rebalanced this portfolio once a year, its annualized return over the entire period was 10.4%. And if you never rebalanced it at all? Exactly the same. (This shocked me, too.)
If we look at only the last 10 years (ending April 2019), annually rebalancing an all-equity portfolio actually lowered performance, because U.S. stocks consistently outperformed Canadian and international, so you would have enjoyed higher returns had you just let them run.
So if rebalancing should not be expected to boost returns—and if it occasionally lowers them—why do it at all? The answer is that rebalancing a portfolio is primarily designed to control risk. If you have a carefully designed plan that calls for a portfolio of, say, 60% stocks and 40% bonds, then you shouldn’t stray too far from those targets. If your portfolio drifts to 70% or 75% stocks, it would be meaningfully riskier than it was before, so the prudent thing to do is sell some stocks and buy some bonds to reduce that risk.
So, I hope it’s clear why monthly rebalancing is much too frequent. Once a year is plenty in most cases. Even then, it’s not necessary to rebalance if your portfolio is only slightly askew. As a rule of thumb, consider rebalancing only when any asset class is more than five percentage points off its target. So if you are aiming for 40% bonds, you’re probably fine as long as you are within 35% to 45%. This is especially true if your portfolio is relatively small: for example, if you have $50,000 invested, each percentage point is just $500, which isn’t going to make a meaningful difference in terms of risk or potential return. Once your portfolio is very large, you can make an argument for rebalancing more frequently.
If you are contributing to your portfolio regularly, you can use those cash flows to keep your portfolio balanced. Whenever you add new money, simply buy whichever asset is furthest below its target. During a year when U.S. equities have risen significantly and bonds have declined, for example, just direct your new contributions to the bonds. During a bear market, when stocks will likely fall below your target, use that new money to buy more equities. You will never keep your portfolio in perfect balance this way, but that’s not necessary. Rebalancing is like playing horseshoes: close is good enough.
Dan Bortolotti, CFP, CIM, is an associate portfolio manager and financial planner with PWL Capital in Toronto.
Selling your home? Got a pet? Then expect either a big cleaning bill or a big reduction on your sale price.
“Pets impact home sales in several ways,” explained Mark Santoyo of Chicago’s RE/MAX Loyalty. “The main concern with pets is their effect on a home’s cleanliness and its smell. If a home is nicely cleaned and free of pet odours, the presence of pets is rarely an issue. However, if there is pet hair everywhere, strong pet odour in the house or pet waste around the yard, it can increase the time needed to sell the property and reduce its value.”
Worse yet, you may be shutting down a potential sale to a fairly substantial segment of the market. It’s estimated that 20% to 30% of young adults will react to an airborne allergen, such as pet dander. While studies show that early exposure to animals is beneficial, the prevalence of other medical conditions, such as asthma, hay fever, will also influence an allergic response. A Swedish study found that 40% of kids with asthma reacted to cats, 34% reacted to dogs and 28% reacted to horses.
Animal allergies are a common concern, and buyers who have them can be easily turned off if a house has pets, explains David Scott of RE/MAX Valley Realtors in Roscoe, Illinois.
“Buyers occasionally are sensitive enough that they ask not to see homes where certain pets, typically cats or dogs, are residents. Other buyers will ask to leave a home immediately if they smell strong or foul pet odours,” Scott said. Of course, many buyers have pets of their own and often show greater tolerance.
But it’s not just odour or pet hair that’s a problem. Yellow or dying grass in the front or backyard, half-chewed toys littered in yards or across rooms, as well as open or smelly litter boxes can prompt concerns, even in pet-loving buyers.
That’s because problems associated with pets can last for years, says Damian Ciszek of RE/MAX 10 in Chicago.
“If pets urinated in the house, the odour can linger indefinitely, and pets can do lasting damage to the woodwork by scratching or chewing,” says Ciszek.
So what should pet owners do to be sure Rover and Fluffy don’t negatively impact the sale of their home? RE/MAX brokers offer five straightforward bits of advice:
→ Clean the place, especially any rugs or carpeting, thoroughly before putting the home on the market, which may mean calling in professionals. And don’t forget the air vents.
Once the house is clean, keep it that way.
→ Pet owners often don’t notice the odours caused by their animals, so it’s best to ask your broker or friend if odours are noticeable.
→ If animals have urinated in the house, replace the affected carpeting or flooring, eliminating the odour at its source.
→ Ideally, remove pets from the home while the house is on the market. If that’s impractical, either take the pets out during showings or keep them confined in a small room or crate.
Santoyo added that pets also can be a distraction. Some people are phobic about animals. Others adore them. Either group can have a hard time ignoring a pet if it is wandering around the home.
“Do you want a buyer playing with your cat for 15 minutes or seeing the best features of your home?” he asked.
To help you get highest sale price for your home, consider spending money to fix the problems. “It may not be cheap,” says Ciszek, “but it will make money for you in the long run.” As a way to illustrate his point, Ciszek states that an animal-damaged home is like a home that hasn’t been updated in 30 years. Scott estimates that for every dollar a potential seller will need to spend to clean or remediate a pet problem, they’ll reduce their bid price by $2 to $3. For example, if it would cost $10,000 to replace the floors the buyer will reduce their offer by $20,000 to $30,000.
“If you want to achieve maximum value on your home sale, it’s best to correct the flaws yourself, rather than offering credits to the buyer,” added Scott.
Two of the more promising measures in the recent federal budget could pave the way for deferred annuities and pooled-risk pension products designed to prevent retirees from outliving their money.
The budget proposed two new types of annuities that can be used for registered plans. The headline-grabber was ALDA: an acronym for Advanced Life Deferred Annuity. As of 2020, ALDAs could become an investment option for those with registered plans like RRSPs or RRIFs, Defined Contribution (DC) Registered Pension Plans and Pooled Registered Pension Plans (PRPPs).
The other proposal is for Variable Payment Life Annuities (VPLAs), which would pool investment risk in groups of at least 10 people within defined-contribution RPPs and PRPPs. This, to me, rings of a relatively obscure academic concept called a “tontine,” which, in its most extreme form—famously depicted in The Wrong Box—pools investments by a group, with the single survivor “winning” the whole pot by outliving all the unfortunates who die sooner. And the idea of sharing risk among large groups to provide “longevity insurance” is also present, if less dramatically so, in traditional Defined Benefit (DB) pension plans, using mortality credits.
The budget says a VPLA “will provide payments that vary based on the investment performance of the underlying annuities fund and on the mortality experience of VPLA annuitants.” That means—unlike DB pensions—payments could fluctuate year over year.
As pension expert Bonnie-Jeanne MacDonald wrote in The Globe and Mail, the risk of not knowing how long you will live is reduced if you’re part of a large enough group, since actuaries use the “law of large numbers” to calculate the highest “safe” pension for each member of a pooled-risk pension. MacDonald, who is Director of Financial Security Research at the National Institute on Ageing at Ryerson University, said investment fees also tend to be lower in pooled plans compared to what individuals might pay on the retail market.
A precedent for pooled-risk DC pensions
There is a precedent for pooled-risk DC pensions: The University of British Columbia’s faculty pension plan has run such an option for its DC plan members since 1967, according to MacDonald.
Matthew Ardrey, a wealth advisor with Toronto-based TriDelta Financial, says you will need 10 or more contributing members of a PRPP or DCPP to create a VPLA fund. VPLA payments must commence by the year a member turns 71 or the end of the year in which the VPLA is acquired, whichever is later. The budget also said Ottawa will consult on potential changes to federal pension benefits legislation to accommodate VPLAs for federally regulated PRPPs and DC RPPs, and may need to amend provincial legislation.
But it’s ALDAs that initially captured the attention of retirement experts, in part because of its ability to push off taxable minimum RRIF payments. Fee-only financial planner Jason Heath says this would be “the biggest change in the Canadian retirement planning landscape in quite some time,” one that makes the ability to defer CPP or OAS benefits to age 70 “pale in comparison.”
An ALDA lets you put up to 25% of qualified registered funds into the purchase of an annuity. The lifetime maximum is $150,000, indexed to inflation after 2020. Beyond that limit, you are subject to a penalty tax of 1% per month on the excess portion.
The main reason to consider an ALDA is that you are worried about outliving your money. Up to now, annuity payments had to start by no later than the year after you turn 71, as with RRIFs. But ALDA payments can be deferred as late as the year you turn 85. “By moving up to $150,000 out of a RRIF/RRSP, the future RRIF minimum you would be forced to take would be less,” Ardrey says. Money in an ALDA would reduce the minimum RRIF withdrawal requirements between age 72 and 85, when ALDA payments would commence. That may, in turn, reduce OAS clawbacks for retirees enjoying high incomes.
As York University Schulich School of Business finance professor Moshe Milevsky points out, “With ALDA, you don’t have to defer [receiving your income] all the way at age 85, but rather up to age 85. So, you can delay to 75 or 80, if that suits your plans and preferences. Age 85 might sound extreme to many. I personally purchased an ALDA—in the U.S., since I’m a dual citizen—delayed to age 80.”
Real longevity insurance and “tontine thinking”
Milevsky should know, as he first used the term ALDA in the North American Actuarial Journal back in 2005. The article was headlined “Real Longevity Insurance with a Deductible.” It describes how ALDAs can help those who aren’t members of traditional DB pension plans and the implicit longevity insurance built into them, which are increasingly rare in the private sector. The paper shows how each $1 a month saved in the working years can yield between $20 per month and $40 per month in eventual retirement benefits. (See also the 2018 MoneySense article titled An Annuity that pays off, if you live long enough. It describes Milevsky’s views on “tontine thinking.”)
Milevsky, who has written entire books on tontines, won’t go so far as to describe ALDAs or VLPAs as tontines, a term that in any case is unlikely to be adopted by the financial industry. He says the ALDA in the budget guarantees an income starting at some advanced age and is backed by an insurance company with capital and reserves. By contrast, “A tontine requires absolutely no insurance company or entity to back up or guarantee payments. The risk is absorbed by the pool or syndicate.”
Still, the budget’s ALDAs are “very interesting and exciting,” Milevsky says, “even path-breaking. I guess that’s what happens when you have a Minister of Finance with ‘deep’ pension knowledge.”
In a press release issued by the National Institute on Ageing after the budget release, MacDonald said the NIA had asked Ottawa to allow workplace DC pension plans to offer improved options to members, notably deferred and pooled-risk pensions. “They listened. These measures offer a safe way to turn hard-earned retirement savings into lifetime pensions. At the end of the day, such pensions deliver more secure, predictable income for life, improving seniors’ financial independence and peace of mind.”
In an interview, MacDonald referenced page 365 of the budget, which effectively allows tontines in DC pension plans, along with longevity insurance, starting on page 362. “These were long advocated in Milevsky’s work, and further envisioned in my CD Howe article.” MacDonald said the paper led to an unprecedented coalition of retirement security stakeholder organizations that seeks changes to tax and pension legislation to meet the needs of Canada’s changing demographics.
MacDonald said a key representative of a large pension plan that’s likely to adopt the VPLA told her he expects early adopters will be large corporate DC plans and quasi-public plans like universities. While it isn’t clear from the budget, financial services providers could also play a role by pooling together multiple small pension plans.
“The runway has been paved”
“Time will tell if these things (ALDA and VLPA) ever get off the ground, but the Canadian runway has now been paved,” Milevsky says, and time will tell what kind of vehicles the industry develops. He notes the budget bill hasn’t passed yet but “ultimately sponsoring companies will have to step up to the plate and start offering these plans. Only once those pricing details are available can anyone judge whether they are good or bad.” He suggests waiting until insurance companies start offering ALDAs before advocating to buy them as a pure tax play to reduced mandatory RRIF payments.
Even so, Milevsky thinks the ALDA measure is encouraging and more likely to be successful than its cousins in the US because they will enable retirees to avoid drawbacks like OAS claw-back or tax-bracket creep. However, he cautions, “if the pricing of these deferred annuities is too heavily loaded with fees and margins, then even I will say ‘forget about it’.”
Retired actuary Malcolm Hamilton doesn’t see the ALDA as a classic tontine, in which all the pooled money goes to the last survivor alone (as in The Wrong Box). Instead, he believes the ALDA “is just a deferred annuity.” He’s reserving judgment on actual products until he sees what the industry offers. “They have created an ability for the insurance industry to craft products that may or may not be of interest to Canadian retirement savers.”
Hamilton agrees the ALDA is similar to the longevity insurance that ordinary annuities provide, although annuities are not very efficient. “Experts say Canadians should buy annuities more than they do,” Hamilton says, adding the original idea for RRSPs was that everyone should buy annuities when they matured at age 70. “It turned out Canadians not only didn’t like buying annuities but felt strongly enough to get politicians to give them a RRIF as an option.” ALDA is “a more intelligent annuity in the sense that you don’t have to commit 50% to 75% of your retirement savings to this because you only annuitize payments at age 85 and later, and they are limiting it to 25% or $150,000, whichever is less. That’s pretty good in terms of providing a reasonable guideline.”
ALDAs may face the same resistance as traditional annuities
Still, ALDAs may face the kind of headwinds confronted by traditional annuities. Both require handing over money to an insurance company in return for guaranteed-for-life future payments. Retired financial advisor Warren Baldwin is critical of the lack of flexibility of annuities in general. ALDA’s main benefit, in his view, is being able to push the tax deferral out to age 85; but he points out that if you can afford to push it out that long, you likely have lots of money, anyway.
Milevsky suggests investors shouldn’t “let the tax tail wag the deferred-annuity dog. Don’t buy this solely to reduce RRIF requirements. You should have a legitimate need for longevity insurance.” He believes a better tax fix would be to eliminate requirements to withdraw from RRIFs for very small accounts, and only force the existing drawdown schedule on larger accounts. “This way, people don’t feel obligated to purchase an insurance product (ALDA) they don’t really need, just to avoid the RRIF factors. I worry about inappropriate sales pitches.”
Matthew Ardrey doesn’t expect many clients will outlive their money; half the time he encourages them to spend more and not leave too large an estate subject to high taxes. Tax deferral may be an issue for affluent retirees but, even then, Ardrey estimates someone with a $1 million RRIF at age 72 would have to withdraw $54,000 if they didn’t have an ALDA, while if they maximized an ALDA, the minimum RRIF withdrawals would range between about $8,100 to $45,900. That’s not huge, especially if the amount is split with a lower-income spouse.
“I fail to see how this is going to help the average Canadian who needs the income from their RRIF account to live day-to-day.… With current interest rates remaining at lows for the foreseeable future, the loss of financial flexibility and the loss of tax-deferred rollover to the surviving spouse on death, the benefits of the ALDA do not outweigh the costs for most investors,” Ardrey concludes.
Q. This fall, I will celebrate my 65th birthday, and plan to reduce my work hours to three days a week, from my current full-time hours now. I also plan to begin collecting my Canada Pension Plan and Old Age Security benefits—but, at the same time, I want to avoid being taxed on my income if possible. What would you suggest I do?
A. From a lifestyle perspective, Rose, I think the phased retirement you’ve opted for is a great way to make the transition from full-time work. Not everyone has the option to go from full- to part-time, but if you can, it’s worth considering.
There is a common misconception that you can’t work while receiving your government pensions, or that there is some sort of reduction or clawback. You can, in fact, receive your Canada Pension Plan (CPP) retirement pension and your Old Age Security (OAS) pension while still working, but there are some important considerations.
If you haven’t contributed enough to the CPP to receive the maximum benefit, you may opt to continue to contribute after age 65 to enhance your pension. If you are entitled to receive the maximum pension already, oddly, you would need to start your CPP pension to receive any “post-retirement benefit” for contributions you make after turning age 65. (In other words, you would not want to hold off on receiving your CPP benefits.)
OAS is a bit different from CPP. For one, there are no contributions to OAS. And unlike CPP, the earliest you can start your pension is age 65, while the latest you can defer it is age 70. Another consideration is that OAS does have a pension recovery tax, often called a “clawback,” that can reduce your pension income. It doesn’t have anything specifically to do with still working after 65, though, and is simply based upon line 236 (net income) of your T1 tax return.
If this net income—regardless of the source—exceeds $77,580 for the 2019 tax year, there is a pension recovery tax, or clawback, of your OAS for 15 percent of your income exceeding the threshold.
You can choose to defer your CPP or OAS pensions after age 65, Rose. People often feel compelled to begin the pensions because they receive their CPP and OAS applications from Service Canada in the mail prior to their 65th birthday, but you can defer as late as age 70. There is a bigger benefit from deferring your CPP pension (an increase to your benefit of 0.7% per month or 8.4% per year) compared to OAS (an increase to your benefit of 0.6% per month or 7.2% per year) after age 65.
Keep in mind, too, that you don’t need to start both CPP and OAS at the same time. You might consider starting one of your government pensions in the fall, to supplement the 40% reduction in your employment income you’ll experience by moving to part-time hours. You can wait to start your other pension after you’ve fully retired.
Another option could be to start withdrawals from your Registered Retirement Savings Plan (RRSP) when you transition to part-time employment, instead of or in addition to your CPP and OAS. You can simply take an RRSP withdrawal, but it may also be beneficial to convert your RRSP to a Registered Retirement Income Fund (RRIF).
You see, if you have RRIF income after the age of 65, you can receive a tax credit called the pension income amount for eligible pension income. This will save you between $351 and $449 per year depending on your province or territory of residence. CPP and OAS are not considered eligible pension income for this tax credit, nor are RRSP withdrawals. RRIF withdrawals, however, are eligible.
RRIF withdrawals you take after age 65 are also eligible for pension income splitting, whereby up to 50% can be moved from your tax return to your spouse’s tax return. This splitting happens on your tax return and gives you the opportunity to decide retroactively if transferring some of your RRIF income to your spouse, up to the 50% maximum, can save you tax as a couple.
If you expect to have a long retirement, and especially if you don’t have other defined benefit pension income from an employer, that can be an even more compelling reason to defer your CPP pension, OAS pension, or both pensions, until after 65. If you take RRIF withdrawals to supplement your part-time employment income, that will draw down your relatively risky retirement income (investments), while your guaranteed retirement income (CPP and OAS) is allowed to keep on increasing. Your CPP and OAS are inflation protected, and you will keep receiving them even if you live to 110. Your investments may not provide that same inflation or longevity protection.
With regards to your concern about owing tax on your CPP or OAS income, unlike employment income, there is no tax automatically withheld on your CPP or OAS pensions. You can opt to have tax withheld if you’d like.
In summary, Rose, you can start your CPP and OAS pensions at 65, while still working, and you may not lose any if you don’t have a high income subjecting you to OAS clawback. You may or may not want to continue contributing to CPP, but you must submit paperwork to stop contributing. And you may benefit from deferring your CPP, OAS, or both, but need to consider whether to start your RRIF withdrawals now or defer.
Jason Heath is a fee-only, advice-only Certified Financial Planner (CFP) at Objective Financial Partners Inc. in Toronto, Ontario. He does not sell any financial products whatsoever.
Peter Leung is a Canadian real estate manager who splits his time between Vancouver and Hong Kong. “I started investing in TFSAs in 2009 but didn’t actually develop an investment strategy until I was three years into it,” says Peter, 36. “I decided to focus on income-producing investments such as Real Estate Investment Trusts (REITs) and other real estate investments because income from these holdings are more highly taxable outside the TFSA.”
Before finally settling on this strategy, Peter looked at other options. “I considered throwing a Hail Mary pass at growth stocks. but when I discovered I couldn’t write off any losses, I decided to abandon that idea. That’s when I started focusing on income-producing strategies.”
Today, Peter doesn’t regret his decision one bit. Right now, almost all of the $82,217 in his TFSA is invested in REITs and other real estate private equity holdings. They include Centurion, which invests mainly in Ontario, renting out apartments to students; as well as Clear Sky Capital, which, among another real estate holdings, invests in car washes and storage facilities across the U.S. and British Columbia. “Almost all of my holdings combine asset appreciation with income and good cash flow,” says Peter. “I avoid capital losses and am willing to hold on to these for the long haul, so the real estate will appreciate.”
A recent addition to his TFSA is Old Kent Road (OKR) Financial, a bridge financing company. It lends money to start-ups such as film production, gaming and electronics companies. The bonus is that the Canadian Federal government provides scientific research and development tax credits to the company, which are then passed on to the unit holders. “This is a new area for me,” says Peter. “I did my due diligence and went to Edmonton to meet the fund owner, and liked the future cash flow that it was projecting.” Returns have been stellar, ranging from 10% to 15% annually over the last three years.
This year, Peter will invest some TFSA money in a U.K. real estate investment fund. “I like the U.K. and think it’s where the real estate bargains are right now. It has positive net migration of about 200,000 but the country isn’t building much anymore. I think real estate there has nowhere to go but up.”
But while happy with his real-estate heavy income strategy—and especially happy with the quarterly distribution so he can reinvest his dividends—Peter would like to get a second opinion. “My goal is to grow my TFSA through regular positive income growth but I’d be interested in hearing if there is a better way to compound my money over the next 30 years,” he says. “I’m young and fairly risk tolerant. And I can hold forever. I’m keeping my TFSA for the long haul—either for retirement or as a legacy for family.”
WHAT THE PRO SAYS
Many financial industry professionals, such as Fidelity’s Peter Lynch, have encouraged people to invest in “what they know.” Peter has done a great job in building up his TFSA. He obviously started early and is well on his way to being successful. In addition, he has a strong appetite for risk, so some of what will follow can be taken a bit more lightly than might otherwise be the case, says John De Goey, a Chartered Investment Manager and Certified Financial Planner with Wellington-Altus Private Wealth Inc.
However, De Goey is concerned about the lack of diversification, combined with home country bias—the tendency most of us have to favour investments based on our own turf—within Peter’s holdings. Despite all the positive considerations noted above, Peter is simply too concentrated in one sector—real estate. “His career and his portfolio are both nearly entirely dependent on it,” says De Goey, who also notes that if ever something were to go wrong in real estate, Peter would be in trouble on all sides. “As a personal supporter of the Centurion product, I would say it is the one that should [continue to] be held. Since 25% or 30% is about as far as I’d go in any one sector, perhaps all of Peter’s other real estate positions could be sold off. At most, perhaps Clear Sky could also be retained on the premise that private equity is, in fact, a separate asset class.”
If Peter wants income-producing products, De Goey notes there are lots of dividend-paying equities and equity-products available. “As with his current positions, DRIPs [dividend reinvestment plans] can and likely should be used. What really ought to matter to investors, and especially investors with a strong risk tolerance and long time horizon, is total return. The cash, WealthBar fund and other holdings could all be re-positioned accordingly.”
Q. I’m a 28-year-old speech-language pathologist making around $5,000 per month after tax. I have been aggressively saving for the past two years and was able to fully pay off my $32,000 student loan debt during that time as well. I currently have $10,000 in my TFSA and I am not sure what to do with it. Looking into the future 10 to 15 years from now, I would like to work only 2 days a week so I have the opportunity to pursue my many passions. To prepare for that, I would like to begin investing but don’t know where to start. Any help would be appreciated.
A. Congratulations, Semina, on extinguishing your student loan quickly—and for taking active steps to create the financial future you want. I encourage you to read as much as you can about personal finance (including on this site), as knowledge will allow you to make informed and effective money and investment decisions.
Let’s start by talking about investment possibilities for your TFSA. I suggest opening an online self-directed trading account for your TFSA money with the financial institution where you currently have your other accounts and do your banking. Once you’ve successfully opened this self-directed TFSA trading account, consider buying a few shares in one or two stocks—preferably good Canadian blue chip stocks, such as one of the big five banks, utilities or telecom companies, which will appreciate in value over time, and also pay dividends. (To help you make your decision, have a look at MoneySense‘s list of good dividend-paying stocks here.)
Now, many other financial planners or advisors might suggest going for growth stocks only inside a TFSA. But remember companies that pay dividends have strong balance sheets, stable businesses and predictable cash flow. These are also companies that have a solid record and a reputation for high-quality management and strong products or services.
Historically, companies that provide dividends to their shareholders have experienced better performance over the long term, with less volatility.
To complement your investing strategy, you might want to consider enrolling in each stock’s Dividend Reinvestment Plan (DRIP). This allows for the quarterly or annual dividends of your stocks to be used to purchase more shares of your company, thus allowing your TFSA to compound and grow quicker.
While DRIP programs are a strong strategy for most folks, younger individuals, like yourself, gain even more through the benefits of DRIPs because you have more time for the years of compounding to work their magic and bring you excellent long-term returns.
And finally, consider starting a monthly direct deposit of a fixed amount of money to your TFSA. Direct deposit is an easy and consistent “pay yourself first” strategy. This ensures you buy shares on a regular basis without having to make a physical transaction every month (where you may be tempted to spend the money instead of to save it).
As the cash amount grows monthly and reaches about $5,000 or so, consider adding another stock to your account. Or, simply add more shares to one of the two stocks you already own. This is a great way to learn about investing and putting some of the knowledge you gain to action. As you learn more about money (and your salary grows), you can choose to refine your strategy, and perhaps open an RRSP (Registered Retirement Savings Plan) as well. You may also want to add some exchange-traded funds (ETFs) to the mix. But even if you simply stick to a dividend-paying stock strategy, your TFSA (and eventually your RRSP) will do just fine. Good luck with your future investing!
Ten years ago, Janet Freedman was rushing out the door of her home for work. Her arms loaded with tax returns, she missed a step on the stairs on her front porch and fell, hitting her head on the concrete. When her neighbours found her, she was barely conscious, with her head trapped between her own front steps and those of the house next door.
Paralyzed, with a partially severed spinal cord, it took more than six months of hospitalization and two years of intensive physiotherapy for Freedman to resume her life. She was unable to work and had no one to support her. “Thank goodness I had a good private disability insurance plan,” says Freedman, a certified financial planner and author of Hit by an Iceberg: Coping with Disability in Mid-Career. “Those payments allowed me to concentrate on my rehabilitation and to live my life without worrying about where the money was coming from for daily living expenses. That made a big difference to me and my recovery.”
While many of us understand the importance of life insurance, the truth is that insurance against an accident or disease that prevents you from working is arguably even more important. A typical 30-year-old has a four times greater chance of becoming disabled than he does of dying before age 65. A full one in six Canadians will be disabled for three months or more before the age of 50.
There are two main options: long-term disability (LTD) and critical illness (CI) policies. Both pay you money in case of an illness or disability, but they do it different ways. Disability insurance provides a monthly income if you’re unable to work due to a serious injury or illness, while critical illness insurance pays out a tax-free lump sum payment following the diagnosis of one of several illnesses covered by your policy. So which one is right for you?
Regular pay if you can’t work
If you work for a large company, you likely already have some kind of long-term disability insurance. Typically, such a plan will pay you a set portion of your monthly income if you are unable to work. Payments end when you start working again, reach age 65, or die. Coverage differs greatly from one employer to another, and if you’re self-employed or you work for a smaller company, you may have no coverage at all.
Such disability plans will either cover you for “any occupation” or “own occupation.” The latter is much better, because under this definition, total disability means the inability to work at your regular job. With “any occupation,” total disability means the ability to perform the duties of any job. That means that if you become disabled, but you could perform a less demanding job, you may not get the benefit. Often plans offer “own occupation” coverage for the first two years of the benefit period and then switch to “any occupation” after that.
To figure out whether you have enough coverage, contact your company’s HR department—if there is one—or your office manager. If you have coverage, ask them to walk you through your group benefits. If you find that your company plan covers at least 60% of your pay in the event of an accident or illness that prevents you from working, you likely have enough coverage. If you don’t have kids and your mortgage is paid off, you likely could get by on a policy that pays 40% to 50% or your salary. “Basically, you want enough coverage to meet your living expenses—meaning mortgage payments, taxes, hydro, food and transportation costs,” says Lorne Marr, an independent insurance broker and founder of LSM Insurance Services in Markham, Ont.
When evaluating your plan, keep in mind that many disability plans include a cap on benefits. For instance, your plan may cover 60% of your gross income, but only up to $2,500 a month. That means if you’re earning more than $50,000 a year, you may not have enough coverage. If you made $130,000 annually, you would only get the $2,500 a month maximum, which amounts to only 23% of your pay.
If you earn a high income, you may want to consider a private disability plan to supplement your group benefits. To give you a quick idea of the cost involved, a private “own occupation” disability policy for a 40-year-old male white-collar non-smoker that pays $3,000 a month until age 65 (90-day waiting period) would cost about $140 a month. The same policy for “any occupation” would cost about $75 a month.
When calculating your coverage, keep in mind that payments from private disability insurance are tax-free, while the payout from most corporate plans is taxable.
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A single payout if you get sick
A second option is critical illness (CI) insurance. You can buy a critical illness policy through an independent insurance broker and it will pay out a lump-sum benefit if you are diagnosed with one of the illnesses specified in the policy. The benefit is tax-free and receiving this benefit doesn’t affect the amount of disability benefits you may also be receiving. When you collect, there are no requirements as to how the money is spent.
The idea of receiving a lump-sum payment of perhaps hundreds of thousands of dollars to help pay for things like retrofitting your home with accessible fixtures, ongoing nanny care for your children and help with housekeeping, but unfortunately critical illness insurance is costly and the situations it covers are limited. Typical premiums for a $200,000 policy for a 40-year-old non-smoker add up to $2,000 a year for a 10-year term. More problematic is the fact that the policies are not standardized and problems often arise when payouts have to be made. For instance, some policies will cover only five illnesses, while more comprehensive ones cover up to 25. Such policies can also have stringent requirements regarding survival periods that have to be met after the disability is sustained before a payout is made. If your illness doesn’t meet the requirements exactly, the policy may not pay out a dime.
For instance, if you have a $100,000 critical illness policy, it may specify that no payment will be made if you have a benign melanoma. The same goes for some of the less serious cancers, such as stage one or stage two prostate cancers. “Read the fine print in the policy carefully,” says Barbara Garbens, a certified financial planner in Toronto. “The list of illnesses it covers will be a lot shorter than the exclusions. So it can be a bit of a mug’s game.”
Which type should you get?
If you don’t already have long-term disability insurance and you’re choosing between the two types of coverage, disability insurance is the clear winner. That’s because it will kick in to help you pay the bills in the event of any illness or accident that prevents you from working, while critical illness insurance only helps if you happen to encounter one of the specific illnesses covered by your plan. As well, collecting critical illness insurance often involves more paperwork and delays.
Stanley Morris’s experience with critical illness insurance clearly shows the difference. Last year at age 59, Morris (not his real name) was diagnosed with a brain tumour. Before his diagnosis, he was an active skier, cyclist and entrepreneur. Six years earlier, while reviewing his benefits, Morris had purchased both private disability insurance coverage as well as a critical illness policy.
When he was diagnosed with the tumour, his disability insurance started paying benefits right away, but because of severe headaches, he was unable to file the critical illness insurance documents quickly. After a couple of months, a close friend stepped in to help him with the paperwork and eventually, his claim was filed. But unfortunately, Morris died before he could collect a penny.
Still, there is one situation where critical illness makes sense, and that’s if you help to support your family, but you can’t get disability insurance because you have no earned income. For instance, a 35-year-old spouse who stays home with three small kids and doesn’t work may be a good candidate for a comprehensive critical illness policy (although even then, only for a brief period of time, say 10 years while the children are young). “A family’s lifestyle would change drastically if the stay-at-home spouse was critically ill,” says Rona Birenbaum, a certified financial planner in Toronto. “Paying people to replace the duties he or she performs is expensive. The coverage may not be perfect but it may helpful in these cases.”
One of the best things about a driving holiday—besides the scenery you get to experience along the way—is that it can be inexpensive. But your choices around where to stay, what kind of vehicle you choose and even which roads you drive can quickly cause your costs to add up. So, to help you stay in your lane, financially speaking, we’re sharing 9 money-saving strategies to use on your next adventure.
1. Map it out… twice
Planning your route ahead as opposed to winging it is the easiest way to save money on road trips since you’ll be able to estimate all of your expenses in advance, including your accommodation, activities and approximate gas costs based on how many kilometres you’ll be driving.
The routes you take can make a big a difference. Toll highways often save you a lot of time, but there might be an alternate route where you can avoid paying any additional charges. The bonus of taking some slower routes is that there might be some fun, unexpected things to see along the way, which makes the journey more exciting than highway-driving directly to your next stop.
If you’re planning a road trip in Canada or the U.S., you’ll want to become familiar with GasBuddy, a website/app that lets you search gas prices by city, state, postal/zip code and even by brand, so you can plan out where to fill up based on where the cheapest gas can be found. GasBuddy will also calculate how much you’ll spend on gas based on your itinerary and the model of your vehicle.
Although it’ll take more work, consider planning two different versions of your trip to see how much things cost. One destination might be much cheaper than the other, but you won’t know that until you actually plot it out.
2. Don’t sleep in big cities
Since you’ll have access to a vehicle, there’s no reason to book your hotel right inside popular tourist areas where rooms will cost you a fortune and you’ll need to pay extra for parking. Pick a hotel with free parking just outside your city of choice and then take public transportation into town. Even if you do decide to drive from your hotel, paying the day rate for parking will likely still make your choice more affordable than staying at a hotel within walking distance of all the major attractions.
3. Book a few budget accommodations
If you’re willing to forgo room service or an on-site restaurant for a couple of nights, booking a room at a popular budget chain like Super 8, Days Inn, Travelodge or Howard Johnson all offer a comfortable bed at a good price. Many of these properties have free wi-fi, free breakfast and a pool.
4. Choose your wheels wisely
Car rentals can be relatively inexpensive, so they’re worth looking into even if you have your own vehicle. You’ll save wear and tear on your wheels, plus you get the chance try out a different vehicle for the duration of your trip. Keep in mind that you’ll pay a premium to rent your dream Range Rover, and even though driving down California’s Pacific Coast Highway in a convertible is like a scene out of a movie, a ragtop isn’t the most practical choice if you’re travelling as a family or you have a bit of luggage. Pick a car that makes sense for you, knowing a large SUV is going to cost more than a midsize sedan while certain types of vehicles are better on gas than others.
Before you book, compare prices. Most travel websites that offer car rentals will scan multiple agencies so that’s a good place to start if you’re looking for the lowest rate. Also check individual sites to see if they offer discounts to associations you belong to, such as CAA or university alumni groups. And checking out autoslash.com. The site will track your confirmed car rental for price drops. Since the price of car rentals change almost daily, if you haven’t paid in advance there’s no harm in canceling and rebooking if AutoSlash finds you a better price.
5. Flying first? Bundle your airfare and car rental
If you plan to flying somewhere before your road trip, you can often save money by booking your flight and car rental at the same time. On a recent trip to Orlando, I saved about $150 USD by doing this via Expedia. This bundling trick doesn’t always work, but since it’ll only take you a few minutes to compare booking bundled versus separately, it’s worth looking into.
6. Don’t get insurance if you don’t need it
Whenever you pick up a rental car, you’ll be prompted to purchase insurance. If you already have insurance for the vehicle you drive at home, then your existing insurance likely covers you for car rentals. Even if you don’t have auto insurance, your credit card may give you car rental insurance (be sure to confirm in advance). In either scenario, you need to decline the car rental insurance policy for your existing insurance to be valid. Keep in mind that credit card insurance policies don’t cover third-party liability, so you may want to purchase that to protect yourself.
7. Co-ordinate your rental pick-ups and drop-offs
Where you pick up and drop off your rental can make a difference. For example, it’s typical to be charged an additional ”one way” fee if you drop off the car from a different place than where you picked it up. However, some agencies will waive the fee if you return the vehicle within a certain radius. For example, when I did a West Coast United States road trip with my wife, I saved about $450 by picking up our car in Portland and dropping it off in San Francisco. We spent a few days in the city without a car (which was easy to do in a city with such great public transit) and when we were ready to leave, we got a different rental car from the airport, which we later returned to LAX. Had we kept a single car straight through the trip, we would have paid the one-way fee and for the additional days we had the car in San Francisco.
8. Pack a cooler
As tempting as it is to hit every drive-thru on the road, eating out gets expensive fast. If you pack a cooler, you can easily store drinks and groceries so you always have snacks handy when you get hungry. When I was younger, I did a road trip with my cousins and my aunt even packed a rice cooker! I’m not suggesting you need to bring a small kitchen with you, but stopping at grocery stores and preparing a few breakfasts or lunches at your hotel is an easy way to save money.
9. Spare yourself a speeding ticket
I live in Toronto, where the speed limit on the highway is typically 90 to 100 kilometres an hour, and it’s unlikely I would get a ticket if I was going 10 or 20 clicks over the speed limit as long as I’m driving responsibly. However, that leeway doesn’t apply everywhere. For example, I was pulled over in Pennsylvania for going 5 miles per hour (8 kilometres per hour) over the limit, and charged about $100 USD. Some countries and states also don’t allow you to turn right on a red (another potential pricey ticket!) so it really pays to do some research about local driving laws before you depart.