How to Retire Worry-free

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How to Retire Worry-free

• Diana Mau, C.A.
• www.dianamau.bc.ca
• Copy right by Diana Mau

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Objectives of This Seminar

• Sources of retirement income or other benefits
  provided by governments, who will be eligible,
  how benefits are calculated, how benefits are
  penalized or enhanced, and how to maximize
  benefits.
• Some tax planning ideas for retirees.
• How to be really worry free !

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Objectives of This Seminar- Winston Wong

• How to take advantage of some investment products
  to maximize retirement income, minimize income
  taxes and provide security.

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Sources of Retirement Income

1. Old Age Security (OAS), Guaranteed Income
   Supplement (GIS) and other provincial supplements
2. Canada pension Plan (CPP)
3. Savings from Registered retirement savings Plan
   (RRSP), Registered pension Plan (RPP) and
   personal savings

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Old Age Security (OAS)

• Federally funded from general tax revenue
• A social security program designed for lower
  middle income Canadian residents since 1952
• Nearly 1/3 of all Canadian residents rely on OAS
  as their source of retirement income
• In 2000, OAS paid over 24 billion to 3.6 million
  seniors GIS provided 5 billion to 1.4 million
  pensioners

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Old Age Security (OAS)

• Full pension a Canadian citizen or resident who
  has lived in Canada for at least 40 full calendar
  years between age 18 and 64.
• Full pension amount (Oct 2008 to December 2008) -
  516.96 per month or just over 6,000 per year.

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OAS - Partial Pension

• Earned 1/40 of the full pension for each complete
  year of residence after 18
• Once a partial pension is approved, the amount
  cannot be increased for additional years of
  residence in Canada
• Minimum of 10 years residence in Canada
• For non-residents, an applicant must have at
  least 20 years of residence in Canada after 18
• If an OAS pensioner leaves Canada, the benefit
  continues for only the month of departure and 6
  months thereafter, unless the recipient has at
  least 20 years residence after age 18

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OAS Benefits

• Full OAS pension is 516.96 per month for the
  last quarter of 2008, or just over 6,000 per
  year
• Benefits are adjusted quarterly to reflect
  increase of cost of living to Consumer price
  Index
• Benefits must be applied
• Retroactive payments are available for up to 12
  months
• Benefits will cease if the recipient dies or
  becomes a non-resident for more than 6 months
  unless the recipient has resided in Canada for a
  minimum of 20 years after age 18

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OAS Clawback

• Since OAS is designed for low to medium income
  pensioners, higher income seniors with income
  over 64,718 in 2008 are required to pay back
  some
• The payback is 15 of the amount by which the
  recipients net income is over 64,718 in 2008
• No OAS when income is over 105,266 in 2008

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Guaranteed Income supplement (GIS)

• Purpose GIS is an additional source of income
  for residents in Canada who are in receipt of OAS
  but who have little or no other source of income

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Eligibility for GIS

• Be age 65 or older
• Be in receipt of OAS (resident of Canada for at
  least 10 years since age 18)
• Meet certain low income requirements
• Be a resident of Canada

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More about GIS benefits

• Max benefit is 652.51 per month for single or
  430.90 for each married/common-law couple for
  Oct to Dec 2008
• Subject to a means test

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More about GIS benefits

• For single individuals, the clawback is 50 of
  the pensioners base income for the preceding
  year (base amount net income - OAS)
• In 2008, the max cutoff for single is 15,672 and
  couple is 37,584
• GIS benefits are available equally to all
  recipients of OAS, regardless of how long one has
  been living in Canada

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More about GIS benefits

• GIS is not impacted by OAS benefit
• GIS must be applied and income tax return must be
  filed
• If GIS recipient leaves Canada , GIS is payable
  for one month of departure and for 6 months
  thereafter

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GIS Benefit Will Terminate If

• The pensioner does not file a tax return by April
  30th
• The pensioners income exceed the max cutoff
• The pensioner leaves Canada for more than 6
  consecutive months
• The pensioner dies

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Allowance

• Purpose To provide an additional source of
  income to qualifying low income seniors who are
  60 to 64, married to a spouse or common-law
  partner who is receiving both OAS and GIS, to
  enhance their standard of living

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Allowance -Eligibility

• An individual aged 60 to 64
• An individuals spouse or common law partner
  receives OAS and GIS
• The individual is a Canadian citizen or resident
  at the time of application
• The individual must have lived in Canada for a
  minimum of 10 years since age 18

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Allowance Benefits

• Maximum allowance for Oct to Dec 2008 is 947.86
  per month (sum of OAS GIS, 516.96 430.90)
• Allowance is subject to a clawback. The max
  income cutoff for the allowance is 28,992 on the
  couples combined income
• At 65, the Allowance is replaced by the GIS
• If the Allowance recipient leaves Canada,
  Allowance is payable for the month of departure
  and for 6 months thereafter

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Termination of Allowance Benefits

• The couples combined base income is greater than
  the max income cutoff
• The recipient leaves Canada for more than 6
  months
• The couple separates or ceases to live common-law
• The recipient spouse/partner dies, then change to
  Allowance for survivors
• Recipient dies

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Table of OAS, GIS rates (Oct to Dec 2008)
Avg Monthly benefit Max Monthly benefit Max base income
OAS 479.07 516.96 15 clawback from 64,718, no OAS if income gt105,266
GIS
Single 434.40 652.52 15,672
Spouse of pensioner 356.80 430.90 37,584
Spouse of non-pensioner 414.22 652.51 37,584








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Table of Allowance Rates
Avg monthly benefit Max monthly benefit Max base income
Allowance
60 to 64 372.35 947.86 28,992

Survivors 555.26 1050.68 21,120
60 to 64

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Tax Treatment of OAS/GIS/allowance

• OAS is fully taxable
• GIS/ Allowance are included in income, but
  subject to a full deduction, making them
  effectively not taxable

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Canada Pension Plan (CPP)

• Became effective Jan 1, 1966
• Fully funded by employers and employees
• Not funded by general tax revenue
• Initially structured on a pay as you go basis
• By 1990s, demographic picture had changed
• Contribution rates has increased from 5.6 in
  1996 to 9.9 in 2004
• Employers Employees contribute 4.95 each

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CPP Payment Rates - 2008
Type Average Monthly Max Monthly
CPP (age 65) 481.46 884.58
CPP (under 65) 360.70 493.28
Survivors 65 / 313.14 530.75
Survivors lt65 360.70 493.28
Combined survivors retirement 682.84 884.58
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CPP Payment Rates (Cont)
Type Avg Monthly Max Monthly
Disability 785.77 1,077.52
Combined survivors Disability 925.45 1,077.52
Death benefit 2,237.81 2,500.00
Children of disabled 204.68 208.77
Children of deceased 204.68 208.77
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CPP Benefits Eligibility

• An individual has made at least one valid CPP
  contribution
• Is at least age 65
• Is between 60 64 and has ceased employment or
  low earnings
• Ceased employment if one is not working at the
  end of the month prior to when CPP begins and
  during the month in which the CPP begins
• Low earnings if one earns less than the current
  max CPP in the month before CPP begins and the
  month in which CPP begins

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CPP Benefits (Cont)

• A person cannot be both a contributor to CPP and
  a recipient of CPP at the same time. Therefore,
  if an individual is receiving CPP, no further CPP
  contributions will be required
• CPP stops at the month of pensioners death.
  There is no guaranteed period.

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Calculating CPP

• CPP benefit is a function of how much of the
  contribution and for how long of the contributory
  period and the age when one chooses to begin
  retirement benefits
• CPP benefits 25 of the average of current
  last 4 YMPE (yearly max pensionable earnings) x
  Average earnings ratio

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Yearly Max Pensionable Earnings (YMPE) calculation
Year YMPE
2004 40,500
2005 41.100
2006 42,100
2007 43,700
2008 44,900
Average sum/5 42,460
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Average Annual Earning Ratio

• Average of annual earning ratios
• Annual earning ratio is calculated as the
  unadjusted earnings divided by the YMPE for that
  year. Any time that the earnings is less than the
  years basic exemption (3,500), the ratio is
  zero, any time when earnings are more than YMPE,
  the ratio is one

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Example to Calculate Annual Earnings Ratio
Average Earnings Ratio
Year 2008 2007 2006 2005 2004
Earnings 45,000 42,000 38,000 36,000 3,000
YMPE 44,900 43,700 42,100 41,100 40,500
Annual earning ratio 1 0.9611 0.9026 0.8759 0
Average earning ratio 0.74792
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Example of Calculating Monthly CPP Benefit

• Yearly CPP benefit 25 x average of current
  last 4 YMPE x average earnings ratio
• 25 x 42,460 x 0.74792 7,939
• Monthly CPP benefit 1/12 of 7,939 or 661.60
• Note there are only 5 years earnings for
  demonstration purposes. In real life, all
  contributory years less drop-out periods should
  be included in the calculation

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Relief for Average Earnings Ratio

• CPP acknowledges interruptions low income
  periods by allowing some contributory period to
  be dropped out of the benefit calculation
• The drop-out calculation includes
• Low earnings while raising children lt7
• Months when the contributor was eligible to
  receive CPP disability pension
• 15 of the contributors lowest earnings

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How to Get Max CPP Benefits

• To be eligible for max CPP benefits,an individual
  would require solid employment record throughout
  the contributory period (from age 18) even
  allowing for the 15 dropout periods

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Normal, Early Late Retirement

• Normal retirement for CPP Age 65
• Early retirement from age 60, CPP payment
  reduction of 0.5 per month or 6 per year, to a
  max reduction of 30 for 5 years
• Late retirement after age 65, payment enhanced
  by 0.5 per month or 6 per year, to a max
  increase of 30

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Assignment of CPP

• Pension sharing between spouses common-law
  partners to achieve income splitting
• Both spouses/partners must assign their CPP
• Both must be at least age 60, and both must be
  receiving CPP

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OAS / CPP Website

• www.hrsdc.gc.ca
• Tel [phone]

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Other Governmental Programs for Seniors

• Low-Income Grant Supplement Program- for age 65
  or older or receiving disability allowance and
  whose home is assessed above 1,050,000
• Low income family of net income less than 28,000
  will be eligible for max supplement of 845,
  between 28,000 to 30,000, eligible for 50.
• Call 1-888-355-2700

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Property Tax Deferment

• To defer property for home owners over age 55,
  surviving spouse or disabled
• Have to pay back deferred taxes interest at
  prime rate administrative fee before home
  transferred to a new owner or upon home owners
  death
• Tel [phone]

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Shelter for Elderly Renters

• Rental subsidy for seniors 60 or over and pay
  rent of more than 30 of income and who do not
  receive provincial income assistance
• Tel [phone]

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Home Adaptations for Seniors

• To help homeowners and landlords pay for minor
  home adaptations such as handrails, lever handles
  on doors, bathtub grab bars etc.
• Max assistance is 3,500
• To qualify, senior household income below 32,500
• Tel [phone]

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Residential Rehabilitation Assistance Program

• To provide low-income homeowners with fully
  forgivable loans in 5 years for the repair of
  lower value homes.
• Household income below 32,500 in Vancouver
• Tel [phone]

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Seniors Supplement

• Provided by Province of B.C. to low-income
  seniors whose income falls below the level
  guaranteed by the province
• Max monthly supplement of 49.50 for single
  seniors and 120.50 for senior couples
• Tel [phone] or 1-866-387-3743

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Health Services

• MSP
• Can apply for premium assistance
• Pharmacare
• Home Community Care and many others

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Other Provincial Programs

• Transit seniors fare discount
• Bus pass for low-income seniors yearly pass for
  45, eligible for those receiving GIS / Allowance
• Ferry fares

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How to Minimize Income Not Cash Flow

• Bury money under your mattress?
• Give away your money ?
• Tax free savings account ?
• RESP for grandchildren ?

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How to Minimize Income Not Cash Flow

• Collapse your RRSP before retirement ?
• Invest in your home get a reverse mortgage ?
• Buy a whole life or universal life insurance ?
• Prepaid funeral expenses, medical/critical
  insurance ?

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Registered Pension Plans (RPP)

• Defined Benefit Plan
• Defined Contribution Plan

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Defined Benefit Plan

• Provides pension benefits based on a defined
  formula where the benefit is known in advance of
  retirement
• Benefit is expressed as a of yearly earnings
  multiplied by the number of years of
  participation
• For example, benefit equals 2 of average of
  final three years service x of years service
• Public service employees get 2 per year, up to a
  max of 35 years, or 70

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Performance of a Defined Benefit Plan

• Plan sponsor / employer /union is responsible or
  the solvency of the plan and the investment risk
• Plan member is guaranteed a defined benefit
  regardless of the performance of the plan
• Generally is no risk, but nothing is certain

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Defined Contribution Pension Plan

• Contributions into the plan are based on a
  specific formula, a known quantity. For example,
  employer and employee each contribute 8 of
  employees salary. The max total contributions by
  employer and employee that can be contributed to
  a defined contribution plan in 2008 is the lesser
  of 18 earnings and 20,000, same as RRSP.
• The retirement income is based on the sum of
  accumulated contributions and the plan earnings.
  Hence retirement income is unknown
• The plan member retains the investment risk

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RRSP

• Contributions to the RRSP are tax deductible,
  income earned inside rhe RRSP are also tax free,
  withdrawals from RRSP are taxable, except the
  Home Buyers Plan or the Lifelong learning Plan
• Contributions to RRSP are limited to the
  contribution room

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RRSP on Retirement

• At age 71, one must convert RRSP into retirement
  income by the end of the year, otherwise the full
  market value of the RRSP would be included as
  income for that year

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Conversion of RRSP to Retirement Income

1. Registered Retirement Income Fund (RRIF). RRIF is
   similar to RRSP, except one may not make any new
   tax-deductible contributions and one must receive
   a specified minimum amount every year
2. Annuity

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Minimum Amount From RRIF
Age Amt Age Amt Age Amt Age Amt
71 7.38 78 8.33 85 10.33 92 16.12
72 7.48 79 8.53 86 10.79 93 17.92
73 7.59 80 8.75 87 11.33 94 20.00
74 7.71 81 8.99 88 11.96
75 7.85 82 9.27 89 12.71
76 7.99 83 9.58 90 13.62
77 8.15 84 9.93 91 14.73
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Annuity Option

• Buying an annuity means leaving money in the
  hands of the annuity issuer, usually an insurance
  company
• Annuity may be for your life, life of your spouse
  or with a guaranteed payment in the event of
  premature death
• You give up control of your money

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Splitting Pension Income

• Beginning in 2007, individuals who receive
  pension income that qualifies for the 2,000
  pension income amount may transfer up to one-half
  of this income to a spouse / common-law partner
• Pension income does not include OAS, CPP, death
  benefits, retiring allowance, RRSP withdrawals
• Joint election Form T1032 must be attached to the
  tax return of each spouse
• Income taxes deducted must be split in the same
  proportion

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Use of Your Home to Fund Retirement

• Consider renting out part of your home
• Selling or downsizing your home
• Reverse mortgage for seniors over age 62
  borrowing using the home as a collateral.
  Interest principal deferred until the property
  is sold

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Other Financial Resources

• Personal assets such as cash, marketable
  securities, rental properties
• Business - proprietorship or corporation, to sell
  or to continue. 750,000 capital gain exemption
  on sale of small business corporation

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Combined Income Tax Rates
Combined Income Tax Rates 08
Income range Tax rates
0 - 34,000 20.35
34,000 - 37,000 23.15
37,000 - 68,000 30.15
68,000 - 74,000 33.10
74,000 - 79,000 37.10
79,000 - 96,000 39.00
96,000 - 121,000 40.70
Over 121,000 43.7
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2008 Personal Amounts
Personal exemption 9,600
Spousal/common law exemption, reduced by partners income 9,600
Age exemption (65 over)- reduced by 15 of NI gt30,936 5,177
Disability amount 6,890
Caregiver amount 4,019
Pension income 2,000
Amounts transferred from spouse/common law partner
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Disability Amount - 6,890

• A non-refundable tax credit used to reduce income
  tax payable
• May be used for yourself, or transferred to your
  spouse /common-law partner, or another supporting
  person
• Has to be certified by a qualified practitioner
  on Form T2201 and be validated by Canada Revenue
  Agency

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Claiming Disability

• Your eligibility is easier than you may think
• Your physical or mental impairment has lasted or
  expected to last for a continuous period of at
  least 12 months and you are markedly restricted
  in any one of the basic activities speaking,
  feeding, hearing, dressing, walking, mental
  functions, bowel or bladder elimination
• Markedly restricted means all or substantially
  all the time, you are unable to perform one or
  more of the basic activities even with the use of
  therapy, devices or medication

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Claiming Disability (Cont)

• Your physical or mental impairment has lasted or
  expected to last for a continuous period of at
  least 12 months and you are significantly
  restricted in two or more of the basic activities
  speaking, feeding, hearing, dressing, walking,
  mental functions, bowel or bladder elimination
• Significantly restricted means you are not quite
  markedly restricted, but you ability to perform a
  basic activity is still substantially restricted

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Medical Expenses

• In addition to disability amount, medical
  expenses of up to 10,000
• Disability and medical expenses can be claimed by
  yourself
• If your income is too low to utilize, then
  disability medical expenses can be transferred
  to your supporting relatives, usually your
  children

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Caregiver Amount - 4,019

• For those who provide care to relatives who live
  with you dependent on you
• Parents grandparents age 65 or over
• Children or grandchildren other relatives who
  are 18 or over and physically or mentally infirm

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Pension Income Amount - 2,000

• Individuals 65 or over can claim lesser of 2,000
  or pension income from RRSP, RRIF, life annuity
  from qualified pension income
• Individuals under 65, life annuity out of pension
  plan, or annuity arising from all other pension
  income by virtue of the death of
  spouse/common-law partner
• OAS, GIS, CPP etc. are not qualified pension
  income

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Use pension splitting to maximize the 2,000
pension income credit

• Commencing 2007, individuals who receive pension
  income that qualifies for the 2,000 pension
  income amount any transfer up to 50 of this
  income to a spouse or common-law partner
• Each can claim 2,000

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Amounts transferred from spouse

• If one spouse /common-law partner has no income
  tax payable and has not fully utilized a certain
  portion of non-refundable credits, e.g. the age
  amount, pension amount, disability amount, the
  unclaimed balance of these amounts can be
  transferred to the other spouse/partner.

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Tax Free Savings Account TFSA

• TFSA is a registered account that allows
  taxpayers to earn investment income tax-free
  inside the account. Contributions are not tax
  deductible and withdrawals of contributions and
  earnings are not taxable
• Commencing Jan 1, 2009, any individual who is a
  resident of Canada and age 18 or older would be
  eligible to open an TFSA

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TFSA Contribution Amount

• 5,000 per year
• Any withdrawals made in previous year would be
  added to the contribution room
• Any unused contribution from a previous year
  would be added to the contribution room for the
  year
• Example In 2009,contribute 2,000, in 2010,
  withdraw 1,000. What is the contribution room in
  2011?

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TFSA Example of Contribution Room
Year Contr. Room Acct Balance
09 allowed contribution 5,000
09 contribution amount -2,000 2,000
09 contribution room c/f 3,000
10 allowed contribution 5,000
10 withdrawal amount 1,000 -1,000
11 allowed contribution 5,000
11 contribution room c/f 14,000
Reconciliation
5,000 x 3 yr 1,000 14,000
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TFSA no impact on income-tested benefits credits

• Income earned withdrawals are not be taken as
  income, hence would not reduce benefits based on
  income level, such as OAS, GIS, Allowance, GST,
  age credit etc.
• Seniors should contribute to a TFSA

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Budget Your After Tax Retirement Income Expenses

• Estimate your after tax retirement income
• Estimate your expenses in retirement. Do you over
  estimate your expenses? Keep your life simple
• Income gt expenses ?

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How to Retire Worry Free

• More important than finance is physical mental
  health
• Physical Health diet and exercise
• Mental Health if youre worried thinking you
  dont have enough, then no matter how much wealth
  you have, you never have enough. You will always
  be worried.

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Youll Be Truly Worried Free

• If you can let go, let your greed goes
• Can you really change your mental thoughts?
• You come with nothing, you go with nothing