Why didn’t this retirement thing seem so tough for Mom and Dad? Was there something that they should have told us that they didn’t? We Baby Boomers are supposed to be the advanced generation with new ideas and the ones who have everything under control. Yet it seems like retirement was easier and less stressful for our parents. In reality, not all parents of Boomers had it easier, but there are many differences between the generations.

Most of our parents worked at their job, career, or business until they were 65…and often for the same employer. This is not such the case for many Boomers. Often it is not the choice of the employee, but a function of what is happening with the employer. The end result however, is that many Boomers have found themselves leaving what had been longer-term employment in the critical period 10 to 12 years prior to their target retirement date. This normally would have been the prime earning and saving time with a familiar employment context.

Employer plans

Employment change at that juncture in life often results in a reduction in income and, correspondingly, in the amounts being put toward savings. New employers may not offer the same type of retirement programs, such as pensions or deferred profit sharing. These factors all contribute to an end scenario that is less attractive and less certain than the one our parents experienced. Most of our parents had only one or two employers throughout their working years. And while not every employer provided a pension plan, they were more prevalent than they are today, and a greater number of the pension plans were the more generous defined benefit programs.

Family life

Many Baby Boomers started their families later in life, and children are living at home longer than ever before. So the Boomers may not have had an empty nest as early as their parents did. Even if the Boomers did successfully launch their offspring, it is quite possible that one or more of the children have returned to the nest, perhaps with grandchildren in tow.


For the Boomers, the rate of divorce runs between 40 and 50 per cent. This is far higher than the experience of their parents. As anyone who has been through a divorce will tell you, in addition to the huge emotional toll there is a substantial financial cost. In many cases, this has disrupted the retirement savings and benefits that had accrued to this point. Remarriage and blended families also put pressure on financial resources.

Overall, many Boomers find themselves being pulled from many sides, with parents who need help, plus adult children, grandchildren or even a marital partner who needs support. It is a tug-of-war that involves emotions, time and money.

The positive? We can work it out. My hope is to see my clients enjoying the golden years of their life and enjoying it to the fullest. This can be achieved by finding the most efficient ways to use the assets clients have accumulated in order to create the cash flow to fund their retirement.

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Everyday, we hear comments from frustrated consumers who are looking for an advisor who is proficient in the area of retirement income planning.  Remember – and this is critical – I am not referring here to ‘retirement planning’, which many advisors do.  I am specifically referring to retirement ‘income’ planning, and that art and science is effectively practised by very few at this point in time.

It may become apparent to you that it is in your best interest to make a change from your current advisor or institution, and this will probably mean moving your investments to another advisor. While this occurs in the industry every day, it is likely not something you, personally, have done often. As the saying goes, “breaking up is hard to do,” and while you may feel a bit awkward about ending a relationship with your existing advisor, remember that this is not about them. It is about you and what you feel is in your best interest. No advisor likes to lose a client. But you do need to coordinate the planning with the investments, and if this can be done in a better way for you elsewhere, then you should consider making a move.

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There are a number of ways that the equity you build in your principal residence can serve to either create an income stream or provide access to an amount of capital. In either option, the receipts are free from taxation. You are not taxed when you take out a loan, and that’s really what you are doing, whether in the form of a reverse mortgage or a line of credit against the equity of your home. In either option, the idea is to be able to access some of the value of the equity in your property while still living there. After all, you can’t sell part of your house. The issue here is that you will then either have to service loan interest or run the risk of having a larger and larger amount of interest capitalizing and reducing the value of this asset when it is sold or it transfers to your estate.

It is a respectable objective to wish to remain in your own home. But that in turn is going to mean maintenance costs that could become higher as your home becomes older. And there may very well come a time when you either want to or have to move. Remember that while you may not be required to repay what has been borrowed while you live in the home, that payment will be due if you sell your home. What will you be left with after the proceeds of the sale are reduced by what you must pay back? And how will those reduced proceeds affect your options in terms of where you will live next? Obviously this would also affect the value of the estate if your home was sold after your death.

The decision to tap into the equity of your home should not be made lightly. In my opinion, this step should be taken only after other income-generating avenues have been explored, and then only as an action that is necessary to provide additional cash flow. You should also seek independent legal counsel and actively discuss this decision with other family members. The earliest age at which someone can entertain this strategy is 62, according to the institutions who provide the loans. I would certainly suggest that you wait until you are in your early seventies before considering this. That is why it is listed as the very last source of potential income. Investigate your options and compare the reverse mortgage and line of credit offerings before making any final decisions.

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So what is the relationship between the tax treatment on different forms of income and the various tax brackets? The following table examines this by calculating how much pre-tax money would be needed from each type of income in 2011 in order to get $1.00 after tax. I am illustrating a simple combined federal/provincial rate.

TABLE 9.1 Generating One After-Tax Dollar

Rule number one of layering your income is: use the least tax-efficient sources of income first. Some people think that they should use up all of their non-registered money first since it is tax exposed and defer all of their RRSP money to use later since it is tax sheltered. While deferral is an effective strategy, you need to assess which assets are best to defer and, in most cases, it is your non-registered holdings, not your RRSPs.

Refer back to Table 8.3 to understand why fully-taxable dollars should be used to establish your base income up to at least the start of the second tax bracket ( $41,545 in 2011). In that lowest bracket, you would only need to withdraw $1.27 from a fully-taxable source in order to have $1.00 after tax. Once you are in the next tax bracket (over $41,544), a withdrawal of $1.45 would be needed from a source that was fully taxable to get that same $1.00 after tax. That rise from $1.27 to $1.45 represents a 66.7 per cent increase in tax payable, just to get the next after-tax dollar to spend.

It is then preferable to use tax-favoured or non-taxable forms of income once you are over the firstfederal bracket, assuming, of course, that you have non-registered assets. You can see how much less dividend income or realized capital gain is required to end up with $1.00 to spend. This will put less strain on your income-producing assets and help to conserve and preserve them. From an efficiency perspective, it is usually preferable to have non-registered investment returns in the form of capital gains rather than dividends. When you look at the previous table, dividends may appear to be the preferable type of income. But remember that the dividend tax credit gross-up inflates your net income figure. What you ultimately want to do is create the amount of after-tax cash flow that you require while keeping your net income figure relatively low.

For more affluent Canadians, it may be appropriate to be referring to taking income to the start of the third tax bracket instead of the second. The numbers may be different but the principles and the strategies are the same. A truly effective blueprint will show a combination of fully-taxable income at the lower tax rates with tax-efficient income at higher tax rates to create the after-tax cash flow you need.

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When you are going through your working years, your employment income is really your main source of cash flow. When you are retired, you may have 6-8 different sources of income. So which ones should you use first? How do you combine them to get the most effective results over time? There is an order in which income is most efficiently drawn. They appear in the order in which I have found they are best engaged. Depending on your age when you retire, you initially may not haveaccess to all sources of income, such as Old Age Security (OAS) and Canada Pension Plan (CPP). We will discuss the CPP in our next post. However, the objective is to use the least tax-efficient and least flexible sources of income first, asthey become available.

  • Old Age Security (OAS)I have always been (and still am) a strong believer that people should commence income from their government benefits as soon as they can.
  • With OAS, there are no survivor benefits, no income-splitting opportunities, noflexibility, no option to commence this income prior to age 65 and it is fully taxable.

For those reasons, I am listing it as the first layer of income. OAS is a universal benefit for all Canadians (unless you are in prison). You don’t make contributions to the OAS program as you do with the CPP. OAS is funded out of the general revenues of the federal government (otherwise known as tax revenue). The income is fully indexed to increases in the consumer price index (CPI), and adjustments are made on a quarterly basis.

There are no reductions if the CPI declines. Monthly payments for the first quarter of 2011 are set at $524.23 for those entitled to the full pension.What is meant by the “full pension”? Technically, there are 40 equal portions in the OAS “pie.”Qualifying for the full pension allows you to receive all 40 portions each month. This amount is payable if you have lived in Canada for at least 40 years after turning 18, or if you meet all three of the following conditions:

  1. You were born on or before July 1, 1952.
  2. Between the time you turned 18 and July 1, 1977, you lived in Canada for some period of time.
  3. You lived in Canada for the 10 years immediately before your application for OAS was approved.

If you do not meet the criteria in either of the full benefit categories, you may still be eligible for apartial pension. For example, someone who lived in Canada for 10 years would qualify for 10 of the 40 portions of the pie. In other words, he or she would have an entitlement to 25 per cent of the full pension.

It’s Not a Clawback, It’s a Social Benefit Repayment

The federal government determined that after reaching a certain level of net income you did not “need” the full OAS pension. Past a certain,higher net income level, it was determined that you did not need any OAS pension at all. This“means test” calculation is assessed on an individual income basis, not on household income. Since July 1996, OAS payments are adjusted based on the prior year’s net income. There is no repayment of the benefit per se. It is simply adjusted or eliminated for the following year.

So that’s fair and acceptable, right?

Let me share with you what is shared with me by retirees who are seeing a reduction or elimination of their OAS benefit: In almost all cases, it drives them crazy. After all, it is frustrating for them, after years of paying taxes, to forgo any of this payment. So your net income comes into play and determines your level of entitlement to a government benefit. (More on net income in Part Four.) That is why you want to structure income in such a way as to keep the level of net income relatively low throughout retirement. In this way you will minimize the needless loss of government benefits and entitlements.

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Last post we talked about the new rules of the CPP. Today, we continue our discussion in what you need to know to be fully prepared when it comes time for your to claim your pension.

So, Should You Still Consider Taking Your Benefit Early?
The reasons why I promote taking this benefit early were listed previously. What will be different under the new rules? The reduction for early receipt will be higher, which means the crossover will occur sooner. If you are receiving CPP pension, have employment income and are under the age of 65, you will now have to contribute to the plan. But that would be true if you were working, whetheror not you were in receipt of the pension. So if you are already at the maximum entitlement, you may as well take the pension, so that any new contributions are creating the PRB you would otherwise not get.I have read some other thoughts on this topic, some of which suggest deferring your CPP pension all the way to age 70. This would increase your pension to 142 per cent of what would be paid to a pensioner at age 65.
The reasoning behind this suggestion was that once you pass the crossover age in your mid to late seventies, there is a large difference in the sum of payments to age 90 and beyond for those who delay commencement. For that argument to have merit, you have to assume that you are going to live well beyond the average life expectancy. It also means using your survivor-friendly and estate-creating assets first and depleting them until you can start your higher CPP income at age 70.And remember that your CPP basically ends when you do and has no estate value. By deferring your CPP pension you would be creating an inflexible, higher and fully-taxable income stream at age 70. If you have also deferred using your RRSP accounts, you may find that you have a very high level of taxable income at age 71, with no ability to control it. Neither of these points makes any sense at all and they are in complete conflict with the objectives of the Income Continuum.Again, every situation needs to be evaluated on its own merits. But after very careful assessment,even if all of the changes were in place, I still feel that the reasons why you should start this benefit earlier outweigh the potential for higher income later. Search for reasons to convince yourself not to take your benefit early and see if you can find any that are that compelling. I will be taking mine as soon as it is available.
Annual updates for CPP benefits are available at www.boomersblueprint.com.
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In 2012, there was four key changes to the Canada Pension Plan. The changes will started in 2012 and will be fully implemented by 2016.

First, there is a positive change in the calculation of career earnings. Simply stated, by increasing the dropout percentage for years of low or no earnings from the current 15 per cent of average career earnings to 16 per cent in 2012 and 17 per cent in 2014, you should have a higher retirement benefit when you elect to receive it.

Second, the removal of the work cessation test is a welcome end to this unnecessary annoyance. You will no longer be required to cease employment or have a reduced income for a two-month period in order to be eligible to apply for your benefit.The above two amendments are constructive, but the following two amendments create very significant changes for those who wish to take their retirement benefits prior to age 65 and particularly for those who are earning employment income during this period.

The third proposed change will further reduce the payments for those who start before 65 and further enhance them for those who start after 65. From a practical and actuarial perspective, these adjustments are appropriate given the longer life expectancy of today’s retirees compared to those who retired 20 years ago.When fully implemented, the early receipt reduction per month will be 0.6 per cent compared to the 0.5 per cent that it is in 2011. The changes for delaying receipt will start in 2011 and be fully in place by 2013. Table 5.2 on the next page illustrates how these changes will be phased in over the next three and five years respectively. I have shown the reductions and increases by percentages. If you refer back to Table 5.1, you will see how this would look in terms of dollars, using 2011 payment rates.I want to use an example just to avoid confusion with these numbers. Assume that you are entitled to the maximum pension at 65 and that you commence the benefit early at age 60, in 2013. Your maximum payment would be reduced by 32.40 per cent. After you start, you are not affected by any other changes that you see in this table.

TABLE 5.2: How the CPP Changes Will Be Phased In

Your Retirement Income Blueprint CPP changes

The fourth and most problematic amendment is that those under the age of 65 who have earned (employment) income while in receipt of the CPP retirement benefit will now be required to make contributions to the plan. CPP contends that they are implementing these changes to help retirees in many different scenarios more effectively transition into retirement while they are still working. They are also promoting this as a way for pensioners to increase their CPP benefit through additional contributions to the plan while they are in receipt of the retirement benefit.This is being called the Post Retirement Benefit (PRB). It will be an option if you are working beyond age 65 but a requirement before that age. Contribution rates will remain the same and the increase to pension income will be applied the following year. The amount of increased benefit is equal to 1/40th of the maximum payment for a retiree aged 65.

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The CPP retirement pension serves as the next layer of income that should be triggered. In this section, I will cover off some mechanics of the benefit and address the most common question people ask about their CPP pension, which is: Start now or start later? I also will describe the significantchanges coming to CPP pension in 2012 and how this could possibly affect you going forward. First, let’s talk about how things will work up to the end of 2011, starting with how your CPP pension is calculated. The benefits payable are dependent upon the level of contributions made (by you and your employer) and the number of years during which they were made. This differs from OAS, which is a uniform amount with universal entitlement. The CPP is designed to replace about 25 per cent of the earnings from employment up to a maximum amount known as the yearly maximum pensionable earnings (YMPE).

In calculating your retirement benefit, 15 per cent of your lowest earning years are removed from the calculation. This can provide a higher income if you have had lower or no earnings in certain years or if you were late in entering the workforce. There is also an adjustment for years when a parent was at home with children under the age of seven. In 2011, an individual aged 65 with entitlement to the maximum retirement benefit will receive a monthly CPP pension of $960.00.

And When I Die . . .
A lump-sum benefit is payable to the estate or a representative of the estate on the death of a contributor. Currently this amount is a flat payment of $2,500. The Quebec Pension Plan (QPP) pays six times the monthly receipt of the pension, to a maximum of $2,500. Oh yes, before I forget to mention it, this is a taxable benefit.

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Today’s post, we are going to look at RRSPs as the next layer in building the cash flow you need. Granted, the payments from RRSP/RRIF plans are fully taxable, but you do have a greater degree of access to these accounts than you do with anything we have discussed to this point. RRSPs are still one of the most effective tools for accumulating retirement assets. It’s important to contribute as much as you can, to the maximum they are allowed, especially in the early years.

There is a possibility of having government benefits reduced or clawed back if your net income in retirement is too high, so you may be wondering why I would still suggest maximizing RRSP contributions if the eventual withdrawals are fully taxable. The main answer is this: for people with higher levels of taxable income, the deduction resulting from an RRSP contribution is significant. Think of the tax savings that you realize as the government helping you to build your retirement nest egg. If you are in the second tax bracket, you will be taxed at between 31 to 38 per cent on each dollar, depending on your province of residence. What this means in terms of your RRSP is that it takes only $0.62 to $0.69 of your take-home pay to make a $1.00 contribution. In addition, the grow thin your account is tax sheltered and deferred. It is only when you start to take money out that it becomes taxable. To be able to deduct and defer makes the whole concept appealing from both a taxation and accumulation perspective.

But in order to make your RRSP work effectively for you, there are two key planning issues that need to be addressed in your blueprint.

First, much like contributing to a money purchase (defined contribution) pension plan, you know what you are putting into your RRSPs. But do you know what it will mean when you retire? What level of sustainable income will your RRSP account create for you? More importantly, what level of after-tax income will your RRSPs be able to generate? Most people I meet for the first time have absolutely no idea of the answers to these questions. Yes, you may have built up a very large account value in your RRSP, but remember that this has to produce income for you over the next 25 to 35 years.

Second, you need to have an exit strategy for these assets. You need to have both a short-term and long-term approach to how your registered accounts will be used. Remember, your RRSPs are one of the most flexible assets you have at your disposal. Your blueprint needs to map out how they will complement and layer with your other sources of income. It also should detail how your RRSP will work with the intelligent dis-assembly strategy for your assets.

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